BUS 640 Managerial Economics Flashcards
BUS 640 Week 1 Assignment Economics of Risk and Uncertainty Applied Problems
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Economics of Risk and Uncertainty Applied Problems.Please, complete the following two applied problems. Show all your calculations and explain your results.
Problem 1: A generous university benefactor has agreed to donate a large amount of money for student scholarships. The money can be provided in one lump sum of $12 million in Year 0 (the current year), or in parts, in which $7 million can be provided at the end of Year 1, and another $7 million can be provided at the end of Year 2.
Describe your answer for each item below in complete sentences, whenever it is necessary. Show all of your calculations and processes for the following points:
1. Assuming the opportunity interest rate is 8%, what is the present value of the second alternative mentioned above? Which of the two alternatives should be chosen and why?
2. How would your decision change if the opportunity interest rate is 12%?
3. Provide a description of a scenario where this kind of decision between two types of payment streamsapplies in the “real-world” business setting.
Problem 2:The San Diego LLC is considering a three-year project, Project A, involving an initial investment of $80 million and the following cash inflows and probabilities: Year 0 Year 2 Year 2 Year 3 Probability Cash Flow ($ mil.) Probability Cash Flow ($mil.) Probability Cash Flow ($ mil.) 0.2 50 0.1 60 0.3 70 0.3 40 0.2 50 0.4 60 0.4 30 0.3 40 0.1 50 0.1 20 0.4 30 0.2 40 Initial Investment $80 mil. Discount Rate 8%
Describe your answer for each question in complete sentences, whenever it is necessary. Show all of your calculations and processes for the following points:
- Describe and calculate Project A’s expected net present value (ENPV) and standard deviation (SD), assuming the discount rate (or risk-free interest rate) to be 8%. What is the decision rule in terms of ENPV? What will be San Diego LLC’s decision regarding this project? Describe your answer.
- The company is also considering another three-year project, Project B, which has an ENPV of $32 million and standard deviation of $10.5 million. Project A and B are mutually exclusive. Which of the two projects would you prefer if you do not consider the risk factor? Explain.
- Describe the coefficient of variation (CV) and the standard deviation (SD) in connection with risk attitudes and decision making. If you now also consider your risk-aversion attitude, as the CEO of the San Diego LLC will you make a different decision between Project A and Project B? Why or why not?
BUS 640 Week 1 Assignment Economics of Risk and Uncertainty Applied Problems
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Economics of Risk and Uncertainty Applied Problems.Please, complete the following two applied problems. Show all your calculations and explain your results.
Problem 1: A generous university benefactor has agreed to donate a large amount of money for student scholarships. The money can be provided in one lump sum of $12 million in Year 0 (the current year), or in parts, in which $7 million can be provided at the end of Year 1, and another $7 million can be provided at the end of Year 2.
Describe your answer for each item below in complete sentences, whenever it is necessary. Show all of your calculations and processes for the following points:
1. Assuming the opportunity interest rate is 8%, what is the present value of the second alternative mentioned above? Which of the two alternatives should be chosen and why?
2. How would your decision change if the opportunity interest rate is 12%?
3. Provide a description of a scenario where this kind of decision between two types of payment streamsapplies in the “real-world” business setting.
Problem 2:The San Diego LLC is considering a three-year project, Project A, involving an initial investment of $80 million and the following cash inflows and probabilities: Year 0 Year 2 Year 2 Year 3 Probability Cash Flow ($ mil.) Probability Cash Flow ($mil.) Probability Cash Flow ($ mil.) 0.2 50 0.1 60 0.3 70 0.3 40 0.2 50 0.4 60 0.4 30 0.3 40 0.1 50 0.1 20 0.4 30 0.2 40 Initial Investment $80 mil. Discount Rate 8%
Describe your answer for each question in complete sentences, whenever it is necessary. Show all of your calculations and processes for the following points:
- Describe and calculate Project A’s expected net present value (ENPV) and standard deviation (SD), assuming the discount rate (or risk-free interest rate) to be 8%. What is the decision rule in terms of ENPV? What will be San Diego LLC’s decision regarding this project? Describe your answer.
- The company is also considering another three-year project, Project B, which has an ENPV of $32 million and standard deviation of $10.5 million. Project A and B are mutually exclusive. Which of the two projects would you prefer if you do not consider the risk factor? Explain.
- Describe the coefficient of variation (CV) and the standard deviation (SD) in connection with risk attitudes and decision making. If you now also consider your risk-aversion attitude, as the CEO of the San Diego LLC will you make a different decision between Project A and Project B? Why or why not?
BUS 640 Week 1 Discussion 1 Firm Objectives
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Firm Objectives. Read the articles Jessica Alba’s Triple Bottom startup raises $25 million and The bottom line of corporate good.
