Schmeckt Gut plans the market launch for the Schmeckt Besser energy bar in Atoll

Question

Schmeckt Gut plans the market launch for the Schmeckt Besser energy bar in Atollia within the next couple of months. The Research Department of Schmeckt Gut has conducted a market analysis of Atollia. The results are provided for you in the supplied EXCEL file. Based on international sources, the Research Department is comfortable in working with the following scenarios on the future development of average income in Atollia, the inflation rate development and tariff rates on imports from Industria: - Income growth: 1% increase or 3% increase or 5% increase or 7% increase - Inflation rate development: 2% increase or 3% increase or 4% increase or 5% increase - Tariffs on imports from Industria: 7.5% or 10% or 5% or free trade Note: These developments are not necessarily matched to each other in the sequence shown above; meaning that we do not know if the 1% increase in income is associated with a 2% increase in inflation rate and a 7.5% tariff rate. Your task: Your task is to write a 3,000-word report addressed to the Board of Directors of Schmeckt Gut in which you address the following: - Do you think you can match the different projections? That is, do you think that a 5% increase in income is associated with a 10% tariff rate and a 2% inflation rate? Explain by linking your discussion to the following concepts: o supply and demand o aggregated demand and aggregated supply o the Philipps Curve, and o the Laffer curve. - What impact would the different predictions of income development, inflation rate development and tariff rate development have on the potential demand of Schmeckt Gut? Conduct a multiple regression analysis using data in the supplied Excel file and then interpret the results. Fully discuss and explain their implications. - Make recommendations as to what the Board of Directors should do under each of your scenarios, based on your matching of the predictions.

Explanation / Answer

a) The correct combinations will be as follows : Tariff on import income The rate of inflation

free trade 7 percent 5 percent

5 percent 5 percent 4 percent

7.5 percent 3 percent 3 percent

10 percent 1 percent 2 percent

As the Tariffs on import increses as per the laffer curve the real disposable income decreases lead to lower consumer spending and lower aggregate demand on the other hand a cut in taxes both direct or indirect increases the real disposable income and therefore increases the consumer spending and aggregate demand and the Phillips curve shows the combination of inflation and unemployment that is a result of shift in aggregate demand with respect to short run supply curve hence when there is high unemployment aggregate demand is low and the rate of inflation is also low. When there is a tax cut on imports aggregate demand increases and therefore high employment and it results in high inflation.

b. The impact of various pridiction on potential demand are as follows there is an indirect relation between tariff rate and demand of the product and a direct relation with rate of inflation and demand.

c . Under each of the situations the board of directors shoud do the following: We can see from the data above with no import taxes there should be more productions in order to get the maximum benifit from the conomies of scale.With increase in tariffs would be down as can be seen from the table mentioned above the board of directors should make sure that business it should take into the account of scarificing ratio which is the number of percentage points of annual output lost in the process of reducing inflation which should not fall below a certain level

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