MBA 540 Mid-term Exam

1. (10 pts.) Stella Ann Freeman is havin" rel="nofollow">ing a difficult time decidin" rel="nofollow">ing whether or not to purchase a new car. How would understandin" rel="nofollow">ing the concept of opportunity costs help her make a decision? 2. (10 pts.) Referrin" rel="nofollow">ing to the table below, hirin" rel="nofollow">ing a driver costs $10. Each machin" rel="nofollow">ine costs $100. Which method should he use and why? 3. (10 pts.) Enron will be an example of a dysfunctional company for many years to come. It was clearly a company riddled with fraud and excess and its conduct drove it in" rel="nofollow">into bankruptcy. The text argues that in" rel="nofollow">individual behavior was not at the core of Enron’s problems. What were the problems with this corporation from an organizational architecture poin" rel="nofollow">int of view? 4. (10 pts.) For many corporations such as utility companies, a major portion of the cost of production is fixed in" rel="nofollow">in the short run. Should these very large fixed costs be ignored when the executives are makin" rel="nofollow">ing output and pricin" rel="nofollow">ing decisions? Why? 5. (10pts.) Choose a real-life example of a firm that you thin" rel="nofollow">ink is part of an oligopoly market and describe the characteristics of the market structure that explain" rel="nofollow">in why the firm would be classified as such. 6. (10 pts.; 2 pts each) You are the manager for Dunkin" rel="nofollow">in Donuts and know the followin" rel="nofollow">ing elasticities: ?= 1.5 ? I = 1.2 ? xy1 = 0.5 ? xy2 = -0.5 ? is the price elasticity of demand for Dunkin" rel="nofollow">in Donuts (DD) glazed doughnuts, ?xy1 is the cross elasticity of demand between DD glazed doughnuts and Krispy Kreme (KK) glazed doughnuts, ?xy2 is the cross elasticity of demand between DD glazed doughnuts and DD French Vanilla coffee, and ? I is the in" rel="nofollow">income elasticity of DD glazed doughnuts. a) If you want to in" rel="nofollow">increase your sales of glazed doughnuts by 30%, in" rel="nofollow">in what direction and by how much do you need to change the price? b) If you make the percentage price change that you calculated in" rel="nofollow">in part a) will total revenue in" rel="nofollow">increase or decrease? How do you know? c) Krispy Kreme lowers its price of glazed doughnuts by 20%. The demand for Dunkin" rel="nofollow">in Donuts glazed doughnuts will change by what percentage and in" rel="nofollow">in what direction? d) Dunkin" rel="nofollow">in Donuts raises the price of its French Vanilla coffee by 15%. The demand for Dunkin" rel="nofollow">in Donuts glazed doughnuts will change by what percentage and in" rel="nofollow">in what direction? e) If average in" rel="nofollow">income in" rel="nofollow">increases by 5% by what percentage and in" rel="nofollow">in what direction will the demand for Dunkin" rel="nofollow">in Donuts glazed doughnuts change? Are DD glazed doughnuts a normal good or an in" rel="nofollow">inferior good and how do you know? 7. (10 pts.) Westin" rel="nofollow">inghouse and General Electric are competin" rel="nofollow">ing on the newest version of clothes washer and dryer combin" rel="nofollow">inations. Two pricin" rel="nofollow">ing strategies exist: price high or price low. The profit from each of the four possible combin" rel="nofollow">inations of decisions is given in" rel="nofollow">in the followin" rel="nofollow">ing payoff matrix: Westin" rel="nofollow">inghouse’s price High ($4000) Low ($2000) General Electric’s price High ($4000) Low ($2000) Payoffs in" rel="nofollow">in dollars of profit. a) (2 pts.) Which strategy offers both Westin" rel="nofollow">inghouse and General Electric the best fin" rel="nofollow">inancial outcome? b) (2 pts.) Does either firm have a domin" rel="nofollow">inant strategy? If yes, which firm and what strategy? c) (4 pts.) The Nash equilibrium is for Westin" rel="nofollow">inghouse to set its price at __________ and earn a profit of __________ and for General Electric to set its price at ______________ and earn a profit of _____________. d) (2 pts.) Why do we see that the strategy that results is not the strategy that offers both players the best fin" rel="nofollow">inancial outcome?