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Managerial Economics
BUSGR 510: Exam 1 2. Suppose I want to open my own restaurant. Currently I am working as a Financial Analyst at a top bank earning $175,000 a year, which I will have to quit to open a restaurant. I am also going to invest $100,000 of my savings which were earning an average annual rate of 6%. What is my opportunity cost(implicit cost) of opening the restaurant. 3. Suppose you can hire 10 workers for $12 each, but to hire the 11th worker you will have to pay all your workers $15 each. What is the marginal cost of hiring the 11th worker. 4. Briefly explain the term post investment holdup. Give an example. How can this problem be solved (Give any one brief solution) 5. ACME Coal paid $5000 to lease a railcar from the Reading Railroad Company. Under the terms of the lease, 50% of the payment made is refundable if the railcar is returned within two days of signing the lease. (a) Upon signing the lease and paying the $5000, how large are ACME’s fixed costs. What are its sunk costs? Explain briefly (b) One day after signing the lease, ACME realizes that it has no use for the railcar. However a farmer has a bumper crop of wheat and has offered, on the same day, to sublease the railcar from ACME at a price of $4500. Should ACME accept the offer? Explain why or why not. 6. East Side Corporation sells Tshirts in the wholesale market. The company has monthly fixed costs of $2000, and it sells the shirts for $5 per shirt. Its AVC and MC is $2.50 per Shirt. (a) How many Shirts will it have to sell in order to break even (b) Suppose the company wants to have profits of $20000. What monthly quantity will it have to sell to accomplish this. 7. Suppose a firm’s demand curve is given by P = 50 − 0.25Q. Find the (value of) price elasticity of demand for the demand curve when the price is $10. Is demand elastic or inelastic? 8. Suppose the marginal cost of production for a company is $6 at its current production levels. Suppose the price elasticity of demand is constant at 2 between prices of $10 to $15, if current prices are $10, is the company pricing at the correct optimal level? If not, should it increase or decrease prices and to what level? 9. In these two cases, you can use any example. (a) Explain what would happen to prices in a market equilibrium if there is an increase in the demand for a product. Give an example of a real life situation pertaining to this. (b) Explain what would happen to prices in a market equilibrium if there is an increase in the supply for a product. Give an example of a real life situation pertaining to this. 10. State Porters five forces. Give an example of a real life business situation in which the business has been able to act strategically to sustain a competitive advantage. 11. Download the file Starz.xls from Blackboard, and also Memo 1. Answer the questions in memo 1 you will need to do your work in the excel spreadsheet as well as provide a typed page of relevant explanations (about half a page double spaced), and submit both to me. To estimate the demand curve you need to perform a regression using excel. Open excel, go to tools, under tools go to data analysis and you should be able to see regression under that. If you dont see a data analysis option under tools, you will need to perform an add in refer to the document I have posted under assignments titled ”Instructions for Installing Analysis Toolpack”. Once you have this, in data analysis go to regression, this will open up a box under input y range, put (right click and highlight) in the price column including the header, under input x range put in the quantity(subscribers) column including the header, check labels, confidence level 95%, name a worksheet ply and click OK. You should see the results the constant is the intercept term of your demand equation, the coefficient with subscribers is your slope. Use this to calculate elasticities in excel. Answer all the questions in the memo. 12. Degree of Operating Leverage (DOL) is a ratio concept that gives management an idea of the effect on profits of a small change in quantity assuming that price, fixed cost and average variable costs remain the same. The formula for DOL = %_(profits) %_Q . %_(profits) can be written as _(profits) profits = _Q(P−AV C) Q(P−AV C)−FC .Thus DOL = Q(P−AV C) Q(P−AV C)−FC . (a) For a given price P=$5, AVC = $3 and FC=$20000, what is the DOL if the manufacturer is producing 15000 units? (b) Using the value of DOL calculated in (a) above, calculate the profits for a 10% increase and 10% decrease in quantity. (c) From the DOL formula, you can see that a manufacturing plant with higher fixed costs and lower variable costs will have a higher DOL relative to a plant with higher variable costs and lower fixed costs i.e. a capital intensive production process will have a higher DOL than a labor intensive process which means that a capital intensive production process will increase profits at a faster rate (relative to quantity) than a labor intensive process. Suppose a company is currently producing 1000 units of a bottled power drink priced at $5. It is using a manufacturing process with a fixed cost of $1450 and variable cost of $2.75 per unit (i.e. AVC). i. Calculate the DOL and the break even point for this production process. Is the company breaking even yet? ii. If the company installs updated machinery its fixed costs rise to $2000 and AVC drops to $2.25. Calculate the DOL and break even point. iii. At what production level should the company switch from the old machinery to the upgraded one?
