Research questions 4 6 8

Research Questions #4 (3 questions) Name: Alexis Lake 1) Using the economic principles of Optimization theory, comment on each of the following….. a) “The optimal number of traffic deaths in the US is zero” This would be focused on minimizing. Zero deaths is the ideal outcome, so that means no cars on the road, no traffic, but also less commerce. b) “Any pollution is too much pollution” This would also be focused on minimizing. Zero pollution is the ideal outcome. c) “we cannot pull US troops out of Afghanistan …we have committed so much already” This would be a sunk cost. The troops and the resources have already been sent or committed to fight in Afghanistan. This is letting the previous decisions or resources used impact decisions today. d) “Since the start up airline has experienced a 25% jump in insurance cost, the airline should increase the number of passengers it serves next quarter in order to spread the insurance cost increase over a larger number of passengers” The insurance costs would be a fixed cost. While this might be focused on maximizing profit, the airline should be focused on the optimal level of activity to make profit. Just selling more seats could have a diminishing return.

2) Emma Electronics Inc. (EEI) has experienced a theft problem and decided to hire security guards. The firm wants to hire the optimal number of guards. The table below shows how the number of security guards hired will impact the number of units of electronics stolen each week. # of guards/ cost

Electronics Stolen weekly/ $25 cost each

0 / $0

50 / $1,250

1 / $200

30 / $750

2 / $400

20 / $500

3 / $600

14 / $350

4 / $800

8 / $200

5 / $1,000

6 / $150

a) If the stolen units cost $25 each and the guards cost $200 each per week. How many security guards should be hired?

2 guards - 16 electronics which equals $400 which equals the cost to hire two guards. b) At $25 cost per unit of electronic stolen, what is the most that EEI would be willing to pay for the first guard? $500 for the first guard – when MB = MC – the $500 is the cost of the first guard.

c) If the stolen units cost $50 each and the guards cost $200 each per week. How many security guards should be hired? # of guards/ cost

Hire 3 guards.

MB = MC at 3 guards.

Electronics Stolen weekly/ $50 cost each

0 / $0

50 / $2,500

1 / $200

30 / $1500

2 / $400

20 / $600

3 / $600

14 / $700

4 / $800

8 / $400

5 / $1,000

6 / $300

3) The marketing department believes that sales of their product referred to as (S) is a function of their advertising spend referred to as (A) and the sum of the spend of their 3 largest competitors referred to as (R ) After collecting 36 weeks of observations of S, A and R, they have formulated the following equation. S = a + bA + cR where S, A and R are measured in dollars per week. At the 10% level of statistical significance‌.

Statistical analysis using regression technique reveals: R-squared = .2247 observations = 36 dependent variable = S P-value of F = 0.0150 Parameter Estimates Y intercept = 175086, A = 0.8550, R = -0.284 a) What sign does the marketing department expect a, b and c to have?

Positive sign b) interpret the coefficients of a, b and c A = the y intercept, or where the regression line crosses the y parameter B = the slope or the x intercept. This is the variable regression line that represents how much the marketing department spent on advertising.

C = the slope or the x intercept. This is the variable regression line that represents how much the competitors spent on advertising. c) if regression analysis indicated that the value of R squared is .2247, what fraction of total variation in sales remains unexplained? .2247 would be a low correlation between in the variables. This means that .7753 or 77% is unexplained. d) What is the expected level of sales each week if the company spends $40,000 for advertising and the sum of three competitors spend $100,000?

S = 175086 + (.8550 x 40,000) + (-.284 x 100,000) S = 175086 + 34,200 – 28,400 S = 180,866

Research Questions #6 (3 questions) Name: Alexis Lake 1) Lilly is a graduate student on a limited income and consumes only wine and cheese. Her current consumption choice is 4 bottles of wine and 10 pounds of cheese. The price of wine is $10 a bottle and the price of cheese is $4 a pound.

The last bottle of wine added 50 units to Lilly’s consumption utility, while the last pound of cheese added 40 units. a) Is Lilly making the utility-maximizing choice? Why or why not?

Utility Max - Marginal utility / price = marginal utility / price 50/10 = 5 40/4 = 10 Based on the information provide, no, Lilly is not making the utility maximizing decision. The last dollar spent on cheese yielded more than the last dollar spent on wine. Lilly can increase utility by increasing her cheese consumption. b) Using what you know of economic theory, what mix of wine and cheese would you recommend and why?

Lilly should buy more cheese and less wine. She should spend one more dollar on cheese and one less on wine. She should continue to buy more cheese until the marginal utility is equal for both wine and cheese. The point at which they will be equal is 4 bottles of wine and 5 lbs. of cheese.

