# BUS 640 Entire Class / Managerial Economics / New

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 \$10mln, or in parts, where \$5.5mln can be provided in year 1, and another \$5.5mln can be provided in year 2. Assuming the opportunity interest rate is 6%, what is the present value of the second alternative? Which of the two alternatives should be chosen and why?
How would your decision change if the opportunity interest rate was 12%? Please, show all your calculations.
1. Volkswagen is considering opening an Assembly Plant in Chattanooga, Tennessee, for the production of its 2012 Passat, tailored for the US market. The CEO of the company is considering two potential options for the size of the plant: one is a large size with a projected annual production of 150,000 cars, and the other one is a smaller size plant, which is cheaper to build, but can only produce up to 80,000 cars per year. Depending on the expected level of demand for these cars in the US, Volkswagen has to decide which option is more profitable. The discount rate is 6% and for simplicity purposes, the CEO is only evaluating a two-year horizon. The initial factory setup cost, the expected demand scenarios, profit, and probabilities are shows in the below table. Calculate the Net Present Value in each of the two options. Which option should the CEO choose and why? Please, show all your calculations.
2. An angel investor is considering investing in one of two start-up businesses and is evaluating the expected returns along with the risk of each option in order to choose the better alternative.
Business 1 is an innovative protein energy drink, which has ENPV of \$100,000 with a standard deviation of \$40,000.Business 2 is a unique chicken wings dipping sauce with an ENPV of \$60,000 and a standard deviation of \$25,000.
1. a) Apply the coefficient-of-variation decision criterion to these alternatives to find out which is preferred by the angel investor, assuming that he/she is risk-averse.
2. b) Apply the maximin criterion, assuming that the worst outcome in Business 1 is to lose \$5,000, whereas the worst outcome in Business 2 is to make only \$5,000 in profit.
3. c) If you were the angel investor, what is your certainty equivalent for these two projects? Are you risk-averse, risk-neutral, or risk-lover?
1. Roshima is researching universities where she could study for her MBA degree. She is considering 3 major attributes that she considers important in her choice: ranking, price, and location. The value she places on each attribute, however, differs according to whether she remains full-time employed during her studies or quits her job and focuses on her degree. If she continues to work full time and takes all her courses online, then ranking is the most important attribute, twice as important as price and three times as important as location. If she quits her job and attends school full time, then location becomes three times as important as ranking and twice as important as price. She is considering two universities, respectively, the MBA program at Arizona State University (ASU) and the MBA program at University of Phoenix (UOP), both of which are priced at approximately \$25,000. She has rated each attribute on a scale of 1 to 100 for each of the two schools.
2. Which of the two options should Roshima pursue of she wants to keep her full-time job? (Calculate the total expected utility from each school option and compare. Graph is not required)
3. Which of the two options should she pick if she plans to quit her job and dedicate to her studies?
4. Which option should she pursue if the probability of being laid off and unable to find a new job is estimated as 0.6? Show your calculations and explain your reasoning.
5. The demand function for Einstein Bagels has been estimated as follows:
– 40.73Px + 84.17Py + 0.55Axwhere Qx represents thousands of bagels; Px is the price per bagel; Py is the average price per bagel of other brands of bagels; and Ax represents thousands of dollars spent advertising Einstein Bagels. The current values of the independent variables are , , and
1. Calculate the price elasticity of demand for Einstein’s Bagels and explain what it means.
2. Derive an expression for the (inverse) demand curve for Einsteins’s Bagels.
3. If the cost of producing Einstein’s Bagels is constant at \$0.10 per bagel, should they reduce price and thereafter, sell more bagels (assume profit maximization is the company’s goal)?
4. Should Einstein Bagels spend more on advertising?
5. The consulting firm that you work for has been hired by the US Government to provide an independent analysis of the demand-side effects of a contemplated increase in the tax on gasoline. They provide you with a data set relating to the period 1962-1987, which they say contains valuable historic lessons relating to the impact of volatile pump prices due to the supply restrictions imposed by the Organization of Petroleum Exporting Countries (OPEC), and the Corporate Average Fuel Economy (CAFE) regulations that required car manufacturers to increase the fuel efficiency of the cars they sold, while at the same time Real Disposable Income (RDI) per capita was rising, the number of passenger cars (NPC) almost doubled, and inflation was pushing up the Consumer Price Index (CPI).
Where: Qx is the gasoline consumption by passenger cars (in millions of gallons);Px is the retail (pump) price of gasoline, in cents per gallon;NPC is the number of registered passenger cars (in thousands);MPG is the national average of miles travelled per gallon of gasoline;RDI is Real Disposable Income per capita (in 1982 dollars); andCPI is the Consumer Price Index (base year 1967).This data illustrates some very interesting issues that were happening over that tumultuous period of our history. You will note that the pump price of gasoline more than doubled five-fold from the mid-1960s to the mid-1970s, and then doubled again in the early 1980s, due to the OPEC crises. The number of passenger cars climbed relentlessly with the love affair with ‘muscle cars’ despite the increasing pump price of gasoline, and indeed outpacing the increases in real disposable income per capita. The average MPG climbed only slowly as manufacturers increased the fuel efficiency of new cars and consumers slowly traded up to the more efficient cars new cars and retired their older vehicles. The changes in CPI show that the rate of inflation was generally much greater than the rate of increase of pump prices as the increased production and transportation costs due to rising fuel prices pervaded the entire economy, pushing up the prices of food and other household items that drive the CPI.
