Week 1 Discussion
DQ 1 Firm Objectives. Why do some business firms pursue a
triple-bottom-line outcome while others focus only on profit maximization?
Please, use a real company example to illustrate your points
DQ 2 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).
Week 2
Discussion
DQ 1 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
DQ 2 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?
Week 3
Discussion
DQ 1 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.
DQ 2 Contribution Analysis. Explain what is meant by
“contribution analysis”. Carefully define the term and provide examples to
illustrate it.
Week 4
Discussion
DQ 1 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?
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?
Week 5
Discussion
DQ 1 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?
DQ 2 New Product Introduction. Bayer Schering Pharma AG,
Germany owns the 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. The 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 the TV ad: “The Cold Truth”, (please, watch
the ad listed in the Required Readings)
The ad shows that Alka-Seltzer Plus fights cough, body
aches, runny nose, sneezing and fever, just like Vicks NyQuil does, but it also
now can fight congestion, unlike NyQuil.
Explain how the new 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 NyQuil,would respond to the ad?
Week 6
Discussion
DQ 1 Game Theory and Strategic Behavior. Suppose that GE is
trying to prevent Maytag from entering the market for high efficiency clothes
dryers. Even though high efficiency dryers are more costly to produce, they are
also more profitable as they command sufficiently higher prices from consumers.
The following payoffs table shows the annual profits for GE and Maytag for the
advertising spending and entry decisions that they are facing.
Based on this information, can GE successfully prevent
Maytag from entering this market by increasing its advertising levels? What is
the equilibrium outcome in this game?
Suppose that an analyst at GE is convinced that just a
little bit more advertising by GE, say another $2m, would be sufficient to
deter enough customers from buying Maytag, thus, yield less than $0 profits for
Maytag in the event it enters. Suppose that spending an extra $2m on
advertising by GE will reduce its expected profits by $1.5 m, regardless of
whether Maytag enters or stays out. Would this additional spending on
advertising achieve the effect of deterring Maytag from entering? Should GE
pursue this option?
DQ 2 Sustainable Competitive Advantage. Describe the
circumstances under which a firm chooses a low-cost strategy to attain
sustainable competitive advantage. What about the situations when a
differentiation strategy is chosen? Provide specific real world examples.
Week 1
Assignment
Economics of Risk and Uncertainty Applied Problems. Please,
complete the following 3 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.
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.
2. 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.
3. 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.
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.
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.
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?
Week 2
Assignment
Consumer Demand Analysis and Estimation Applied Problems.
Please, complete the following 3 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.
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.
a. 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)
b. Which of the two options should she pick if she plans to
quit her job and dedicate to her studies?
c. 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.
2. The demand function for Einstein Bagels has been
estimated as follows:
– 40.73Px + 84.17Py + 0.55Ax
where 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
a. Calculate the price elasticity of demand for Einstein’s
Bagels and explain what it means.
b. Derive an expression for the (inverse) demand curve for
Einsteins’s Bagels.
c. 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)?
d. Should Einstein Bagels spend more on advertising?
3. 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);
and
CPI 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.
a. 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.
b. 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).
Week 3
Assignment
Production Cost Analysis and Estimation Applied Problems.
Please, complete the following 3 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.
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.
a. 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?
b. What number of drivers appears to be most efficient in
terms of output per driver?
c. What number of drivers appears to minimize the marginal
cost of transportation assuming that all drivers are paid the same salary?
2. 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.
a. Derive average variable cost (AVC) data from the data in
this table.
b. 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.
c. 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?
d. 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?
3. 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.
a. Using regression analysis, find an equation that best
fits the data to represent the TVC function.
b. At what sales/output level will marginal costs (MC) reach
a minimum?
c. Estimate the value of TVC for sales/output level 250,000
units, and calculate the 95% confidence interval for your estimate
Week 4
Assignment
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?
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 $1,995 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 +
0.2348Yw
for the western market and
Qe = 49,714.29 – 30.7692Pge + 6.984Pbe + 1,180Ag – 950Ab +
0.0825Ye
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 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.
a. Derive the demand curves for GGC’s product in each
market.
b. 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.
c. Confirm your quantity and price results algebraically.
d. Calculate the price elasticities of demand in each market
and discuss these in relation to the prices to be charged in each market.
e. Add a short note to GGC management outlining any
reservations and qualifications you may have concerning your price
recommendations.
Week 5
Assignment
Price Quotes and Pricing Decisions Applied Problems. Please,
complete the following 3 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.
