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PEPPERDINE BA 445 - Homework 5 Questions

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Homework 5 Questions Managerial Economics BA 445 BA 445 Dr. Jon Burke Exam 1 (Practice Version) These are practice questions from Lessons A.9 and A.10 for your upcoming Exam 1. This homework is graded pass/fail at the beginning of the class when it is due. Exam 1 is a 100-minute exam (1hr. 40 min.). There will be 6 questions (about 17 minutes per question) drawn from Lessons A.1 through A.10 To avoid the temptation to cheat on Exam 1, you must agree to the following rules before taking your exam: • Turn off your cell phones. • You cannot leave the room during the exam, not even to use the restroom. • The only things you can have in your possession are pens or pencils and a simple non-graphing, non-programmable, non-text calculator. • All other possessions (including phones, computers, or papers) are prohibited and must be placed in the designated corner of the room. • Possession of any prohibited item (including phones, computers, or papers) during the exam (even if you don’t use them but keep them in your pocket) earns you a zero on this exam, and you will be reported to the Academic Integrity Committee for further action.Homework 5 Questions Managerial Economics BA 445 A.9 Monopolistically Competitive Entry and Exit Question 1: You manage Apple Inc., and make computers that meet the specifications of Pepperdine University. Apple competes with Dell Inc. and HP (the Hewlett-Packard Company) to sell computers through Tech Central. Apple Computer offers connectivity to iPods and iPhones in an attempt to differentiate itself from its competitors. The weekly demand for Apple Computers is given by Q = 10-0.5P, and the weekly cost for Apple Computers is C(Q) = 2Q2. If other firms in the industry sell computers for $60, what price and quantity of computers should Apple choose to maximize profit? What long-run changes should Apple anticipate? Explain. Answer to Question:Homework 5 Questions Managerial Economics BA 445 A.9 Comparing Markets Question 2: Consider the cost function C(Q) = 400 + 40Q + 2Q2 for Apple to produce the new iPhone 5 smart phone. Using that cost function for the iPhone 5, determine the profit-maximizing output and price for the iPhone 5, and discuss its long-run implications, under three alternative scenarios: a. Apple’s iPhone 5 is a perfect substitute with RIM’s BlackBerry Bold 9700 and several other smart phones that have similar cost functions and that currently sell for $200 each b. Apple’s iPhone 5 has no substitutes and so is a monopolist, and the demand for the iPhone 5 is expected to forever be Q = 32 – (1/2)P c. Apple’s iPhone 5 currently has no substitutes, and currently the demand for the iPhone 5 is Q = 32 – (1/2)P, but Apple anticipates other firms can develop close substitutes in the future. Answer to Question:Homework 5 Questions Managerial Economics BA 445 A.10 Uniform Pricing Question 3: An analyst for Home Depot estimates the demand for lumber from Home Depot to be ln(QL) = 3.6 – 3.2 ln(PL) + 3.8 ln(PW) + 2.3 ln(A) where QL is the linear feet demanded for lumber from Home Depot, PL is the price per linear foot of lumber from Home Depot, PW is the price per linear foot of lumber from Lowes, and A is the dollars spent advertising Home Depot. Last year, Home Depot sold 10 million linear feet of lumber and spent $2 million on advertising on national T.V. Its plant lease is $4 million, and that includes utilities. Capital depreciated from age, at a cost of $5 million. Payments to employees (all on salary) cost $1.75 million. Finally, through its Williams Brothers Lumber Co. subsidiary, Home Depot planted replacement trees, hired lumberjacks, and milled trees into 10 million linear feet of lumber at a combined cost of $5 million. All inputs were purchased in competitive input markets. What price should Home Depot charge per linear foot of lumber? Answer to Question:Homework 5 Questions Managerial Economics BA 445 A.10 Block Pricing Question 4: Suppose typical consumer’s demand for cans of Mountain Dew is estimated to be P = 9 - 2Q, and the cost of producing Q cans is C(Q) = Q. Assume market conditions allow the firm to package units sold to each customer so that customers do not share their packages. Compute the optimal number of cans in a package of Mountain Dew, compute the optimal package price, and compute optimal profit. Answer to Question:Homework 5 Questions Managerial Economics BA 445 A.10 Bundle Pricing Question 5: Microsoft Corporation is an American multinational corporation that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions. Microsoft estimates that its 3 million customers are one of five types: • One fifth are business users (B). • One fifth are college students (CS). • One fifth are recreational users (R). • One fifth are children (C). • One fifth are senior citizens (S). The maximum price each type of consumer will pay for Windows and for Microsoft Office is as follows: Consumer Type Windows Price Microsoft Office Price B $120 $55 CS $90 $60 R $70 $10 C $20 $5 S $70 $35 To keep the problem simple, assume there are zero marginal costs of selling to any of those consumers. Assume market conditions allow the firm to bundle units sold to each customer so that customers do not share their bundles. What is the optimal price per unit if Windows is sold separately from Microsoft Office? And the optimal price if Microsoft Office is sold separately? What is the optimal price per unit if Windows is bundled together with Microsoft Office? Is it better to sell the two products separately? Or better to sell the two products as a bundle? Answer to Question:Homework 5 Questions Managerial Economics BA 445 A.10 Two Part Pricing Question 6: A personal seat license, or PSL, gives the holder the right to buy tickets for seats in a stadium. Suppose typical consumer’s demand for seats at the Dallas Cowboys Stadium is estimated to be Q = 5 – (1/30)P, and Dallas’s cost of providing Q seats is C(Q) = 30Q. Assume market conditions allow the firm to charge a fee to each customer to have the right to buy individual units (tickets) from the firm, and that customers do not resell individual units to other


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