Question One

Read the case given below carefully and answer the questions that follow. Peugeot-Citron of France: A Price-Taker in China's Auto Market Competition in international markets is often more keen than in domestic markets. This is especially true in developing economies, where price rather than product differentiation is the main driver of consumer purchase decisions. Consider, for instance, the French automaker PSA Peugeot-Citron. In the mid-2000s, its Citron division had a minuscule share of China's auto marketespecially compared to the market share it enjoyed in France and Europe. In an interview regarding the Chinese market, one of its managers remarked, "If prices fall, we will also follow suit, but not by more than the decrease in the market." Another manager added, "This is a very competitive market . . . we have to think about the capacity at the factory." These remarks suggest that, in China, Citron had very little control over price; in essence, it operated as a "price taker" in the Chinese market for automobiles. As a price-taker, it had no incentive to price below the market price. Furthermore, Citron would lose customers to other automakers if it attempted to charge a price premium in the developing Chinese market. As a price-taker, Citron's main decision was how many cars to produce at the market price. Managers in China had to ensure that the capacity at factories was sufficient for producing the optimal volume of cars. Citron continues to face aggressive competition from other international firms as well as domestic Chinese firms. In light of the large capacities of GM and other automakers with operations in China, Peugeot-Citron is likely to continue to have limited power over its price for many years to come.

a) With justification from the case, explain the type of a market structure that Peugeot-Citron of France is operating in within China's auto market. Comment on the level of industry concentration in this case. (10 marks)

b) Outline the characteristics of the market structure identified in (a) above. (10 marks)

c) What strategies can a firm in the market structure identified in (a) above employ to stay afloat. (10 marks)

Question Two

The consumers of a beauty product named "clear" will buy 40 units when the price is set at Kshs 25 per unit. At that price the producers are willing to supply 50 units. When the price is lowered to Kshs 18, the consumers are willing to buy 56 units of clear while producers reduce their supply to 45 units. Determine:

a) The demand and supply functions and hence the equilibrium price and quantity (5 marks)

b) The price elasticity of demand and supply (5 marks)

c) If the government was to give a Kshs 3 per unit subsidy on clear, determine the equilibrium price and quantity after the subsidy and show how the subsidy is shared between the consumers and producers (5 marks)