In reference to the articles, discuss how firms incorporate the triple bottom line concept into traditional business concerns over profitability. Respond to at least two of your classmates’ posts.
BUS 640 Week 1 Discussion 1 Firm Objectives
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Firm Objectives. Read the articles Jessica Alba’s Triple Bottom startup raises $25 million and The bottom line of corporate good.
In reference to the articles, discuss how firms incorporate the triple bottom line concept into traditional business concerns over profitability. Respond to at least two of your classmates’ posts.
BUS 640 Week 1 Discussion 2 Decision Making Under Uncertainty
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Decision Making Under Uncertainty. To save on gasoline expenses, Edith and Mathew agreed to carpool together for traveling to and from work. Edith preferred to travel on I-20 highway as it was usually the fastest, taking 25 minutes in the absence of traffic delays. Mathew pointed out that traffic jams on the highway can lead to long delays making the trip 45 minutes. He preferred to travel along Shea Boulevard, which was longer (35 minutes), but rarely had traffic jams. Edith agreed that in case of traffic jams, Shea Boulevard was a reasonable alternative. Neither of them knows the state of the highway ahead of time.
After driving to work on the I-20 highway for 1 month (20 workdays), they found the highway to be jammed 3 times. Assuming that this month is a good representation of all months ahead, should Edith and Mathew continue to use the highway for traveling to work?
How would you conclusion change for the winter months, if bad weather makes it likely for traffic jams on the highway to increase to 6 days per month?
How would your conclusion change if Mathew purchased a new smart-phone app that could show the status of the highway traffic prior to their drive each morning, thus reducing the probability of them getting into a jam down to only 1day per month (where on this day, the app showed no traffic jam, but a jam developed in the meantime as they were driving along the highway).
BUS 640 Week 1 Discussion 2 Decision Making Under Uncertainty
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Decision Making Under Uncertainty. To save on gasoline expenses, Edith and Mathew agreed to carpool together for traveling to and from work. Edith preferred to travel on I-20 highway as it was usually the fastest, taking 25 minutes in the absence of traffic delays. Mathew pointed out that traffic jams on the highway can lead to long delays making the trip 45 minutes. He preferred to travel along Shea Boulevard, which was longer (35 minutes), but rarely had traffic jams. Edith agreed that in case of traffic jams, Shea Boulevard was a reasonable alternative. Neither of them knows the state of the highway ahead of time.
After driving to work on the I-20 highway for 1 month (20 workdays), they found the highway to be jammed 3 times. Assuming that this month is a good representation of all months ahead, should Edith and Mathew continue to use the highway for traveling to work?
How would you conclusion change for the winter months, if bad weather makes it likely for traffic jams on the highway to increase to 6 days per month?
How would your conclusion change if Mathew purchased a new smart-phone app that could show the status of the highway traffic prior to their drive each morning, thus reducing the probability of them getting into a jam down to only 1day per month (where on this day, the app showed no traffic jam, but a jam developed in the meantime as they were driving along the highway).
BUS 640 Week 2 Assignment Consumer Demand Analysis and Estimation Applied Problems
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Consumer Demand Analysis and Estimation Applied Problems. Please complete the following two applied problems:
Problem 1:Patricia is researching venues for a restaurant business. She is evaluating three major attributes that she considers important in her choice: taste, location, and price. The value she places on each attribute, however, differs according to what type of restaurant she is going to start. If she opens a restaurant in a suburban area of Los Angeles, then taste is the most important attribute, three times as important as location, and two times asimportant as price. If she opens a restaurant in the Los Angeles metropolitan area, then location becomes three times as important as taste and two times as important as price. She is considering two venues, respectively, a steak restaurant and a pizza restaurant, both of which are priced the same. She has rated each attribute on a scale of 1 to 100 for each of the two different types of restaurants.
Attribute Steak Restaurant Pizza Restaurant Taste 80 70 Location 55 80 Price 65 50
Show all of your calculations and processes. Describe your answer for each question in complete sentences.
- Which of the two options should Patricia pursue if she wants to open a restaurant in a suburban area of Los Angeles? Calculate the total expected utility from each restaurant option and compare. Graph is not required. Describe your answer, and show your calculations.
- Which of the two options should she pick if she plans to open a restaurant in the Los Angeles metropolitan area? Describe your answer, and show your calculations.
- Which option should she pursue if the probability of finding a restaurant venue in a suburban area can be reliably estimated as 0.7 and in a metropolitan area as 0.3? Describe your reasoning and show your calculations.
- Provide a description of a scenario in which this kind of decision between two choices, based on weighing their underlying attributes, applies in the “real-world” business setting. Furthermore, what are the benefits and drawbacks, if any, to this method of decision making?
