Expert answer:Need help with the following economic problem sets
Expert answer:Parsons-Ashworth Bread Company decided to diversify their product line. The company introduced a new bagel line called Brandon’s Bodacious Bagels. This line required a $500,000 high-temperature oven which can only be used for bagels, but can be resold for $200,000. To train the workforce on how to make bagels, there was a one-time employee training cost of $100,000. Labor and material cost sixty cents ($0.60) per bagel. Brandon and Jared are paid an annual salary of $100,000 each as management consultants for the entire business (all product lines). The annual lease on the production building is $600,000 (all products produced same building). Investments of similar risk earn an annual interest rate of 10%. You are hired as a consultant to answer the following questions. Which of these costs, if any, are sunk? [2 pts] From the information given, what is the only hidden cost? [2 pts] If Parsons-Ashworth are producing 100,000 bagels, at what price should Parsons-Ashworth shut-down bagel production in the short-run? Show all work. [3 pts] You are now considering long-run profitability. Consider all costs given and allocate 25% of management consultants’ salary and building lease cost to the bagel division. At what price per bagel is the bagel-division profitable given annual production of 1,000,000 bagels? Show all work. [3 pts]PLEASE SEE ATTACHED DOCUMENT FOR FURTHER PROBLEM SETS AND NEED RESULTS IN 2HRS PLEASE.
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Parsons-Ashworth Bread Company decided to diversify their product line. The company introduced a new
bagel line called Brandon’s Bodacious Bagels. This line required a $500,000 high-temperature oven which can
only be used for bagels, but can be resold for $200,000. To train the workforce on how to make bagels, there
was a one-time employee training cost of $100,000. Labor and material cost sixty cents ($0.60) per bagel.
Brandon and Jared are paid an annual salary of $100,000 each as management consultants for the entire
business (all product lines). The annual lease on the production building is $600,000 (all products produced
same building). Investments of similar risk earn an annual interest rate of 10%. You are hired as a consultant
to answer the following questions.
•
•
•
•
Which of these costs, if any, are sunk? [2 pts]
From the information given, what is the only hidden cost? [2 pts]
If Parsons-Ashworth are producing 100,000 bagels, at what price should Parsons-Ashworth
shut-down bagel production in the short-run? Show all work. [3 pts]
You are now considering long-run profitability. Consider all costs given and allocate 25% of
management consultants’ salary and building lease cost to the bagel division. At what price
per bagel is the bagel-division profitable given annual production of 1,000,000 bagels? Show
all work. [3 pts]
Global Parties (“GP”) has for years offered a fancy celebration package for kids’ birthday
parties. They have decided to step their business operations up a notch and bring in a market
expert (ie, you).
a. Currently they offer one package: the Clowns from Around the World (“CAW”) package.
They have been charging $300 for this CAW package. You estimate that the price elasticity
of demand for this package is currently at E_d=-0.8. What advice do you give them? Fully
explain your answer, including what information you need from GP. [3 pts]
b. Next, you identify that there are some kids whose families are more price-sensitive than
others, and many of them are being priced out of the market. What are two (2) different
pricing approaches that you can advise GP to take with respect to the different market
segments? Fully explain your answer, including SPECIFIC examples/applications of your
approach as well as what information would be needed to put the pricing approaches into
effect. [4 pts]
c. Finally, you discover Festivals International (“FI”), which offers a Horses from Around the
World (“HAW”) party for $350. If GP were to acquire FI and continue to offer HAW, what
advice would you give them on their overall pricing strategy upon acquisition of FI? Fully
describe your answer, including what information you may need from/about GP and IF. [3
pts]
Parsons-Ashworth Bread Company has been a local company which has produced and sold bread
products only to consumers in California; however, one of its products, Jared’s Jasmine Toast, has
tested well in Nevada. The current price for a loaf of Jared’s Jasmine Toast is $3.00. Market research
shows the price elasticity of demand in Nevada is .8 (in absolute value). In California, the market
research shows the elasticity of demand is 1.5 (in absolute value). The MC of production of one loaf
of bread is one dollar.
a. Explain the relevance of the market research reports in qualitative terms, ie, what do they
suggest? (2 pts)
b. In Nevada, should you increase, decrease, or not change the price? Fully support your
answer. (4 pts)
c. In California, should you increase, decrease, or not change the price? Fully support your
answer. (4 pts)
Games
a. You must choose whether or not to fully engage with your business partner in the most
recent rollout of a new product; so must your partner. Complete the payoff table below so
that it is NOT a Prisoner’s Dilemma. Fully explain your answer. (Hint: there will be various
values that can provide a correct solution; explain why yours is valid). [5 pts]
Partner’s Support
Your
Support
Full
Partial
Full
You: 10 ; Partner: 10
You: 14 ; Partner: 5
Partial
You: 5 ; Partner: 14
You: __ ; Partner: __
b. Galaxy Pro is your main competitor in the market for space-ready paperweights. You both
have the chance to use advanced military polymer or just glass.
i.
What is (are) the pure Nash equilibrium(a) in this game, if any? [3 pts]
ii.
Does this game show a first-mover advantage, a second-mover advantage, or
neither? Fully explain your answer. [2 pts]
Galaxy Pro
You
Polymer
Glass
Polymer
You: 50 ; Galaxy Pro: 40
You: 60 ; Competitor: 30
Glass
You: 70 ; Galaxy Pro: 90
You: 40 ; Competitor: 120
Parsons-Ashworth Bread Company travel to Vancouver to sell Jared’s Jazzy Gingerbread at the
World’s Fair. The fair is out in the open and the weather has a large effect on the demand for
Jared’s Jazzy Gingerbread. Demand under different weather conditions and Brandon and Jared’s
willingness to sell are listed in the following three tables. (10 pts)
Rainy Demand
Price
Quantity
1
1000
2
800
3
700
4
600
5
400
6
300
7
200
8
100
Sunny Demand
Price
Quantity
1
1500
2
1200
3
1000
4
900
5
700
6
600
7
400
8
200
Supply
Price
1
2
3
4
5
6
7
8
Quantity
125
325
575
825
975
1250
1500
1750
If the weather forecast predicts a 25% chance of rain over the weekend, what is the
EXPECTED equilibrium quantity of Jared’s Jazzy Gingerbread that will be sold, based on
expected demand and supply? (Show your work).
