Q3. Question 3 is based on the business scenarios described above, the information provided here and the information contained in the question statement. The Republic of Ivarrona decides to encourage one of its domestic companies to take on APC. There is a packaging company called Local Packaging Corp (LPC from hereon) that enters the market with competing products. LPC offers a Basic Packaging (BP) carton identical to APC's BP product. It also offers a carton with some embedded sensors in it that can do some - not all - of what APC's Intelligent Packaging (IP) can do. LPC's product is based on a proprietary but inferior technology. For ease of reference we will refer to this product as Ordinary Packaging (OP from hereon) to distinguish it from BP and IP. As a result, LPC's OP product is not of the same value (as IP) to the companies that ship medical supplies. The SCs value the OP carton at $34 per carton (box) and the FCs value the OP carton at $24 per carton. The table below shows the value of the three products to the buyers. Value Per Carton Basic Ordinary Intelligent Packaging Packaging Packaging VALUE to Spenders Corp- SC $30.00 $34.00 $80.00 VALUE to Frugal Corp - FC $20.00 $24.00 $30.00Now, we address the matter of costs. The unit cost of producing a carton of each kind of product is shown below. Note due to the proprietary nature of technology, APC does not produce OP and LPC does not produce IP. Unit cost of production (cost of producing one Basic Ordinary Intelligent carton) Packaging Packaging Packaging COST Per Unit - APC $20.00 $30.00 NO Product COST Per Unit - LPC $10.00 $50.00 NO Product The government of Ivarrona offers LPC a subsidy. For each carton of OP that it sells, it will offer LPC $10.00. The government wants LPC to lower the price and compete against the foreign company, APC. Note the government subsidy is only for every OP carton sold; no subsidies are offered for selling BP where LPC already enjoys an advantage because of its lower labor costs. For simplicity assume that each buyer - SC or FC - will buy only one carton. It could be BP, OP or IP depending on the price. But not more than one. If the price of a product is more than the value of the product to the buyer, the buyer will not buy the product; if the price is less than or equal to value, the buyer will buy the product. Finally, companies will not make a loss in the hope of future sales (assume this to be a problem set in a single period, with no future!). The details of unit costs, value, etc. are shown in the table below. All information about costs, value, subsidies etc. are public information - i.e. all players in the market have all information.The government of Ivarrona offers LPC a subsidy. For each carton of OP that it sells, it will offer LPC $10.00. The government wants LPC to lower the price and compete against the foreign company, APC. Note the government subsidy is only for every OP carton sold; no subsidies are offered for selling BP where LPC already enjoys an advantage because of its lower labor costs. For simplicity assume that each buyer - SC or FC - will buy only one carton. It could be BP, OP or IP depending on the price. But not more than one. If the price of a product is more than the value of the product to the buyer, the buyer will not buy the product; if the price is less than or equal to value, the buyer will buy the product. Finally, companies will not make a loss in the hope of future sales (assume this to be a problem set in a single period, with no future!). The details of unit costs, value, etc. are shown in the table below. All information about costs, value, subsidies etc. are public information - i.e. all players in the market have all information. Cost & Value of a Carton (unit cost Basic Ordinary Intelligent and unit value) Packaging Packaging Packaging COST Per Unit - APC $20.00 $30.00 NO Product COST Per Unit - LPC $10.00 $50.00 NO Product Government Subsidy per carton given to LPC No Subsidy $10.00 NO Product VALUE to Spenders Corp- SC $30.00 $34.00 $80.00 VALUE to Frugal Corp - FC $20.00 $24.00 $30.00