Problem 2:The demand function for Newton’s Donuts has been estimated as follows:
Qx= -14 – 54Px + 45Py + 0.62Ax
whereQxrepresents thousands of donuts;Pxis the price per donut;Pyis the average price per donut of other brands of donuts; and Ax represents thousands of dollars spent on advertising Newton’s Donuts. The current values of the independent variables areAx=120,Px=0.95, andPy=0.64.
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
1. Calculate the price elasticity of demand for Newton’s Donuts and describe what it means. Describe your answer and show your calculations.
2. Derive an expression for the inverse demand curve for Newton’s Donuts. Describe your answer and show your calculations.
3. If the cost of producing Newton’s Donuts is constant at $0.15 per donut, should they reduce the price and thereafter, sell more donuts (assuming profit maximization is the company’s goal)?
4. Should Newton’s Donuts spend more on advertising?
BUS 640 Week 2 Assignment Consumer Demand Analysis and Estimation Applied Problems
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Consumer Demand Analysis and Estimation Applied Problems. Please complete the following two applied problems:
Problem 1:Patricia is researching venues for a restaurant business. She is evaluating three major attributes that she considers important in her choice: taste, location, and price. The value she places on each attribute, however, differs according to what type of restaurant she is going to start. If she opens a restaurant in a suburban area of Los Angeles, then taste is the most important attribute, three times as important as location, and two times asimportant as price. If she opens a restaurant in the Los Angeles metropolitan area, then location becomes three times as important as taste and two times as important as price. She is considering two venues, respectively, a steak restaurant and a pizza restaurant, both of which are priced the same. She has rated each attribute on a scale of 1 to 100 for each of the two different types of restaurants.
Attribute Steak Restaurant Pizza Restaurant Taste 80 70 Location 55 80 Price 65 50
Show all of your calculations and processes. Describe your answer for each question in complete sentences.
- Which of the two options should Patricia pursue if she wants to open a restaurant in a suburban area of Los Angeles? Calculate the total expected utility from each restaurant option and compare. Graph is not required. Describe your answer, and show your calculations.
- Which of the two options should she pick if she plans to open a restaurant in the Los Angeles metropolitan area? Describe your answer, and show your calculations.
- Which option should she pursue if the probability of finding a restaurant venue in a suburban area can be reliably estimated as 0.7 and in a metropolitan area as 0.3? Describe your reasoning and show your calculations.
- Provide a description of a scenario in which this kind of decision between two choices, based on weighing their underlying attributes, applies in the “real-world” business setting. Furthermore, what are the benefits and drawbacks, if any, to this method of decision making?
Problem 2:The demand function for Newton’s Donuts has been estimated as follows:
Qx= -14 – 54Px + 45Py + 0.62Ax
whereQxrepresents thousands of donuts;Pxis the price per donut;Pyis the average price per donut of other brands of donuts; and Ax represents thousands of dollars spent on advertising Newton’s Donuts. The current values of the independent variables areAx=120,Px=0.95, andPy=0.64.
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
1. Calculate the price elasticity of demand for Newton’s Donuts and describe what it means. Describe your answer and show your calculations.
2. Derive an expression for the inverse demand curve for Newton’s Donuts. Describe your answer and show your calculations.
3. If the cost of producing Newton’s Donuts is constant at $0.15 per donut, should they reduce the price and thereafter, sell more donuts (assuming profit maximization is the company’s goal)?
4. Should Newton’s Donuts spend more on advertising?
BUS 640 Week 2 Discussion 1 Marginal Rate of Substitution
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Marginal Rate of Substitution. What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate.
BUS 640 Week 2 Discussion 1 Marginal Rate of Substitution
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Marginal Rate of Substitution. What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate.
BUS 640 Week 2 Discussion 2 Demand Elasticity
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Demand Elasticity. Please, read the article Hainer, R. (2010), provided in the required readings section for this week. The tobacco industry is a prime example to consider when talking about price elasticity of demand. While nicotine use can be addictive for many users, it is not addictive for the so-called “social smokers”.
What can we say about the price elasticity of demand for nicotine products (such as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the group of “social smokers”? Can we say whose demand is likely to be more elastic? Why?
BUS 640 Week 2 Discussion 2 Demand Elasticity
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Demand Elasticity. Please, read the article Hainer, R. (2010), provided in the required readings section for this week. The tobacco industry is a prime example to consider when talking about price elasticity of demand. While nicotine use can be addictive for many users, it is not addictive for the so-called “social smokers”.
What can we say about the price elasticity of demand for nicotine products (such as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the group of “social smokers”? Can we say whose demand is likely to be more elastic? Why?