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Managerial Economics
BUSGR 510: Exam 2: Due Thursday August 8th 1. Suppose the US Dollar appreciates in its value against the Euro. (a) If you were exporting US made products to Europe, what would happen to the prices of your exports? Explain briefly (5 points) (b) If you were importing to the US products made in Europe, what would happen to the prices of your imports? Explain briefly (5 points) 2. What should you do to maximize profits with respect to prices after you acquire a substitute product. Which prices should you change more - Explain(5) 3. What should you do to maximize profits with respect to prices after you acquire a complement product.(5) 4. Briefly describe how these firms would price discriminate: department stores, airlines, movie theaters(5) 5. Give an example each of volume discounts and bundling as forms of price discrimination(5 points) 6. Suppose an airline flying on the New York - Chicago route has estimated the demand curves for three different types of customers: business (no advance purchase), leisure (7 day advance puchase), and discount (14 day advance purchase) travellers. They are: Business: P = 600 − Q and MR = 600 − 2Q Leisure: P = 500 − 2Q and MR = 500 − 4Q; Discount: P = 400 − 3Q and MR = 400 − 6Q. Assume there is only one class of service, hence the marginal cost of providing the service is equal for all customers and is $200. What prices will the airline charge to each of the three different segments of customers. (10 points) 7. Suppose you have a negotiation situation between Mangement and Labor concerning Labor wages. Management and Labor do well when they each do the opposite of what the other does i.e. the best situations for both are: (i) for management to bargain hard (offer low wages) and Labor to accomodate (accepts the contract offered) and (ii) for Management to accomodate (offer generous wages) and Labor to bargain hard (threatens to strike). 1 (a) If Management moves first what would you expect the equilibrium of this sequential game to be. (4 points) (b) If Labor moves first what would you expect the equilibrium of this sequential game to be. (4 points) (c) Is this a game with a first mover or last mover adavantage? Explain briefly (2 points) 8. Briefly describe the difference between the mechanism of an oral or English auction and a Vickrey or second price auction. Is there any difference between the winning bidders in the two auctions, and the winning payments made in the two auctions? Briefly explain.(7 points) 9. Give 2 examples each of screening and signalling that are used in businesses to get rid of the adverse selection problem. (8 points) 10. Suppose a bank is faced with two types of borrowers - a high risk borrower that should be charged an interest rate of 9% and a low risk borrower that should be charged an interest rate of 4%. There is a 30% chance of getting a high risk borrower and a 70% chance of getting a low risk one. What is the expected interest rate that will be charged by a bank that cannot exactly distinguish between the two types but knows the probabilities of each type. In this market for loans what would be the result. (5 points) 11. Suppose you have hired a new worker, unfortunately you do not know if the worker is a shirker or a hard worker. Suppose working hard raises the probability of making a sale from 40% to 80% (thus raises the probability of making a commission C by the same percentage). If the cost of working harder is $150,what commission C should you offer the worker to provide an incentive to work hard. (5 points) 12. Suppose as a manager of a profitable department store you are confronted with a pricing problem. You have two types of customers: a high-end type that are willing to pay a price of $20 for a pair of Levis Jeans, and a low-end type customer that are willing to pay a price of $13 for the same pair of jeans. Your supplier provided you with the jeans at MC of $11 per jeans. Your survey of your customers for jeans tells you that 50% of your customers are of the high end type and 50% are of the low end type. 2 (a) If you decided to price high, what would be your expected profits per unit.(5 points) (b) If you decided to price low, what would be your expected profits per unit.(5 points) (c) Suppose your store attracts 1000 customers for these jeans: will you price high or low? Explain briefly.