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BS 545 Current Economic Analysis Homework




Question;Please type your answers in this Word document(Disclaimer: The situations portrayed in the questions below are fictionalized, so anycorrespondence with reality is a coincidence.)1. The market for widgets reasonably matches the assumptions of a perfectly competitivemarket. Widgets, Inc., one of the suppliers in this market, has the following schedule ofshort-run total costs:Output(widgets per month)Short-Run Total Cost($ per month)05011102160320042555325(a) Compute a third column showing the short-run marginal cost of producing the 1st, 2nd, 3rd,4th, and 5th widgets.Answer:Output(widgets per month)Short-Run Total Cost($ per month)05011102160320042555Short-Run Marginal Cost($ per widget)--325(b) The market price for widgets is $60. To maximize its profits, how much should Widgets,Inc., produce?Answer:1Name ______________________________(c) Demonstrate with calculations that the profits of Widgets, Inc., would be higher in theshort run if it were to produce the amount you specify in part (b) than if the companywere to shut down its production.Answer:2. Legislation being considered in Congress would have the Food and Drug Administrationapprove new pharmaceutical products only if a new product can be shown to be moreeffective than all other existing products for treating a medical condition. In contrast, the lessstringent existing standard is that a product can be approved if it is more effective than aplacebo. (Under either standard, the product must also be safe.)a. You are the public affairs V.P. for a pharmaceutical company that has several successfulproducts on the market. Those products have patents that will not expire for many years,so no other company can produce your products, both other companies could developdifferent products that treat the same medical conditions that your companys productstreat. Your company has no new products in its development pipeline. In the interest ofthe companys shareowners, should you recommend to your CEO that your companyshould support or oppose the proposed legislation? Explain. (This question is aboutwhat action would be profitable for your company, not about what arguments yourlobbyists would make, you have confidence that your staff could generate argumentsabout the benefits to the nation to support whichever position you recommend.)Answer:b. Now you have been hired as the public affairs officer by an upstart pharmaceuticalcompany that has products under development but has no products on the market yet. Inthe interests of the companys shareowners, what is your recommendation to your CEOabout that same proposed legislation? Explain. (The same parenthetical applies as inpart (a).)Answer:3. Pauls Plumbing is the only plumber in a small town. Pauls daughter has come back hometo visit after getting her MBA. She got interested in her fathers pricing of his services. One2Name ______________________________of his services is replacing water heaters. Some customers want their water heaters replacedquickly because their old water heater failed, call these the urgent group. But somecustomers want their water heaters replaced at his convenience to improve their efficiency,call this the convenience group. The father told the daughter that his price for replacing awater heater is the same for the urgent and convenient groups. She has estimated that theprice elasticity for the urgent group is smaller than it is for the convenient group. Further,she estimates that his marginal revenue for the convenient group is higher than his marginalcost, while the marginal revenue for the urgent group is lower than his marginal cost. Whatprice changes should the daughter recommend to her father the plumber?Answer:4. You are a manager considering two expansion options. Option A has an expected net presentvalue of $100,000 and a standard deviation of $20,000. Option B has an expected net presentvalue of $110,000 and a standard deviation of $80,000. Your estimated probabilitydistributions of the two options are as shown below.3Name ______________________________ytliaborPOption B - Expected Value $110,00020%18%16%14%12%10%8%6%4%2%0%-80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200 220 240 260Net Present Value ($ thousands)a. You are sole proprietor of a small firm. This project would strain your resources, and thefirm might struggle for some time if returns from the project turned out to be poor. Giventhat background, which of the two expansion options would you choose? Explain.Answer:b. Before you can undertake that expansion, you have sold your firm to a much largercorporation, so your firm becomes a small division of that corporation. You manage thatdivision. Now your expansion is only one of many investments that the large corporationis undertaking. You decide that the profitability of your expansion would be uncorrelatedwith the returns from the investments of the large corporations other divisions. Giventhe probabilities specified for Options A and B, which option would you pick in the bestinterests of the corporations shareowners? Explain.Answer:5. Pick a business decision scenario from your own experience. For that scenario, how wouldyou have analyzed it if you had taken this course? Explain. How did the decision that was4Name ______________________________actually made in that scenario differ, if at all, from the decision you would have made orrecommended from what you know now?Answer:Topics Covered:CHAPTER11CHAPTER12CHAPTER14CHAPTER15ManagerialDecisionsinCompetitiveMarketsManagerialDecisionsforFirmswithMarketPowerAdvancedPricingTechniquesDecisionsunderRiskandUncertainty


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