BUS 640 Week 3 Assignment Production Cost Analysis and Estimation Applied Problems
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Production Cost Analysis and Estimation Applied Problems. Please complete the following two applied problems: Problem 1:Jennifer William is the owner of a small pizza shop and is thinking of increasing products and lowering costs. William’s pizza shop owns four ovens and the cost of the four ovens is $1,000. Each worker is paid $500 per week. Workers employed Qty of pizzas produced per week 0 0 1 75 2 180 3 360 4 600 5 900 6 1140 7 1260 8 1360
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
1. Which inputs are fixed and which are variable in the production function of William’s pizza shop? Over what ranges do there appear to be increasing, constant, and/or diminishing returns to the number of workers employed?
2. What number of workers appears to be most efficient in terms of pizza product per worker?
3. What number of workers appears to minimize the marginal cost of pizza production assuming that eachpizza worker is paid $500 per week?
4. Why would marginal productivity decline when you hire more workers in the short run after a certainlevel?
5. How would expanding the business affect the economies of scale? When would you have constant returnsto scale or diseconomies of scale? Describe your answer.
Problem 2:The Paradise Shoes Company has estimated its weekly TVC function from data collected over the past several months, as TVC = 3450 + 20Q + 0.008Q2 where TVC represents the total variable cost and Q represents pairs of shoes produced per week. And its demand equation is Q = 4100 – 25P. The company iscurrently producing 1,000 pairs of shoes weekly and is considering expanding its output to 1,200 pairs of shoes weekly. To do this, it will have to lease another shoe-making machine ($2,000 per week fixed payment until the lease period ends).
Show all of your calculations and processes. Describe your answer for each item below in complete sentences, whenever it is necessary.
1. Describe and derive an expression for the marginal cost (MC) curve.
2. Describe and estimate the incremental costs of the extra 200 pairs per week (from 1,000 pairs to 1,200pairs of shoes).
3. What are the profit-maximizing price and output levels for Paradise Shoes? Describe and calculate theprofit-maximizing price and output.
4. Discuss whether or not Paradise Shoes should expand its output further beyond 1,200 pairs per week.State all assumptions and qualifications that underlie your recommendation.
BUS 640 Week 3 Assignment Production Cost Analysis and Estimation Applied Problems
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Production Cost Analysis and Estimation Applied Problems. Please complete the following two applied problems: Problem 1:Jennifer William is the owner of a small pizza shop and is thinking of increasing products and lowering costs. William’s pizza shop owns four ovens and the cost of the four ovens is $1,000. Each worker is paid $500 per week. Workers employed Qty of pizzas produced per week 0 0 1 75 2 180 3 360 4 600 5 900 6 1140 7 1260 8 1360
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
1. Which inputs are fixed and which are variable in the production function of William’s pizza shop? Over what ranges do there appear to be increasing, constant, and/or diminishing returns to the number of workers employed?
2. What number of workers appears to be most efficient in terms of pizza product per worker?
3. What number of workers appears to minimize the marginal cost of pizza production assuming that eachpizza worker is paid $500 per week?
4. Why would marginal productivity decline when you hire more workers in the short run after a certainlevel?
5. How would expanding the business affect the economies of scale? When would you have constant returnsto scale or diseconomies of scale? Describe your answer.
Problem 2:The Paradise Shoes Company has estimated its weekly TVC function from data collected over the past several months, as TVC = 3450 + 20Q + 0.008Q2 where TVC represents the total variable cost and Q represents pairs of shoes produced per week. And its demand equation is Q = 4100 – 25P. The company iscurrently producing 1,000 pairs of shoes weekly and is considering expanding its output to 1,200 pairs of shoes weekly. To do this, it will have to lease another shoe-making machine ($2,000 per week fixed payment until the lease period ends).
Show all of your calculations and processes. Describe your answer for each item below in complete sentences, whenever it is necessary.
1. Describe and derive an expression for the marginal cost (MC) curve.
2. Describe and estimate the incremental costs of the extra 200 pairs per week (from 1,000 pairs to 1,200pairs of shoes).
3. What are the profit-maximizing price and output levels for Paradise Shoes? Describe and calculate theprofit-maximizing price and output.
4. Discuss whether or not Paradise Shoes should expand its output further beyond 1,200 pairs per week.State all assumptions and qualifications that underlie your recommendation.