(5 points) 13. The following is a case study using a recent event: CVS versus Walgreens: An interesting recent case involves two pharmacists CVS and Walgreens. Rather than a situation where the two indulge in a competitive battle against each other over advertising or a price war, they battle against each other on the services offered. In early June 2010, Walgreens announced that it would “no longer participate in new and renewed benefit plans from its rivals (CVS) drug benefits unit” (CNN Money, June 7 2010). The main grievance of Walgreens was CVS Caremark’s Maintenance Choice Plan which started requiring patients that have chronic medical conditions to fill their prescriptions at CVS pharmacies only rather than giving them the choice to fill it at Walgreens (or other pharmacies). As a result of this announcement both companies shares fell — CVS fell 8% and Walgreens fell 2.7%. As a response CVS in a couple of days decided to drop Walgreens from its pharmacy benefits plan, which would force some of its benefits customers to pay a much larger amount to get their drugs from Walgreens, leading to a potential loss of customers for Walgreens. As a result CVS shares fell 1.5% and Walgreens fell 3%. Eventually, about a week later the two pharmacies decided to end their war, coming to a compromise agreement the financial terms of which were not disclosed. As a result both firms saw their stock values increase. Briefly comment on this example as an application of the Prisoners Dilemma game (10 points)
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Managerial Economics
BUSGR 510: HW 4: Due Saturday July 27th 1. Suppose an airline flying on the Charlotte - Chicago route has estimated the demand curves for three different types of customers: business (no advance purchase), leisure (7 day advance puchase), and discount (14 day advance purchase) travellers. They are: Business: P = 600 − Q and MR = 600 − 2Q Leisure: P = 500 − 2Q and MR = 500 − 4Q; Discount: P = 400 − 3Q and MR = 400 − 6Q. Assume there is only one class of service, hence the marginal cost of providing the service is equal for all customers and is $100. What prices will the airline charge to each of the three different segments of customers. (Hint: Set MR=MC for each class of travel). 2. The relationship between Price elasticity of demand andMarginal Revenue can be shown to be: MR = P _ 1 − _ 1 |e| __ There are two types of customers that come to the Barnegat Fish Company to have their signature crabcakes: An affluent group with a price elasticity of demand for crabcakes of e = −2; and a less wealthy type with a price elasticity of demand for crabcakes of e = −5. The restaurant wants to introduce a coupon to encourage more people to visit their restaurant. Thus every buyer pays the posted price of $P per crabcake but those who tender the coupon get a discount of $X off the posted price. If the Marginal Cost of a crabcake is $2.00, what is the price of the crabcake and what is the value of the coupon?(Set MR=MC). 1 3. Consider a model of two firms (Firm 1 and Firm 2)competing against each other and setting prices simultaneously. Suppose they have a choice of setting either P = $5 or P = $8. If both of them set the lower price they split the total profits of $44 equally(i.e. each of them gets $22). If they both set the higher price, they split the total profits of $82 equally(i.e. each of them gets $41). However, if one of them charges the lower price while the other firm charges the higher price, the lower price firm earns a profit of $60, while the other firm earns a profit of $14. The payoff matrix is given below. Does Firm 1 and 2 have a dominant strategy each? What is the Nash Equilibrium? Explain briefly. Strategies for Firm 2 $5 $8 Strategies $5 (22, 22) (60, 14) for Firm 1 $8 (14, 60) (41, 41) 4. In the figure below is an example of a sequential game. Find the equilibrium FIGURE 10-1 The GM-Ford SUV Game
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Managerial Economics
BUSGR 510: HW 5: Due Tuesday July 30th 1. Suppose as a manager of a profitable department store you are confronted with a pricing problem. You have two types of customers: a high-end type that are willing to pay a price of $25 for a pair of Levis Jeans, and a low-end type customer that are willing to pay a price of $15 for the same pair of jeans. Your marginal costs are $13 per jeans. Your survey of your customers for jeans tells you that 60% of your customers are of the high end type and 40% are of the low end type. (a) If you decided to price high, what would be your expected profits per unit. (b) If you decided to price low, what would be your expected profits per unit. (c) Which pricing will you choose, based on the expected pricing per unit. 1 2. (a) Suppose a “lemons” car is valued at $2500 and a good car is valued at $5000. If you know that there is a 50% chance of getting each, what is the expected value of the car. (b) What will happen in the market if the price is based on the expected value. Explain. 3. Suppose you have hired a new worker, unfortunately you do not know if the worker is a shirker or a hard worker. Suppose working hard raises the probability of making a sale from 40% to 80% (thus raises the probability of making a commision C by the same percentage). If the cost of working harder is $200,what commission C should you offer the worker to provide an incentive to work hard.
