Final Examination

(Cumulative up to Ch. 9)

1.   White Mountain Ski Resort (WMSR) has the following demand equations for its customers.

[Connecting the final exam with the first mid-term exam in terms of price elasticity concept]

The demand equation for the resort is as follow with MC of \$10.

Q = 1,000 – 30P with corresponding P = 33.33 – 0.033Q with MR = 33.33 – 0.067Q

1. What price should WMSR charge? What is the operating profit, Q x (P – V) ignoring fixed cost for simplicity. Note that V = MC in this case, being linear.
2. You are a new manager of WMSR and learned that your customer consists of local skier as well as out of town skier. Can you do better than the former manager given this new information about your customers? Here just state how and why you could do better before you crunch number.
3. You took Economic Analysis course in your MBA degree and you found out that:

The demand equation for Out of Town Skiers is Qo = 500 -10P with corresponding P = 50 – 0.1Q with MR = 50 – 0.2Q

The demand equation for local skiers is Ql = 500 – 20P with corresponding P = 25 – 0.05Q with MR = 25 – 0.1Q. VC = MC is still \$10 for both skiers.

What are the respective prices you are going to charge for local and out of town skiers? How many local and out of town skiers would you get with your new pricing strategy?

1. Compare your new operating profit with that of your former manager and analyze why your strategy is better than that of your former manager as much in detail as you can?  Here you need to analyze the numbers you got in (c) and explain why operating profit is greater than that of your former manager.
2. As a promotion for out of town skiers, WMSR decided to offer free skiing for first day if they stay more than one night at the resort hotel on its premise. What is the maximum number of skiers the company can expect if they are going to waive \$10 marginal cost as incentive, i.e., MC = 0? Do not consider the extra lodging revenue.
3. What would be the price to charge if the maximum number shows up?
4. Suppose only one half of the maximum number of out-of-towners showed up.  What is the price to charge?
5. Compare the price to charge for the maximum and the price to charge for one half of the maximum. What can you say about those one half customers in view of the price difference?
6. What could WMSR do with this information in the future in dealing with those one half customers? What could be your one recommendation which will the benefit WMSR?
7. Compute operating profit of this promotional free skiing for one half of the maximum customers? Is this a smart strategy even if only one half showed up? This question is akin to’ martine’ pricing of Broadway Show in NYC at discount during day time. Do not consider the extra revenue for one more night stay considered in order to focus on the impact of the promotional strategy only.
8. Compare the operating profit of the two cases, the maximum number and only the half of the maximum number.
9. Should WMSR be disappointed with the fact that only one half of the maximum number of customer showed up? Here you compare the operating profit of the maximum and only one half of the maximum.
10. Was the fact that only one half of the maximum number showed up a boon to the resort or not in spite of the initial disappointment? Explain why.

2.   A firm has the following demand and cost equation for a product.

[from #7 Chapter 9]

Q = 200 – 5P;   P = 40 – 0.2Q and MR = 40 – 0.4Q

TC = 400 + 4Q

a.     What are price, quantity and profit for this company?

b.     Suppose the original demand shifted to Q = 100 – 5P. If it is a firm under monopolistic competition, what might have happened to this firm in this monopolistic market for such a shift in view?

c.     What should the firm do in the face of a new demand equation in the short run and why? Provide a computational basis for your answer.

d.     What kind of strategies should the firm to consider for the long run, assuming that the firm did not do much after the shift in (b)?

e.     Now, Q = 400 – 10P with P = 40 – 0.1Q with the corresponding MR = 40 – 0.2Q & cost equation, TC = 400 + 2Q as a result of operating in a Global Economy. Explain the differences between in demand and cost equations.

f.      What are price, quantity and profit for this company as a result of operating in global economy?

g.     How did operating in a global open economy change the situation in terms of price, quantity and profit?

h.     Now summarize the differences in three cases, (a), (b) and (c) and explain the impact of global economy in this company.

i.      How does this case contrast with the negative impact of “outsourcing” in 1x. and 1y. in Exam #1?

j.      It is sometimes said that a firm has to be “lucky” first and then “good.”  Explain what is meant by this statement.

k.     Review the case history of Pepsi’ v Coke at the beginning of my lecture note of S and D of Chapters 3 & 4 from Module One. In answering this question, consider why Pepsi was lucky in the first place and was good, which helped Pepsi survive during the depression of the 1930’s, after two bankruptcy filings. Google the history of Pepsi v. Coke during the 1930’s And then explain the rationale of Pepsi’ strategy, which not only helped Pepsi survive and became a major competitor to Coke.