BUS 640 Week 3 Discussion 1 Relevant Costs
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Relevant Costs. Two partners own together a small landscaping business in North Carolina, called Summer Lawn Care. They have been specializing in summer grass seeding, installation, and maintenance. Recently, the partners acquired special technology and know-how for winter grass installations and maintenance. They also added a tree cutting service as recent storms in the area had caused demand for this service to soar. One of the partners insists that the name of the business should change to Lawn and Tree Care, so that it better reflects the range of services and, thus, generates more customer interest, and thus contracts. The second partner wants to keep the old name and argues, “We have already paid for business cards, vehicle paint,signage, and ads in Yellow Pages”. Evaluate the arguments of the two partners. Explain and illustrate their points by identifying the relevant and irrelevant costs for this decision.
BUS 640 Week 3 Discussion 1 Relevant Costs
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Relevant Costs. Two partners own together a small landscaping business in North Carolina, called Summer Lawn Care. They have been specializing in summer grass seeding, installation, and maintenance. Recently, the partners acquired special technology and know-how for winter grass installations and maintenance. They also added a tree cutting service as recent storms in the area had caused demand for this service to soar. One of the partners insists that the name of the business should change to Lawn and Tree Care, so that it better reflects the range of services and, thus, generates more customer interest, and thus contracts. The second partner wants to keep the old name and argues, “We have already paid for business cards, vehicle paint,signage, and ads in Yellow Pages”. Evaluate the arguments of the two partners. Explain and illustrate their points by identifying the relevant and irrelevant costs for this decision.
BUS 640 Week 3 Discussion 2 Contribution Analysis
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Contribution Analysis. Explain what is meant by “contribution analysis”. Carefully define the term and provide examples to illustrate it.
BUS 640 Week 3 Discussion 2 Contribution Analysis
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Contribution Analysis. Explain what is meant by “contribution analysis”. Carefully define the term and provide examples to illustrate it.
BUS 640 Week 4 Assignment Market Structures and Pricing Decisions Applied Problems
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Market Structures and Pricing Decisions Applied Problems. Please complete the following two applied problems:
Problem 1:Robert’s New Way Vacuum Cleaner Company is a newly started small business that produces vacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for the product is expressed as Q = 5000 – 25P where Q is the number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by TC = 1500 + 20Q + 0.02Q2.
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
1. What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and illustrate the equilibrium point.
2. How much economic profit do you expect that Robert’s company will make in the first year?
3. Do you expect this economic profit level to continue in subsequent years? Why or why not?
Problem 2:Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east- coast city. Last year, GGC’s price for the typical lawn system was $1,900 compared with BLG’s price of $2,100. GGC installed 9,960 systems, or about 60% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners because the parts are readily available at hardware stores.)
GGC has substantial excess capacity–it could easily install 25,000 systems annually, as it has all the necessary equipment and can easily hire and train installers. Accordingly, GGC is considering expansion into the eastern suburbs, where the homeowners are less wealthy. In past years, both GGC and BLG have installed severalhundred systems in the eastern suburbs but generally their sales efforts are met with the response that the systems are too expensive. GGC has hired you to recommend a pricing strategy for both the western and eastern suburb markets for this coming season. You have estimated two distinct demand functions, as follows:
Qw =2100 – 6.25Pgw + 3Pbw + 2100Ag - 1500Ab + 0.2Yw
for the western market and
Qe = 36620 - 25Pge + 7Pbe + 1180Ag - 950Ab + 0.085Ye
for the eastern market, where Q refers to the number of units sold; P refers to price level; A refers to advertising budgets of the firms (in millions); Y refers to average disposable income levels of the potential customers; the subscripts w and e refer to the western and eastern markets, respectively; and the subscripts g and b refer to GGC and BLG, respectively. GGC expects to spend $1.5 million (use Ag = 1.5) on advertising this coming year and expects BLG to spend $1.2 million (use Ab = 1.2) on advertising. The average household disposable income is $60,000 in the western suburbs and $30,000 in the eastern suburbs. GGC does not expect BLG to change its price from last year because it has already distributed its glossy brochures (with the $2,100 price stated) in both suburbs, and its TV commercial has already been produced. GGC’s cost structure has been estimated as TVC = 750Q + 0.005Q2, where Q represents single lawn watering systems.
Show all of your calculations and processes. Describe your answer for each item below in complete sentences, whenever it is necessary.
1. Derive the demand curves for GGC’s product in each market.
2. Derive GGC’s marginal revenue (MR) and marginal cost (MC) curves in each market. Show graphicallyGGC’s demand, MR, and MC curves for each market.
3. Derive algebraically the quantities that should be produced and sold, and the prices that should becharged, in each market.
4. Calculate the price elasticities of demand in each market and discuss these in relation to the prices to becharged in each market.
5. Add a short note to GGC management outlining any reservations and qualifications you may haveconcerning your price recommendations.