Maxim Motronics A.G. have been marketing a new product in
Europe that has achieved notable market success and it now plans to introduce
this product into the United States market. The product is an electronic device
that is mounted in the rear window of passenger cars and allows the driver of
one vehicle to have a spoken message converted to text and scrolled across the
display panel to be read by occupants of a following vehicle. This new product
can utilize the hands-free telephone microphone already installed in many new
vehicles, or provides this as free accessory. Maxim expects that demand will be
slow at first but will pick up quickly as automobile accessory stores begin to
stock the product and as word-of-mouth promotion spreads awareness. Maxim also
plans to produce a humorous video for posting to YouTube and to utilize
social-media marketing to spread awareness and enthusiasm for the new product.
Market demand estimates provided by Maxim are that the firm expects to sell
about 125,000 units into the U.S. market within 24 months, and that sales per
month will start slowly and increase monthly in the expected diffusion pattern
until they stabilize at about 10,000 per month after month 24. The diffusion
curve parameters that fit these assumptions are shown in the equation + 46.11T2
– 1.352T3, where Q is sales per month and T is the number of months after the
launch into the US market. Maxim’s average variable cost (AVC) is constant at
$62 per unit and he expects to set the profit-maximizing price by applying a
167% mark-up to arrive at his regular price of $165, since he estimates the
demand curve to be – 0.02Q.
a. What introductory price do you recommend Maxim sets for
the launch of the product into the US market, and why? (State any assumptions
you need to make).
b. How might he further adjust the price before raising it
to the regular level he envisions? (Again, state any assumptions you need to
make.)
c. What is your advice for Maxim concerning the confirmation
of his prior projections of demand and the shape of the diffusion curve, and
the profit-maximizing price, after this new product gains some months of
experience in the U.S. market?
2. Your company, Bright Paints, is one of a dozen companies
manufacturing a special reflective paint used for traffic signs. The State
Department of Transportation has called for tenders to supply 10,000 gallons of
blue reflective paint to be delivered within two months. You can foresee
fitting in a production run of the blue paint and have decided to bid on the
job. You calculate your incremental costs for this job to be $76,200. This
particular contract is standard, similar in all in respects to hundreds of
contracts you have bid on over the past few years. Your pricing policy has been
to apply a mark-up to incremental costs to arrive at the bid price. Your
mark-up has been higher when you had plenty of orders and lower when you had
few or no orders to fulfill. You have assembled data relating the mark-up rate
used and the percentage of contracts won at each mark-up rate, as follows.
a. Why would your company have bid with a zero mark-up on
some past tenders? Why didn’t it win all of those contracts?
b. What is the bid price that maximizes the expected
contribution of the contract?
c. Why, or why not, is the fixed-price mode of bidding
likely to be the best one to use for this contract?
3. In calculating the incremental cost of a particular project,
how would you treat the possible future costs of a lawsuit that may occur as a
result of this project, where the cost of the lawsuit might range from $10,000
to $500,000 with an associated probability distribution?
Week 6
Final Paper
Focus of the Final Paper
Research a specific company of your choice and identify some
of the managerial decisions that were made over time and in response to changes
in its market or competitive environment. Use the Ashford University Online
Library and web-based sources for your research. At least three external
scholarly sources must be used. Address all of the following areas:
Describe the company and provide a brief history of its
operations. Find or use graphs to illustrate its financial performance over the
years.
Identify any sources of risk or uncertainty in its
operations. Do the financial reports indicate risky or uncertain activities or
changes to the economic environment that ultimately appear to have affected the
company’s financial outcomes? Be specific.
Are there any government regulations that have affected this
company’s operations domestically or abroad? Explain.
Describe the inputs that are used in this company’s
production function and identify any challenges to securing these inputs.
Determine if the company has introduced new products in
existing markets or created new markets over time. What is the impact on its
finances?
Determine if the price of its products increased or declined
over time and analyze the reasons for price fluctuationsz Study the demand
elasticity for its products and discuss the availability of close substitutes
for its products. How does that affect pricing decisions?
Analyze the company’s profitability. Identify the economy or
industry influences on its costs, operations, and profitability.
Describe the competitive environment in which the firm
operates, the distribution of market power, and the strategic behavior of the
firm and its competitors. Apply your knowledge of the theory of this company’s
market structure. How does the company make pricing and production decisions?
Is your observation supported by the theoretical models? Refer to the financial
reports for illustration.
Identify any non-price competitive strategies that the
company might be engaging in? Provide specific examples.
Evaluate if the company made any mistakes in its decisions
over time, and recommend any changes or improvements for the future operations.
Refer to the financial reports when making specific observations or
recommendations.
Use economic language and demonstrate your understanding of
the concepts and theories of this course.