The Fed announced that prices would be rising by 3 percent. However, due to unexpected
surges in demand, prices rose by 5 percent. How would this unexpected inflation rate help, hurt,
or not impact each of the following? Fully explain your answers. (10 pts)
a.
b.
c.
d.
A homeowner with a fixed-rate mortgage. [2.5 pts]
A union worker in the third year of a five-year labor contract. [2.5 pts]
A student with a variable- and deferred-interest loan tied to inflation. [2.5 pts]
A retiree primarily living off of her mutual-fund-invested 401(k). [2.5 pts]
Parsons-Ashworth Bread Company has decided to enter a foreign market, Mexico. The exchange
rate between the United States and Mexico listed in the Wall Street Journal changed from 1USD=19
MXN to 1USD=20 MXN. In addition, there was a surprise increase in the price level in Mexico, but
not in the US. (10 pts)
a. What will happen to the demand for Parsons-Ashworth Bread in Mexico based ONLY on
the change in exchange rates (all else equal)? Explain your answer. [2 pts]
b. What will happen to the demand for Parsons-Ashworth Bread in Mexico based ONLY on
the difference in inflation (all else equal)? Explain your answer. [3 pts]
c. What will happen to the demand for Parsons-Ashworth Bread in Mexico based on BOTH
the change in exchange rate AND the difference in inflation? Explain your answer; you can
assume a certain inflation rate in the US if it helps. [3 pts]
d. As a stakeholder of Parsons-Ashworth Bread Company, what do you prefer to happen to
the USD/MXN exchange rate as well as relative inflation between the US and Mexico?
Explain your answer. [2 pts]
Many laser-building companies are considering bidding for access rights to a large deposit of
Thulium (atomic number 69). One-third (1/3) of the companies value this deposit at $600
million and two-thirds (2/3) at $900 million. The mining company will hold an oral auction to
determine who gets the rights to the deposit. The mining company expects only two (2) firms to
actually show up to the auction and bid on the deposit, and will set a reserve price of $300
million.
a. What is the expected revenue from this auction? [6 pts]
b. The laser-building companies themselves don’t bid, rather an employee of the companies
bids. Sometimes, the employee gets really excited about the auction and overbids. Who is the
principal and who is the agent? [1 pt]
c. Does this principal-agent relationship in (b) describe moral hazard, adverse selection or
neither (ie, there is no principal-agent problem)? Justify your answer. [3 pts]
d. Suppose that half (1/2) of the high-value firms have employees who act in the way described
in (b), and they do so by bidding up to $1,000 million, instead of $900 million. What is the
new expected revenue from the auction, still assuming only two (2) bidders show up? [Note:
This could be tricky, so think hard about this.] [6 pts]
e. Given your answers to (a) and (d), what is the expected amount of the agency costs to the
laser-building industry? [2 pts]
Parsons-Ashworth Bread Company has many local and global competitors. Further, its products,
while slightly-differentiated, have no patented attributes. Answer the following questions: (20
points)
a. Parsons-Ashworth Bread Company resides in what market type? Fully explain your answer.
In addition to the three market types discussed in class (oligopoly, monopoly, perfect
competition), consider a fourth market type called monopolistic competition. Monopolistic
competitive markets are characterized by low barriers to entry/exit, many firms with
relatively low market power, differentiated products, and relatively elastic demand with close
substitutes but no perfect substitutes. (4 pts)
b. What do you assume regarding the elasticity of Parsons-Ashworth Bread as well as the
relative elasticity of Parsons-Ashworth Bread compared to bread in general? Fully explain
your answer. (4 pts)
c. Explain four ways that Parsons-Ashworth Bread Company might use both direct and
indirect price discrimination to increase profits, using at least one example of each type of
PD. Obviously, fully explain your answers. (6 pts)
d. Applying RBV and the main strategies to increase profits, explain three strategies you could
apply for the purpose of making Parsons-Ashworth Bread Company the next Wonder Bread
(but tastier…because Wonder Bread is disgusting). (6 pts)
You bought Parsons-Ashworth Bread Company and are now pitching the idea to a venture
capitalist. She is very excited to work with you and wants to grow the business. This requires a
workforce (managers and salespeople) to be hired as well as a framework for the business. Since you
took Econ, you now understand how asymmetric information, principal-agent problems, and
incentives are important considerations in the hiring and overall framework of the organization.
Further, you expect to find ways to lower the risk and uncertainty of your investment. (20 points)
a. Develop a compensation package for both the managers and the salespeople. Describe each
package and explain the differences as well as the rationales. (5 points)
b. You are now looking to hire. You have hundreds of applicants. Please discuss your selection
process, keeping in mind what you developed in (a). (5 points)
c. You have now hired your staff and are examining monitoring. Please discuss how much or
little to monitor with the above considerations in mind. Should this be considered in (a) and
(b)? Are there ways to discourage shirking? (5 points)
d. Explain how you might be able to lower the risks and uncertainties of your new business.
Please give examples of both risks and uncertainty that this business faces, and how you
might be able to account for them (or not) in the hiring process. (5 points)
…
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