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Managerial Economics
Time of Day Tolling on Sydney Harbour Tunnel On 27 January 2009, the New South Wales government introduced a new time of day tolling system for southbound traffic on the Sydney Harbour Bridge (SHB) and Sydney Harbour Tunnel (SHT). Previously, passenger vehicles paid a flat $3 toll to travel south on both these harbour crossings. The new system introduced the following tolls on weekdays for these two harbour crossings: From 6:30am to 9:30am: $4.00 From 9:30am to 4:00pm: $3.00 From 4:00pm to 7:00pm: $4.00 From 7:00pm to 6:30am: $2.50 Table 1 below shows average weekday southbound traffic volumes on the Sydney Harbour Tunnel for the 12 months before and after the new tolling system was introduced: Table 1: Sydney Habour Tunnel Traffic Before Traffic After 5:30am to 6:30am 6:30am to 9:30am 4:00pm to 7:00pm 7:00pm to 8:00pm 7:00pm to 6:30am (inclusive) 2103 10161 8192 1782 7709 2539 10123 8104 1781 8587 There is no toll on the Ryde Bridge to the west of the Sydney Harbour Bridge and Tunnel. Table 2 below shows southbound traffic on the Ryde Bridge before and after the new tolling system was introduced for the Sydney Harbour Bridge and Tunnel: Table 2: Ryde Bridge Traffic Before Traffic After 6:30am to 9:30am 4:00pm to 7:00pm 9954 9892 10380 10106 Based on the data in Tables 1 and 2, answer the following questions: 1. Based on the information given in Table 1, calculate the absolute value of the price elasticity of demand for southbound journeys on the Sydney Harbour Tunnel for each of the time periods shown in Table 1. (Note: use the midpoint formula and show your calculations) (2 marks) 2. Based on your calculations in question 1, indicate whether the price elasticity of demand is elastic, inelastic or unit elastic for each time period given in Table 1. What factors might explain the price elasticity of demand for private car travel on this harbour crossing? (2 marks)
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Elasticity and Price Discrimination
Elasticity and Price Discrimination: Evidence from Sams Club and CVS An Example In a recent New York Times article, “Sam’s Club personalizes Discounts for Buyers” (May 30 2010) the reporter Andrew Martin talks about an innovative discount idea from Sam’s Club, the warehouse chain of Wal Mart. He describes a new program called “eValues” where Sams Club customers who are “Plus” members can go to a bright green kiosk near the entrance, swipe their membership card through the card-reader and get an individualized booklet of coupons. This individualized booklet is tailored to each individuals expected demand for products and provides them with coupons for products that they would most like to purchase using the discounts. This is significantly different from the standard across the board discounts offered by most retailers. For example warehouse clubs send out a booklet of coupons that any individual belonging to these warehouses could use. Similarly grocery stores have long used “Preferred Shopper Cards” to offer discounts on products on their shelves. For example, if you browse by the selves of a grocery store aisle, you will see the price tag for a particular product offering the information that the normal price is $x while if you use the preferred shopper card for that store the price will be $(x-a). A similar though more generic idea that has often been used by producers and distributors is the coupon booklet insert that comes with your Sunday newspaper. In that booklet you get a wide
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Law
Question: Explain how a statute, the Restatement Second, and stare decisis affect legal decisions.
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Mediation
Mediation is very important development in the area of law. The cost of litigation has increased significantly. Moreover, court litigation takes long time. Therefore, mediation has been developed by the parties. Mediation is the process of resolving disputes between the parties without going to the court of law. In this case, an independent third party mediator helps both the parties in reaching a conclusion. Therefore, mediation has developed as very good alternate dispute resolution method.
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Tort
Question One: Please discuss three intentional torts. In your response, please define each intentional tort and give a factual example of each. You can make up each example or reference the examples from the textbook. Question Two: Distinguish negligence from an intentional tort. Please also provide two factual examples of where a defendant acted negligently. You can make up the examples or reference the examples from the textbook.
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Contracts
Question One: Please explain the difference between an express contract and an implied contract. Please give factual examples of each type of contract. (Worth up to 4 points) Question Two: Please explain when the following sources would be applied to a contract. In answering this question, think about the subject matter of the contract and how that would effect the determination of which source is applied. (Worth up to 6 points)
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