BUS 640 Week 4 Assignment Market Structures and Pricing Decisions Applied Problems
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Market Structures and Pricing Decisions Applied Problems. Please complete the following two applied problems:
Problem 1:Robert’s New Way Vacuum Cleaner Company is a newly started small business that produces vacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for the product is expressed as Q = 5000 – 25P where Q is the number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by TC = 1500 + 20Q + 0.02Q2.
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
1. What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and illustrate the equilibrium point.
2. How much economic profit do you expect that Robert’s company will make in the first year?
3. Do you expect this economic profit level to continue in subsequent years? Why or why not?
Problem 2:Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east- coast city. Last year, GGC’s price for the typical lawn system was $1,900 compared with BLG’s price of $2,100. GGC installed 9,960 systems, or about 60% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners because the parts are readily available at hardware stores.)
GGC has substantial excess capacity–it could easily install 25,000 systems annually, as it has all the necessary equipment and can easily hire and train installers. Accordingly, GGC is considering expansion into the eastern suburbs, where the homeowners are less wealthy. In past years, both GGC and BLG have installed severalhundred systems in the eastern suburbs but generally their sales efforts are met with the response that the systems are too expensive. GGC has hired you to recommend a pricing strategy for both the western and eastern suburb markets for this coming season. You have estimated two distinct demand functions, as follows:
Qw =2100 – 6.25Pgw + 3Pbw + 2100Ag - 1500Ab + 0.2Yw
for the western market and
Qe = 36620 - 25Pge + 7Pbe + 1180Ag - 950Ab + 0.085Ye
for the eastern market, where Q refers to the number of units sold; P refers to price level; A refers to advertising budgets of the firms (in millions); Y refers to average disposable income levels of the potential customers; the subscripts w and e refer to the western and eastern markets, respectively; and the subscripts g and b refer to GGC and BLG, respectively. GGC expects to spend $1.5 million (use Ag = 1.5) on advertising this coming year and expects BLG to spend $1.2 million (use Ab = 1.2) on advertising. The average household disposable income is $60,000 in the western suburbs and $30,000 in the eastern suburbs. GGC does not expect BLG to change its price from last year because it has already distributed its glossy brochures (with the $2,100 price stated) in both suburbs, and its TV commercial has already been produced. GGC’s cost structure has been estimated as TVC = 750Q + 0.005Q2, where Q represents single lawn watering systems.
Show all of your calculations and processes. Describe your answer for each item below in complete sentences, whenever it is necessary.
1. Derive the demand curves for GGC’s product in each market.
2. Derive GGC’s marginal revenue (MR) and marginal cost (MC) curves in each market. Show graphicallyGGC’s demand, MR, and MC curves for each market.
3. Derive algebraically the quantities that should be produced and sold, and the prices that should becharged, in each market.
4. Calculate the price elasticities of demand in each market and discuss these in relation to the prices to becharged in each market.
5. Add a short note to GGC management outlining any reservations and qualifications you may haveconcerning your price recommendations.
BUS 640 Week 4 Discussion 1 Strategic Behavior in Oligopolies
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Strategic Behavior Oligopolies. An interesting example of strategic behavior comes from a 1997 article about Microsoft’s investment in Apple (New Straits Times, 1997). The article is included in the Required Readings list. Facing tough anti-trust scrutiny from government agencies, Microsoft provided financial support to Apple in order to ensure Apple’s survival and, therefore, to ensure that competitiveness in the industry remains. Moreover, the partnership with Apple provided an additional market for Microsoft’s products – the MS Office and the IE products were to be bundled with the MAC OS as one of the conditions for this financing. Discuss this case in the context of market structure and strategic behavior. What market structure dothese firms operate in? Why did Microsoft need to preserve competitiveness in the industry? What was Microsoft afraid of in the event that Apple did not survive?
BUS 640 Week 4 Discussion 1 Strategic Behavior in Oligopolies
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Strategic Behavior Oligopolies. An interesting example of strategic behavior comes from a 1997 article about Microsoft’s investment in Apple (New Straits Times, 1997). The article is included in the Required Readings list. Facing tough anti-trust scrutiny from government agencies, Microsoft provided financial support to Apple in order to ensure Apple’s survival and, therefore, to ensure that competitiveness in the industry remains. Moreover, the partnership with Apple provided an additional market for Microsoft’s products – the MS Office and the IE products were to be bundled with the MAC OS as one of the conditions for this financing. Discuss this case in the context of market structure and strategic behavior. What market structure dothese firms operate in? Why did Microsoft need to preserve competitiveness in the industry? What was Microsoft afraid of in the event that Apple did not survive?