50

10

100

20

150

30

200

40

250

50

300

60

40

1

80

2

120

3

160

4

200

5

240

6

2) A large city newspaper reported it was losing $20 million dollars a year. Their accountant suggested they raise their price from 50 cents to 75 cents which he estimated would bring in an additional $65 million a year. The publisher rejected the idea citing the large drop in circulation experienced by The Wall Street Journal when it raised its price to 75 cents.

What implicit assumptions are the Accountant and the publisher making about the price elasticity of their newspaper?

The accountant’s implicit assumption is that the price of the newspaper is inelastic, essentially that the price will have less effect on the quantity demanded.

This is why they believe raising the price will increase revenue.

However, the publisher’s implicit assumption is that the price of the newspaper is elastic, meaning that a price increase will decrease the amount demanded. This price change will decrease overall revenue because the publisher believes that newspaper consumers are price sensitive. Also, there are other newspaper substitutes available for consumers, which might be more affordable.

3) If we assume that the demand for plastic surgery is price inelastic, which of the following would be True? a) when the price of plastic surgery increases the number of operations decreases True – Price and demand are inversely related b) The % change in the price for plastic surgery, is less than the % change in quantity demanded.

False – the % change in the price would have to be greater than the % change in the quantity in order for this to be true. c) Changes in the price of plastic surgery do not change the number of surgeries False d) Quantity demanded is highly responsive to changes in Price False – this would only be true if the price was elastic instead of inelastic.

Research Questions #8 (2 questions) Name: Alexis Lake 1) Verado is a small pottery firm operating in Sedona Arizona. They manufacture decorative clay fire pits for consumers to place on their patios and decks. They are one of 53 firm’s worldwide manufacturing and selling clay fire pits to major retailers. Market research indicates there is little brand differentiation experienced by consumers. A clay fire pit is a clay fire pit regardless of who sells it.

The worldwide equilibrium point for Clay fire pits rest at $190 per unit.

The following spreadsheet provides data on Verado’s cost of production. a) Enter the correct data for the last 8 empty columns below (average Fixed cost.

Average variable cost, average total cost and Short run marginal cost, Total Revenue, Marginal revenue, Profit, Average Profit, Profit Margin) Q

TC

- $5,000

100 $10,000

200 $19,000

300 $27,000

400 $38,000

500 $50,000

600 $66,000

700 $84,000

800 $104,000

900 $126,000

1,000 $150,000

Total FC

Total VC

AFC

AVC

ATC

SMC

$5,000

$0

$5,000

$5,000

50

50

100

$5,000

$14,000

25

70

$5,000

$22,000

16.67

$5,000

$33,000

$5,000

TR

MR

50

19,000

190

95

90

38,000

190

73.3

90

80

57,000

190

12.5

82.5

95

110

76,000

190

$45,000

10

90

100

120

95,000

190

$5,000

$61,000

8.3

101.7

110

160

114,000

190

$5,000

$79,000

7.14

112.9

120

180

133,000

190

$5,000

$99,000

6.25

123.8

130

200

152,000

190

$5,000

$121,000

5.56

134.4

140

220

171,000

190

$5,000

$145,000

5

145

150

240

190,000

190

AFC= FC/Q AVC= VC/Q ATC = TC/Q TR = PxQ MR Change in revenue Average Profit = Profit/Q Profit = Revenue – TC Profit Margin = Profit/Rx100

Q

Profit

Profit Margin

Average Profit

-

100

9,000

90

90

200

19,000

95

95

300

30,000

100

100

400

38,000

95

95

500

45,000

90

90

600

48,000

80

80

700

49,000

70

70

800

48,000

60

60

900

45,000

50

50

1,000

40,000

40

40

b) How many clay fire pits should be produced if Verado wishes to minimize total cost? 300 units – lowest ATC. c) How many clay fire pits should be produced if Verado wishes to maximize its Profit Margin? 300 units for highest average profit d) How many Fire pits would advise Verado to produce? And why> 700 units because revenue > TVC, also SMC is very close to the price

2) Quad Plex Cinema is the only movie theater in Idaho Falls. The nearest rival theater is 35 miles away in Pocatello. Despite the relative lack of competition the theater has begun to lose movie goers. The owner believes that he has a monopoly on big screen entertainment and he needs to raise prices to offset the financial losses. a) comment on this strategy‌‌ what is the economic factors for a and against While they are the only supplier in the area, they still face challenges with customer demand. If the theater suffers losses even with the changing price and accounting for their expected level of output at which MR = SMC. Higher prices could cause higher losses.

b) How might the actual Market power of Quad Plex be measured?

They would need to determine whether the two different theater’s services are elastic or inelastic demand. If inelastic then they have greater market power because even with price increases they will continue to have revenue, if they are elastic than they would have less market power.

c) What Options should the Theater consider in the long Run? In thinking about the economies of scale, they could increase the size of its movie theater to offer more movies, more concessions. They could also evolve or change their business model to offer meals and alcoholic beverages, which could give them a greater competitive edge against the other theater in the area.