1. Reconcile the fact that while the quantity demanded of gasoline and pump prices both rise over this period generally, they are inversely related along a demand curve.
2. Conduct a multiple regression analysis to explain the quantity demanded of gasoline in terms of the other data provided. (Transpose this data into an Excel spread-sheet and use the Excel regression tool, if loaded, or alternatively download an ‘add-in’ regression program such as ‘Statpro’ to find the regression statistics).
1. Jennifer Trucking Company operates a large rig transportation business in Texas that transports locally grown vegetables to San Diego, California. The company owns 5 large rigs and hires local drivers paid fixed salaries monthly, regardless of the number of trips or tons of cargo that each driver transports each month. The below table presents details about the number of drivers and the total cargo transported by the company at different staff levels.
2. Which inputs are fixed and which are variable in the production function of Jennifer Trucking Company? Over what ranges do there appear to be increasing, constant and/or diminishing returns to the number of drivers employed?
3. What number of drivers appears to be most efficient in terms of output per driver?
4. What number of drivers appears to minimize the marginal cost of transportation assuming that all drivers are paid the same salary?
5. The Palms Dry Cleaning Shop in Fort Lauderdale, Florida, faces a highly seasonal demand for its services, as the snow-birds retirees flock to Florida in mid-fall to enjoy the mild winter weather and then return to their main homes in mid-spring. Given this seasonality, Palms tries to keep the overhead costs as low as possible and therefore, often uses seasonal contracted labor to man its operations. The following table shows the labor costs in each month of operation over the past 12 months as well as the total number of garments that were dry-cleaned in each month. Palms pays fixed wages per hour to each employee, and we can assume that the costs of other variable inputs (such as chemicals, electricity, etc) have remained constant.
6. Derive average variable cost (AVC) data from the data in this table.
7. Use gradient analysis to provide an estimate of eleven data points that seem to represent the MC curve over this range of outputs. Plot these data points and sketch in estimated MC and AVC curves that seem to best fit these data points.
8. Suppose that demand is estimated to move from its present (May) level of 3,500 units to 4,000 units next month (June). What is the incremental cost of meeting this demand?
9. Assuming that Palm’s price to dry clean a garment has been constant at \$15 over the past year, and will remain at that level, what contribution to overheads and profit can it expect in June?
10. Over the past 12 months the Four Winds Novelty Company firm has recorded its internet sales (equals monthly output levels) and its monthly total variable costs (TVC) for a particular novelty item as shown in the following table. Sales have grown over this period with relatively few shocks due to uncontrollable weather, political and sporting events. This online retailer carries no inventories; when it receives a pre-paid on-line order from a customer, it simply buys the product from a supplier and ships it out to the customer.
11. Using regression analysis, find an equation that best fits the data to represent the TVC function.
12. At what sales/output level will marginal costs (MC) reach a minimum?
13. Estimate the value of TVC for sales/output level 250,000 units, and calculate the 95% confidence interval for your estimate
BUS 640 Week 4 DQ 1 Strategic Behavior Oligopolies 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 do these 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 DQ 2 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 Market Structures and Pricing Decisions Applied Problems   Please, complete the following 2 applied problems in a Word or Excel document. Show all your calculations and explain your results. Submit your assignment in the drop box by using the Assignment Submission button.A small business which produces plastic vacuum-suction covers for round household dishes has a monopoly that is protected by a utility patent. The market demand curve for this product is estimated to be: – 25P where Q is the number of plate covers per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by + 2500Q -0.25*Q2.(i) What is the profit-maximizing price and output level? Solve this algebraically for equilibrium P and Q and also plot the MC, D and MR curves and illustrate the equilibrium point.(ii) What profit do you expect that the firm will make in the first year?(iii) Do you expect this profit level to continue in subsequent years? Why or why not?
1. 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 \$1,995 compared with BLG’s price of \$2,100. GGC installed 9,130 systems, or about 55% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners since 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 several hundred 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 east¬ern suburb markets for this coming season. You have estimated two distinct demand functions, as follows:Qw =1,035.548 – 6.07164Pgw + 2.83Pbw + 2,100Ag – 1,500Ab + 0.2348Ywfor the western market andQe = 49,714.29 – 30.7692Pge + 6.984Pbe + 1,180Ag – 950Ab + 0.0825Yefor 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 on advertising this coming year and expects BLG to spend \$1.2 million on advertising. The average household disposable income is \$55,000 in the western suburbs and \$25,000 in the eastern suburbs. GGC does not expect BLG to change its price from last year, since 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 5 755.363Q 1 0.005Q2 where Q represents single lawn watering systems.
1. Derive the demand curves for GGC’s product in each market.
2. Plot graphically the demand and MR curves for each market, and also show GGC’s combined marginal revenue curve (MR) and its MC curve. Show graphically the quantities that should be produced and sold, and the prices that should be charged, in each market.
3. Confirm your quantity and price results algebraically.
4. Calculate the price elasticities of demand in each market and discuss these in relation to the prices to be charged in each market.
5. Add a short note to GGC management outlining any reservations and qualifications you may have concerning your price recommendations.