BUS 640 Week 4 Discussion 2 Local Market Power
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Local Market Power. Bulls Eye department store specializes in the sales of discounted clothing, shoes, household items, etc. similar to the offerings at a regular Walmart or Target. Bulls Eye is the only department store in Show Low and the nearest other discount retailer is Target, located 49 miles away in Eagar. Bulls Eye, therefore, has some market power in its local area. Despite having some market power, Bulls Eye is currently suffering losses. An analyst at Bulls Eye is recommending to the manager to raise prices, so that profitability can be improved. The manager is unsure of this strategy as recent data points to increasing numbers of individuals shopping more and more. What are the pros and cons of raising the prices at Bulls Eye and would that strategy be profitable?
BUS 640 Week 4 Discussion 2 Local Market Power
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Local Market Power. Bulls Eye department store specializes in the sales of discounted clothing, shoes, household items, etc. similar to the offerings at a regular Walmart or Target. Bulls Eye is the only department store in Show Low and the nearest other discount retailer is Target, located 49 miles away in Eagar. Bulls Eye, therefore, has some market power in its local area. Despite having some market power, Bulls Eye is currently suffering losses. An analyst at Bulls Eye is recommending to the manager to raise prices, so that profitability can be improved. The manager is unsure of this strategy as recent data points to increasing numbers of individuals shopping more and more. What are the pros and cons of raising the prices at Bulls Eye and would that strategy be profitable?
BUS 640 Week 5 Assignment Price Quotes and Pricing Decisions Applied Problems
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Price Quotes and Pricing Decisions Applied Problems. Please complete the following two applied problems:
Problem 1:Jessica Alba, a famous actress, starts the baby and family products business, The Honest Company, with Christopher Gavigan. Alba and Gavigan set up their site so families can choose what kinds of non-toxic, all- natural products they’d like to use and get them in a bundle. Families can choose all kinds of products from food to hygiene necessities and cleaning supplies. Suppose they are thinking of expanding their business into five domestic markets: Phoenix, Dallas, Chicago, New York, and Atlanta. Assume their primary goal of business is to maximize economic profits, although they want to do business honestly.
Show all your calculations and process. Describe your answer for each question in three- to five-complete sentences.
1. You are a business adviser for Alba and Gavigan. Describe a skimming price and a penetration price, and advise them whether they should charge a skimming price or a penetration price, with supportive reasoning for and against each pricing alternative.
2. Are they likely to make economic profits initially? Can they continue to make economic profits in the long term? Why or why not? Discuss.
3. What advice would you give to Alba and Gavigan to help them make more profit in the long term?
Problem 2:You operate your own small building company and have decided to bid on a government contract to build a pedestrian walkway in a national park during the coming winter. The walkway is to be of standard government design and should involve no unexpected costs. Your present capacity utilization rate is moderate and allows sufficient scope to understand this contract, if you win it. You calculate your incremental costs to be $268,000 and your fully allocated costs to be $440,000. Your usual practice is to add between 60% and 80% to your incremental costs, depending on capacity utilization rate and other factors. You expect three other firms to also bid on this contract, and you have assembled the following competitor intelligence about those companies.
Issue
Rival A
Rival B
Rival C
Capacity Utilization
At full capacity
Moderate
Very low
Goodwill Considerations
Very concerned
Moderately concerned
Not concerned
Production Facilities
Small and inefficient plant
Medium sized and efficient plant
Large and very efficient plant
Previous Bidding Pattern
Incremental cost plus 35- 50%
Full cost plus 8-12%
Full cost plus 10-15%
Cost Structure
Incremental costs exceed yours by about 10%
Similar cost structure to yours
Incremental costs 20% lower but full costs are similar to yours
Aesthetic Factors
Does not like winter jobs or dirty jobs
Does not like messy or inconvenient jobs
Likes projects where it can show its creativity
PoliticalFactors
Decision makeris a relative of the buyer
Decision makeris seeking a new job
Decision makeris looking for a promotion
Show all of your calculations and processes. Describe your answers in three- to five-complete sentences.
1. What price would you bid if you must win the project?
2. What price would you bid if you want to maximize the expected value of the contribution from thiscontract?
3. Defend your answers with discussion, making any assumptions you feel are reasonable and/or aresupported by the information provided.
BUS 640 Week 5 Assignment Price Quotes and Pricing Decisions Applied Problems
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Price Quotes and Pricing Decisions Applied Problems. Please complete the following two applied problems:
Problem 1:Jessica Alba, a famous actress, starts the baby and family products business, The Honest Company, with Christopher Gavigan. Alba and Gavigan set up their site so families can choose what kinds of non-toxic, all- natural products they’d like to use and get them in a bundle. Families can choose all kinds of products from food to hygiene necessities and cleaning supplies. Suppose they are thinking of expanding their business into five domestic markets: Phoenix, Dallas, Chicago, New York, and Atlanta. Assume their primary goal of business is to maximize economic profits, although they want to do business honestly.
