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Berkeley MBA 201A - FINAL EXAM

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MBA 201A—Economic Analysis for Business Decisions—Fall 2009FINAL EXAM*** WRITE YOUR NAME AND COHORT ONLY ON THE LAST PAGE ***UNIVERSITY OF CALIFORNIA BERKELEYHass School of BusinessMBA 201A—Economic Analysis for Business Decisions—Fall 2009Professors Steve Tadelis and Catherine WolframFINAL EXAMInstructions: The number in brackets (e.g., [5]) indicates the points for each question. Total: 180 points. Note that you have 180 minutes to do the exam, so you should spend no more than 1 minute per point.Please Write Legibly. Briefly explain your answers (that is, don’t just write “yes” or “no” and don’t just write down a numerical answer without showing how you derived it). Write only on this exam and not on other sheets of paper.Please sign the honor code oath at the bottom of the back page.Short answer questionsThe following three questions require only short answers (1-3 sentences). Use any graphs that will help your explanation. Be sure to label graphs clearly.1. [10] Even with a very small number of competitors, firms occasionally get locked in bitter price competition and drive prices down to their marginal costs. Discuss two factors that help firms avoid the “Bertrand Trap.”MBA 201A Professors Tadelis and Wolfram Fall 2009—Final2. [10] Alice is a contractor bidding in a sealed-bid auction for a job to paint Bob's house. Being an expert painter, Alice knows for sure (and is correct) that it will cost her exactly$5,000 (labor and material) to paint Bob's house. The auction rules state that the lowest bidder gets the job and gets paid the amount of the second lowest bid. Explain to Alice, who does not know economics, why she should bid exactly $5,000.3. [10] Two firms have to set their capacity in a market they are about to enter. Their payoffs are described by the following matrix (the lower left number in each cell is the payoff to Row Inc. and the upper right number is the payoff to Column Ltd.): Column Ltd. Small Mid Large SmallRow Inc. Mid LargeWhat is (or are) the Nash equilibrium of this game?2 67 75 104 48 66 55 311 45 23MBA 201A Professors Tadelis and Wolfram Fall 2009—FinalQuestion 4You run a photography company that specializes in weddings near your home in Carmel, California. You have two types of clients: the wealthy, who own a single, year-round house in Carmel, and the very wealthy, who own multiple houses, including one in Carmel.You can distinguish between the two types of clients, but you feel that you would lose considerable business, especially from the very wealthy, if you charged different prices to consumers based on their wealth.Your marginal costs are $2000 per wedding regardless of what type of client you’re serving. This includes the cost of film and the cost of labor (either the opportunity cost of your time if you do the wedding yourself, or the wages you pay to your associates). You expect that in 2010 there will be 140 weddings, including 40 to the wealthy and 100 to the very wealthy.In order to try to distinguish the wealthy from the very wealthy, you are thinking of offering two types of services: all black-and-white photos or half black-and-white, half color. Based on your extensive interviews with potential clients, you estimate the following valuations for these two types of services in 2010:Number of weddings Half black-and-white, half colorAll black-and-whiteWealthy 40 $5,000 $6,000Very wealthy 100 $6,000 $10,000Assume that the cost difference between color and black-and-white film is negligible, although you might tell your clients otherwise to justify your new pricing scheme. Also assume that couples in Carmel get married no more than once per year, so they will order no more than one photography package.a. [10] In 2010, what would be the profit-maximizing way to price all black-and-white and half black-and-white, half color wedding photos?3MBA 201A Professors Tadelis and Wolfram Fall 2009—Finalb. [15] You learn that the reception location of choice for the wealthy is considering doing a major renovation in 2010. This would drive the number of wealthy clients down to 20. You believe that there’s a 50% chance that they will go through with the renovation, in which case, you would have 20 wealthy clients and 100 very wealthy, still with the same valuations listed in the table above. If they decide to delay their renovation (an event to which you assign probability of 50%), then the number of clients will be exactly as in the table above. You need to print up your new brochure with 2010 prices before you know whether or not the renovation is going to take place. Assuming you are risk neutral, what prices would you choose? In other words, what prices maximize expected profits?c. [5] Would you choose different prices than you did in part b. if you were risk averse? Why or why not?4MBA 201A Professors Tadelis and Wolfram Fall 2009—Finald. [10] How much would you be willing to pay to learn whether or not the renovation wouldtake place before you printed your 2010 brochure?5MBA 201A Professors Tadelis and Wolfram Fall 2009—FinalQuestion 5You are the product manager of Macrohard's new student-targeted software line, Dormroom 2009, which includes two components: Letter 2009, the new word-processor, and Surpass 2009, the new spreadsheet analyzer. Your market research team tells you that there are five student groups that compose the market with the following willingness-to-pays (WTP) for each product: There are an equal number of students in each of the 5 groups listed in the table above.The company’s accountant presents the following table of per unit costs for both of the products:* Amortized based on expected number of customers.a. [10] What are the marginal costs of selling Letter 2009? Surpass 2009? Explain your answer.6WTP forLetter 2009($)WTP forSurpass 2009($)Engineering Majors 10 55Econ Majors 40 70Poli-Sci Majors 45 45Pre-Med Majors 70 40Humanities Majors 55 10Unit Costs Letter 2009 Surpass2009Software development*$1.00 $3.00Promotion*$0.20 $0.20Manual development costs*$1.00 $1.90Manual printing costs $4.60 $6.60Customer Support Website*$0.30 $0.40CDs (each) $0.40 $0.40Total Unit Costs $7.50 $12.50MBA 201A Professors Tadelis and Wolfram Fall 2009—Finalb. [10] Macrohard's CEO insists on offering a single price per product without offering the bundle


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