Mid-term Exam
1. (10 pts.) Stella Ann Freeman is having a difficult time
deciding whether or not to purchase a new car. How would understanding the
concept of opportunity costs help her make a decision?
2. (10 pts.) Referring to the table below, hiring a driver
costs $10. Each machine costs $100. Which method should he use and why?
3. (10 pts.) Enron will be an example of a dysfunctional
company for many years to come. It was clearly a company riddled with fraud and
excess and its conduct drove it into bankruptcy. The text argues that
individual behavior was not at the core of Enron’s problems. What were the
problems with this corporation from an organizational architecture point of view?
4. (10 pts.) For many corporations such as utility
companies, a major portion of the cost of production is fixed in the short run.
Should these very large fixed costs be ignored when the executives are making
output and pricing decisions? Why?
5. (10pts.) Choose a real-life example of a firm that you
think is part of an oligopoly market and describe the characteristics of the
market structure that explain why the firm would be classified as such.
6. (10 pts.; 2 pts each) You are the manager for Dunkin Donuts
and know the following elasticities:
?= 1.5 ?I = 1.2 ? xy1 = 0.5 ? xy2 = -0.5
? is the price elasticity of demand for Dunkin Donuts (DD)
glazed doughnuts, ?xy1is the cross elasticity of demand between DD glazed
doughnuts and Krispy Kreme (KK) glazed doughnuts, ?xy2is the cross elasticity
of demand between DD glazed doughnuts and DD French Vanilla coffee, and ?I is
the income elasticity of DD glazed doughnuts.
a) If you
want to increase your sales of glazed doughnuts by 30%, in what direction and by
how much do you need to change the price?
b) If you
make the percentage price change that you calculated in part a) will total
revenue increase or decrease? How do you
know?
c) Krispy
Kreme lowers its price of glazed doughnuts by 20%. The demandforDunkin Donuts glazed doughnuts
will change by what percentage and in what direction?
d) Dunkin
Donuts raises the price of its French Vanilla coffee by 15%. The demand for
Dunkin Donuts glazed doughnuts will change by what percentage and in what
direction?
e) If
average income increases by 5% by what percentage and in what direction will
the demand for Dunkin Donuts glazed doughnuts change? Are DD glazed doughnuts a
normal good or an inferior good and how do you know?
7. (10 pts.) Westinghouse and General Electric are competing
on the newest version of clothes washer and dryer combinations. Two pricing
strategies exist: price high or price low. The profit from each of the four
possible combinations of decisions is given in the following payoff matrix:
Westinghouse’s price
High
($4000) Low ($2000)
General Electric’s
price High ($4000)
Low ($2000)
Payoffs
in dollars of profit.
a) (2 pts.) Which strategy offers both Westinghouse and
General Electric the best financial outcome?
b) (2 pts.) Does
either firm have a dominant strategy? If yes, which firm and what strategy?
c) (4 pts.) The Nash equilibrium is for Westinghouse to set
its price at __________ and earn a profit of __________ and for General
Electric to set its price at ______________ and earn a profit of _____________.
d) (2 pts.) Why do we see that the strategy that results is
not the strategy that offers both players the best financial outcome?
