me mod b 2016 - dem3 - homework (2) (1)

8/19/2019 ME Mod B 2016 - DeM3 - Homework (2) (1)

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Hult International Business SchoolManagerial Economics

DEM 3 Mod B 2016

Homework Answer Key

Total points: 100

Please answer the following questions and upload them on MyCourses before 12:00 noon(Dubai Time) on Saturday, February 13. Please provide your answer first and thenexplain how you got to the solution. All text must be typed, not handwritten.

Numeric grades will be assigned on the following basis:

Correct solution: 50%

Correct explanation: 50%

Up to 3 points of the total grade will be subtracted for handwritten documents (-3) orunprofessional appearance (up to -2 for typos, improper formatting and the like)

PART I: FUNDAMENTALS OF MANAGERIAL ECONOMICS (18 points)

Please use the foll owing information to answer the next 4 questions 1-4 (2 points each)

Amy Muscle is trying to whether to open a new health club. She presently makes $25,000 per

year as an aerobics instructor and will have to give up this job if she opens the health club.

This club will have 2 sources of revenues: (1) revenues from club memberships and (2)

revenues from personal trainer fees charged to those members who request a personal trainer.

Revenues from these personal trainer fees are expected to be $15,000 per year. Amy wants to

manage the club and combine it with that of the personal trainer at the club. If she chooses toopen the club, it will cost her $210,000 per year in rent and other operating expenses. Please

circle the correct answer (no explanation required for the 4 questions below).

1. What are her yearly accounting costs of running the club?

a) $0 b) $25,000c) $185,000d) $200,000e) $210,000f) $225,000

g)

$235.000h) None of the above


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2. What are her total opportunity costs of running the club?

a)

$0 b) $25,000c) $185,000d) $200,000

e)

$210,000f) $225,000g) $235,000h) None of the above

3. How much revenue from club memberships would she need to earn to make 12.5%

accounting profit margin (Accounting profit divided by Sales) for the club?

a) $25,000 b) $185,000c) $200,000d) $210,000e)

$225,000f) $235,000g) $243.500h) None of the above

4. How much revenue from club memberships would she minimally need to earn to make

12.5% economic profit margin (Economic profit divided by Sales) for the club?

a) $25,000 b) $185,000c) $200,000

d)

$210,000e) $225,000f) $235,000g) $243,500h) None of the above


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PART II: DEMAND AND SUPPLY (14 points)

Please answer the foll owing 2 questions.

Remark 1: Please use graphical demand/supply analysis to illustrate your points

Remark 2: When a question refers to the market (for a particular product) it means ‘theequilibrium price and the equilibrium quantity’

10. Caviar and Melba toast are complements. Recently pollution has been a problem in theVolga River, where much of the world's caviar originates. The sturgeons that live inthese waters are laying fewer eggs than before. Show graphically and explain theeffects on the market for caviar and the market for Melba toast. (9 points)

11. Caviar and Melba toast are complements. Recently pollution has been a problem in theVolga River, where much of the world's caviar originates. The sturgeons that live inthese waters are laying fewer eggs than before. In addition, the Surgeon General has

identified and communicated a number of health hazards related to eating caviar. Showgraphically and explain the joint effects of these two factors on the market for caviar(5 points)


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PART III: COST ANALYSIS (16 points)

The foll owing in formation applies to the next 4 questions (4 points each). Please cir cle the

correct answer (no explanation r equired for the 4 questions below).

You are the manager of an electricity generating company operating in what is close to a perfectly competitive market as there are 10 other electricity generating companies in themarket. You own 4 production facilities:

The largest plant is a heating oil facility with a daily capacity of 4m kWh and a marginal costof $0.12 per kWh generatedThe 2nd largest plant is a natural gas facility with a daily capacity of 3m kilowatt/hour (kWh)and a marginal cost of $0.11 per kWh generated.The 3rd largest plant is a nuclear facility with a daily capacity of 2m kWh and a marginal costof $0.07 per kWh generated.The smallest plant is a brown coal plant with a daily capacity of 1m kWh and a marginal cost

of $0.08 per kWh generated.

Fixed costs are $10k per year for the next 10 years. There is no cost associated with turning a plant on or off.

12. Tomorrow’s market demand is expected to be P = 1 – (Q/100,000,000), where Q is thetotal volume of kWh. How much electricity do you plan to generate?

a) None b) More than 0 but less than 2m KWhc) 3m kWd) 4m kWh

e)

5m kWhf) 6m kWhg) 10m kWhh) Impossible to tell based on the above information

13. Tomorrow’s market price is expected to be $0.115. How much electricity do you planto generate?

a) None b) More than 0 but less than 2m KWhc) 3m kWd) 4m kWh

e)

5m kWhf) 6m kWhg) 10m kWhh) Impossible to tell based on the above information


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14. What is the average variable cost (rounded to 3 decimal places if need be) of producingthe amount of kWh selected in the previous question?

a) Zero b) $0.070/kWhc) $0.080/kWh

d)

$0.092/kWhe) $0.095/kWhf) $0.113/kWhg) None of the aboveh) Impossible to tell based on the above information

15. How much electricity do you expect to generate if tomorrow’s market price is expectedto be $0.10?

a) None b) More than 0 but less than 2m KWhc) 3m kWh

d)

4m kWhe) 5m kWhf) 6m kWhg) 10m kWhh) Impossible to tell based on the above information


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PART IV: MARKET STRUCTURE ANALYSIS (10 points)

The fol lowing information applies to the next 2 questions (Please show your calcul ation and

explain): A particular industry is comprised of 5 firms. Firm 1 has 30 percent market share,firm 2 has 25 percent, firm 3 has 20 percent, firm 4 has 20 percent and firm 5 has 5 percent

market share.

