Description
Micro Economics
Dec 2026 Examination
Q1 Following the unexpected launch of a next-generation gaming console by a competitor, Sony faces the challenge of forecasting demand for its upcoming PlayStation release. Historically, PlayStation demand has shown sharp peaks at launch due to hype and scarcity, followed by tapering as substitutes entered the market at varied price points. Economic downturns have further intensified consumer price sensitivity, making demand forecasting and pricing decisions more complex. Sony’s product team must now evaluate how cross elasticity of demand and substitute goods will influence consumer behavior across different markets. As Sony’s product strategist, apply the concepts of cross elasticity of demand and substitute goods to recommend pricing and production planning for the new PlayStation. What actions should Sony take to account for direct competition, substitute availability, and varying economic environments in its demand analysis? How can these insights guide optimal allocation of production across markets with different consumer sensitivities? (10 Marks)
Ans 1.
Introduction
A rival console just changed the game for Sony. Demand for the new PlayStation will not move in isolation anymore. Cross elasticity and substitute availability now sit at the center of Sony’s pricing and production decisions, across every market it serves.
Concept and Application
Cross Elasticity of Demand Explained for This Case
Cross elasticity measures how demand for one product changes when a competing product’s
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Q2 (A) A mid-sized automobile manufacturer in Pune plans to increase production of electric cars after receiving a surge in orders. However, the actual supply capacity depends on several conditions – some plants can ramp up quickly, while others face constraints. Management realizes that multiple business and external factors determine how much and how fast supply can be increased. As an economics student, analyze the automobile manufacturer case and explain any three factors that influence the supply of electric cars. Show how these factors affect the company’s ability to expand production and meet rising demand. (5 Marks)
Ans 2(A).
Introduction
More orders should mean more cars. But this manufacturer is learning that supply rarely scales as easily as demand does. Several real factors decide how fast, and how much, production can actually rise.
Concept and Application
Production Capacity and Existing Plant Constraints
Some plants already run close to their maximum output and cannot simply speed up further.
Q2 (B) A popular smartphone brand launches its new model at a premium price. Initially, demand is strong due to hype and brand loyalty. However, as competitors introduce substitutes at lower prices, consumer response changes. Rising incomes in urban areas increase willingness to pay, while in rural markets, price sensitivity remains high. Seasonal promotions and advertising campaigns further influence how consumers react to price changes. Using the concept of elasticity of demand, explain any three factors that affect demand elasticity in the smartphone case above. Show how elements such as availability of substitutes, income levels, and advertising/consumer preferences influence the responsiveness of consumers to price changes. (5 Marks)
Ans 2(B).
Introduction
Hype sells a phone at launch. Price sensitivity decides what happens after. This smartphone brand is watching that shift play out differently across cities, incomes, and competitor moves.
Concept and Application
Availability of Substitutes Shapes Responsiveness
When close substitutes exist at lower prices, consumers switch quickly if this brand’s price feels
