Dutch Lady Sees High Sales Growth

Dutch Lady Milk Industries Bhd. expects its sales to grow double digit this year. For its nine months ended September 30, 2018, the company posted a net profit RM 11.2 million on a turnover of RM253.2 million. Despite a rise in global price for a raw material, the company had no intention of passing on any substantial price increase to consumers. The robust Malaysia economy, with consumers insatiable demand for a new product, would continue to spur milk sales. The company intends to spend RM 1.5 million over the five weeks period on a communications programs to supports its launch of Dutch Lady 123 and Dutch Lady 456, both which have been upgraded. Prior to this, it had spent more than RM500,000 on consumer research on the products. To date, as the clear leader of the market, Dutch Lady 123 commands a total 27% of the market share and it is hoped that Dutch Lady 456 would be the same. The company current RM15 million renovation of its production area would allow Dutch Lady to easily expand its product range in the future.

According to economic theories, how would an increase in the global price of raw materials affect the market for Dutch Lady products?

(2 marks)

"Despite a rise in global price of raw materials, the company had no intention of passing on any substantial price increase to consumers: How would this be possible? Explain your answer.

(3 marks)

In your opinion, which market structure does Dutch Lady belongs to, is advertising important? Why?

(3 marks)

What is marginal cost? Explain why, as a rational producer, you would not accept a price below marginal cost.

(4 marks)

What is the most important factor in the short run production decision: fixed cost or marginal cost? Give your reason.

(3 marks)