03 Jun Question Please answer the following short
Question
Please answer the following short answer questions (5 pts each):
18. As a budding entrepreneur, you have purchased a small bagel shop. You have
engaged in a market study to categorize your customers willingness to pay for a meal
(coffee+bagel) into 8 equal sized groups: ($5.00, $4.50, $4.00, $3.50, $3.00, $2.50,
$2.00, $1.50). All of your costs are fixed except labor and materials, which cost $2.25
per meal sold.
a. What price should you charge for a meal? Does your answer depend on the total
number of consumers?
b. Suppose your market research tells you that the four lowest value groups are all
students. Should you offer a student discount? If so, how much?
19. Concert price have increased coincidentally with illegal downloading of music off
the internet. What is the causal link?
20. VetPharm has historically produced and sold drugs for animals; however, one of its
products developed for animal use has recently been approved for a similar use in
humans. Market research has revealed that that at the current per dose price, the
elasticity of demand on the part of animal owners is -2.0. The research also estimates
that at this price the elasticity of demand for human use would be -.2. The current price
is $5.00 per dose. If the MC of production is $1, what should the company do?
a. reduce animal price; reduce human price.
b. raise animal price; raise human price.
c. reduce animal price; raise human price.
d. raise animal price; reduce human price.
21. Ivan loves classical music, and his favorite composer wrote nine
symphonies. Ivan just happens to the 9 symphonies in exactly the order in
which they were written. The table below shows the values that Ivan places on
having these symphonies which he does not currently yet own:
Rank Total Personal Value
1_______________19 2_______________36 3_______________51
4_______________64 5_______________75 6_______________84
7_______________91 8_______________96 9_______________99 You can interpret
the above to mean, for example, that Ivan values her favorite Symphony at $19, and that
the total value of the first Symphony plus Symphony # 2 (his second favorite) is $36,
etc. If the symphonies were sold individually on CDs – one symphony per disc – and the
price per CD was $10.00, how many CDs would he buy?
22. Referring to the question above: If the symphonies were also offered as a complete
set of 9 CDs and the price of the entire set was $79.00, would he rather buy the
individual CDs or the box set? HINT: WHICH OPTION GIVES HIM MORE
CONSUMER SURPLUS?
34. The following represents the potential outcomes of your first salary negotiation after
graduation:
Employer
Low Salary Offer
Employee Walks
Employer gets 0
Employee gets 0
Employee Accepts
Employer gets 100
Employee gets 75
High Salary Offer
Employee Walks
Employer gets 0
Employee gets 0
Employee Accepts
Employee gets 100
Employer gets 75
Assuming this is a sequential move game with the employer moving first, circle the
most likely outcome. Does the ability to move first give the employer an advantage? If
so, how? As the employee, is there anything you could do to realize a higher payoff?
35. You are
considering
launching a strategic
alliance with a
competitor to join
your separate skills to
develop a new jointly
owned technology.
Both you and your
partner have the
option of fully or
partially supporting
the alliance.
Complete the payoff
diagram to make this
a Prisoners
Dilemma. You fully
support alliance
Partner fully
supports alliance
Partner partially
supports alliance
You partially support alliance
You: 100
Partner: 100
You: 50
Partner: 150
You: 150
Partner: 50
You:
Partner:
37. Suppose that you are a seller bargaining with a buyer. Your bottom line is zero, and
you think the buyer’s top dollar is either $5 with probability .25, or $6 with probability .
75. Suppose further that you can commit to a posted price. What is the price that
maximizes expected profitability?
39. You take a position with a large real estate development company as your first job
after graduation. Your first big assignment is to sell an office building you have been
informed the companys cost into the building (and the bottom line price it is willing to
accept) is $400,000. You have identified a likely buyer and you assess that his top price
is either $500,000 with a probability of .3, $600,000 with a probability of .5, or
$1,000,000 with a probability of .2. You have to commit to a posted price what price
will maximize your profitability?
40. You start an insurance company as your first entrepreneurial venture after
graduation. Your main product line is malpractice insurance for dentists. After
exhaustive research, you learn that settling malpractice claims against careful dentists
costs $2,000 and settling malpractice claims against reckless dentists costs $7,500.
Individual dentists know whether they are reckless or careful, and your research shows
that approximately 20% of dentists are reckless. How much do should you charge for
malpractice insurance to break even? Why?
41. Research has shown that the majority of strategic alliance joint ventures between
companies are not successful. Provide an adverse selection and moral hazard
explanation for this lack of success.
42. Botulinum toxin, marketed under the brand name Botox is a drug that paralyzes
muscles into which it is injected. It is one of the few promising treatments for migraine
headaches, which affect about 10% of the population. Migraine headaches are
debilitating, but there is no objective way to diagnose them. Thus migraine headaches
are relatively easy to fake. Botox is also very popular as a cosmetic treatment to get rid
of wrinkles. If you are a small business, should you offer insurance coverage for Botox
treatments for migraine headaches? (HINT: moral hazard.)
43. In the Oct 29, 2005 NY Times Article, Wal-mart’s Health Care Struggle is Corporate
America’s too, an internal Wal-Mart Memo, suggested redefining jobs to require
physical activity, and to offer health care insurance plans that allowed workers who
have low medical costs to spend the unused benefits on other items, like housing or
education. Give an adverse selection explanation and a moral hazard explanation of how
these actions can help reduce Wal-Mart’s health care costs.
44. Assume you paid $3,000 for your notebook computer. The probability of the
computer being stolen is .02 if you are careful and .05 if you are not. How much (in
dollar terms) are you willing to expend in caring for the computer? If you had purchased
insurance that replaced the computer if it were stolen, how much would you be willing
to spend in taking care of it (ignore the costs of lost data and time in getting a
replacement)? Why?
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