Show all your calculations and process. Describe your answer for each question in three- to five-complete sentences.
1. You are a business adviser for Alba and Gavigan. Describe a skimming price and a penetration price, and advise them whether they should charge a skimming price or a penetration price, with supportive reasoning for and against each pricing alternative.
2. Are they likely to make economic profits initially? Can they continue to make economic profits in the long term? Why or why not? Discuss.
3. What advice would you give to Alba and Gavigan to help them make more profit in the long term?
Problem 2:You operate your own small building company and have decided to bid on a government contract to build a pedestrian walkway in a national park during the coming winter. The walkway is to be of standard government design and should involve no unexpected costs. Your present capacity utilization rate is moderate and allows sufficient scope to understand this contract, if you win it. You calculate your incremental costs to be $268,000 and your fully allocated costs to be $440,000. Your usual practice is to add between 60% and 80% to your incremental costs, depending on capacity utilization rate and other factors. You expect three other firms to also bid on this contract, and you have assembled the following competitor intelligence about those companies.
Issue
Rival A
Rival B
Rival C
Capacity Utilization
At full capacity
Moderate
Very low
Goodwill Considerations
Very concerned
Moderately concerned
Not concerned
Production Facilities
Small and inefficient plant
Medium sized and efficient plant
Large and very efficient plant
Previous Bidding Pattern
Incremental cost plus 35- 50%
Full cost plus 8-12%
Full cost plus 10-15%
Cost Structure
Incremental costs exceed yours by about 10%
Similar cost structure to yours
Incremental costs 20% lower but full costs are similar to yours
Aesthetic Factors
Does not like winter jobs or dirty jobs
Does not like messy or inconvenient jobs
Likes projects where it can show its creativity
PoliticalFactors
Decision makeris a relative of the buyer
Decision makeris seeking a new job
Decision makeris looking for a promotion
Show all of your calculations and processes. Describe your answers in three- to five-complete sentences.
1. What price would you bid if you must win the project?
2. What price would you bid if you want to maximize the expected value of the contribution from thiscontract?
3. Defend your answers with discussion, making any assumptions you feel are reasonable and/or aresupported by the information provided.
BUS 640 Week 5 Discussion 1 Good Will in Price Bidding
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Good Will in Price Bidding. Sometimes, a bidder on a work contract may bid lower than what would maximize his/her profit from the contract and the reason for that is to create goodwill (to increase expected future business from the buyer). How would you value the goodwill that is obtained in this way?
BUS 640 Week 5 Discussion 1 Good Will in Price Bidding
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Good Will in Price Bidding. Sometimes, a bidder on a work contract may bid lower than what would maximize his/her profit from the contract and the reason for that is to create goodwill (to increase expected future business from the buyer). How would you value the goodwill that is obtained in this way?
BUS 640 Week 5 Discussion 2 New Product Introduction
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New Product Introduction. Bayer Schering Pharma AG, Germany owns Alka-Seltzer, which was launched in 1931 and was meant for relief of minor aches, pains, inflammation, fever, headache, heartburn, sour stomach, indigestion, and hangovers. Alka-Seltzer Plus was a spin-off of the original medicine, meant to relieve colds and flu.
The company has recently introduced a new and improved Alka-Seltzer Plus, as described in thisTV ad. The ad shows that Alka-Seltzer Plus can fight congestion, unlike DayQuil.
Explain how Alka-Seltzer Plus has been quality and price-positioned in an existing market. In your opinion, has Bayer positioned their product appropriately in the market for cold and flu symptoms relief products? Would you advise Bayer to use a skimming or a penetration pricing strategy? Explain your reasoning.
How do you think Proctor and Gamble, the company who produces Vicks DayQuil, would respond to the ad?
BUS 640 Week 5 Discussion 2 New Product Introduction
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New Product Introduction. Bayer Schering Pharma AG, Germany owns Alka-Seltzer, which was launched in 1931 and was meant for relief of minor aches, pains, inflammation, fever, headache, heartburn, sour stomach, indigestion, and hangovers. Alka-Seltzer Plus was a spin-off of the original medicine, meant to relieve colds and flu.
The company has recently introduced a new and improved Alka-Seltzer Plus, as described in thisTV ad. The ad shows that Alka-Seltzer Plus can fight congestion, unlike DayQuil.
Explain how Alka-Seltzer Plus has been quality and price-positioned in an existing market. In your opinion, has Bayer positioned their product appropriately in the market for cold and flu symptoms relief products? Would you advise Bayer to use a skimming or a penetration pricing strategy? Explain your reasoning.
How do you think Proctor and Gamble, the company who produces Vicks DayQuil, would respond to the ad?