16. What is the Herfindahl-Hirschman Index (HHI) for this industry? (5 points)

17. Assume that firms 2 and 5 intend to merge. Based on the 2010 U.S. Department ofJustice Merger Guidelines do you think the Justice Department would be likely toscrutinize a merger between firm 2 and firm 5? (5 points)


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PART V: PERFECT COMPETITION (16 points)

The fol lowing information applies to the next 4 questions (4 points each): Consider thefollowing information on production capacities for the market for a precious (commodity) metaland its associated marginal costs (all other costs have been sunk). Please select the correct

answer. (No explanation is required)

Country Annual production (kgs) Marginal cost ($/kg)

Argentina 1000 25

Brazil 3000 30

Thailand 2000 40

US 2000 35

Ukraine 500 45

Indonesia 1000 20

Romania 3000 60

Congo 2000 80

World annual demand (in kgs) is given by: Q= 8000 - 50P

18. What is the equilibrium price in this perfectly competitive market?

a) $20/kg b) $25/kgc) $30/kgd) $35/kge) $40/kgf) $45/kgg) $60/kg

h)

$80/kg

19. How much of the world precious metal supply will be produced in Asia (Indonesia plusThailand)?

a) Nothing b) 1000 kgsc) More than 1000 but less than 3000 kgsd) 3000 kgse) More than 3000 kgs


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20. Suppose Indonesia, Brazil, Thailand and Argentina manage to improve their production processes resulting in a 10% drop in marginal cost for each of these countries. Whatwill happen to the world equilibrium price?

a) Nothing b) It will drop by 5%

c)

It will drop by 7.5%d) It will drop by 12.5%e) None of the above

21. What will happen to the world equilibrium price should Brazil experience a miningdisaster, effectively limiting its mining capacity to 1000kgs (from 3000kgs initially)?

(Answer this question without reference to the information in question 20, but to theinformation provided in the table)

a) It will eventually reach $30/kg b) It will eventually reach $35/kg

c)

It will eventually reach $40/kgd) It will eventually reach $45/kge) It will eventually reach $60/kgf) It will eventually reach $80/kgg) It will eventually exceed $80/kg


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PART VI: MONOPOLY (10 points)

The foll owing in formation applies to question 22 & 23 : You are a strategy consultant toCoca-Cola and have estimated that the daily demand for Coca-Cola is given by:

QC = 10 – 3PC + 2PG + PP + A, whereQC = the daily volume of Coca-Cola sold (in liters)PC = the price per liter of Coca-Cola (in $)PG = the price per liter of Ginger Ale (in $)PP = the price per liter of Pepsi-Cola (in $)A = the level of advertising of Coca-Cola (in $)

One can rewrite the above equation asPC = ((10 + 2PG + PP + A – QC)/3to obtain a typical demand function

Suppose that the marginal cost of a liter of Coca-Cola is constant at $1.Suppose that currently PC = 3, PP = 2 and PG = 3 and that A=3 and suppose that historicallyneither Ginger Ale nor Pepsi-Cola have followed Coca-Cola’s price hikes or price cuts.

22. What price would you recommend to Coca-Cola if its goal is to maximize profits,knowing that Coca-Cola has decided to keep advertising expenditures at A=3? Pleaseshow your work. (6 points)

23. What price would you recommend to Coca-Cola if its goal is to maximize revenues,knowing that Coca-Cola has decided to keep advertising expenditures at A=3? Pleaseshow your work. (4 points)


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PART VII: OLIGOPOLY AND GAME-THEORETIC ANALYSIS (16 POINTS)

The fol lowing payoff matri x applies to the next 4 questions.

Both players have this information about payoffs, play this game only once and want to

maximize their individual payoffs. The first entry represents the payoff to player 1. Thesecond payoff represents the payoff to player 2.

Player 2

t1 t2 t3

S1 -1, -4 3, 10 4, 20

Player 1S2 1, 4 1, -10 5, 3

24. Suppose both players move simultaneously in the one-shot game. Does player 1 have adominant strategy? If so which one(s)? Explain (6 points)

25. Suppose both players move simultaneously in the one-shot game. Does player 2 have adominant strategy? If so which one(s)? (No explanation required) (2 points)

26. Does either player have a dominated strategy in the simultaneous move one-shot game?If so which one(s)? What is/are these dominated strategies, if any? (6 points)

27. Are there one or more Nash equilibrium strategies in the simultaneous move one-shotgame? If so, which one(s)? (No explanation required) (2 points)

me mod b 2016 - dem3 - homework (2) (1)

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