Entire Course (Managerial Economics) sample essay

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

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).

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
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

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?

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).

Week 3

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.

Contribution Analysis.

Explain what is meant by “contribution analysis”. Carefully define the term and provide examples to illustrate it.

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. 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. 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.

Week 4

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?

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?

Market Structures and Pricing Decisions Applied Problems. 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. 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.)

Week 5

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?

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)

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.

Week 6

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? 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. 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.