3.   A firm in an oligopolistic industry has identified two sets of demand curve. If the firm is the only one that changes price (i.e., other firms do not follow), its demand curve takes the form: Q = 82 – 8P (1) with MR = 10.25 – 0.25Q. If it is expected that competitors will follow the price action of the firm, the demand curve is of the form: Q = 44 – 3P (2) with MR = 14.66 – 0.66Q  [from #3 Chapter 9 HW]

1. Find the price and the quantity at the intersection of two demand curves with a kink.
2. Identify the portions of the two demand curves, with “L shaped curve with a “kink” opening up above and the portion of the other two demand curves with “reverse L shaped curve with a “kink” opening up below.

Discuss the difference in implication behind the portions of two demand curves, one with “L shape” above and the other with “reverse L shape” below. Explain which one is considered to be “optimistic” and which one, “pessimistic” and why?

1. Calculate the range of marginal revenue curves on the vertical portion of the MR curves at Q where the kink is.
2. Suppose that there are two firms within this range under this oligopoly: one with higher MC but with lower fixed cost and other with lower MC but with higher fixed cost, similar to Prob. #1 above. But both MC’s are within the range of marginal revenue on the vertical portion of the MR. Would they charge the same or different prices at the kink? Why or why not?
3. What would happen to the price and the quantity implied above if the production cost for the whole industry increases due to a tighter environmental restriction?
4. How would your answer in (e) change if the cost increase, which still falls within the vertical range of MR curves, was only for one oligopolistic firm in the industry? And why?
5. What does this kink demand curve example try to teach us in view of the questions asked so far?

4.  Ace and Baumont Corporations make and sell electrical equipment. Both have to decide whether or not to discount. The payoff matrix of “Discount” and “Not to Discount” expressed in terms of profit (+) or loss (-) for each firm is given below for each combination of strategies. Read my lecture note on game theory

Baumont Corporation

No Discount               Discount

No Discount   (\$10mil, \$10mil)       (-\$4mil, \$16mil)

Ace Corporation

Discount      (\$16mil, -\$4mil)          (4mil, \$4mil)

In the above matrix, the first number is for Ace and the second, for Baumont respectively.

a.        What are the optimum strategy for each, the resulting profit/loss for each and why?

b.       Is there any other strategy better than the one they took in (a), which makes each firm better off as opposed to the strategy taken? If there is, why did they not take it?

c.        How would you compare this case to the so called “prisoner’s dilemma” case? Explain it clearly.

d.       How would you compare this case to the so called “Nash Equilibrium”? Explain the difference between this case and Nash Equilibrium clearly. You may need to Google for Nash Equilibrium.

e.        Does it matter whether this is one-shot deal or meant to be a situation in which each corporation faces continuously for some time? Why or why not?

f.        Suppose that the profits for “discount strategy” for both Ace and Baumont are reduced to \$8 millions from the current profit of \$16 million respectively. The revised payoff matrix is shown below.

Baumont Corporation

No Discount              Discount

No Discount         (\$10mil, \$10mil)      (-\$4mil, \$8mil)

Ace Corporation

Discount               (\$8mil, – \$4mil)       (\$4mil, \$4mil)

What would be the optimum strategy for each and why?

g.       What fundamental changes took place in the revised matrix above, which made the situation quite different from the original payoff matrix at the beginning? Please be succinct and to the point in your explanation.

h.       How does such a corporation as General Electric use the concept involved in the revised payoff matrix above in its marketing strategy? Be specific in your explanation.

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