Competitiveness of the market

Question

Assignment:

Question 1

You are given the following data for your firm, which sells high-capacity video MP3 players.

Q	P	TC
0	78	$100,000
1,000	76	$125,500
2,000	74	$144,000
3,000	72	$158,500
4,000	70	$172,000
5,000	68	$187,500
6,000	66	$208,000
7,000	64	$236,500
8,000	62	$276,000
9,000	60	$329,500
10,000	58	$400,000

Which of the following represents the correct formulas for P and MR in terms of Q_D?

a. P = 78 - 0.004Q_D; MR = 78 - 0.008Q_D

b. P = 39,000 - 500Q_D; MR = 39,000 - 250Q_D

c. P = 39,000 - 500Q_D; MR = 39,000 - 1,000Q_D

d. P = 78 - 0.002Q_D; MR = 78 - 0.004Q_D

Question 2

Which of the following equations is correct, based on the data above?

a. ATC = 0.0000005Q³ - 0.005Q² + 30Q + 100000

b. AVC = 0.0000005Q² - 0.005Q + 30 + 100000/Q

c. MC = 0.0000015Q² - 0.01Q + 30

d. AVC = 0.0000005Q² - 0.005Q + 30/Q

Question 3

The profit-maximizing quantity occurs at _______ and at _________.

(Since MC is in terms of Q², solving with calculus and algebra can be messy. Your table should give an exact answer.)

a. Q = 2,000; P = $74

b. Q = 6,000; P = $66

c. Q = 8,000; P = $62

d. Q = 8,000; P = $46

Question 4

How much total profit would your firm earn if you set P and Q at their profit-maximizing levels?

Select one:

a. $220,000

b. $276,000

c. $0; break even.

d. $496,000

Question 5

Describe the competitiveness of the market by calculating the Lerner index.

Select one:

a. ≈ 25.8%

b. 46%

c. 62%

d. ≈ 34.8%

Question 6

Do Applied Problem #13 on page 504 about Coke's attempt at gaining market share.

"In a recent 'earnings call,' a teleconference call to shareholders in which the CEO reports and discusses quarterly earnings per share, Coca-Cola's CEO Muhtar Kent bragged about 'winning' market share from rival beverage company PepsiCo.

However, rising sugar costs in 2011 are forcing Coke to raise soft drink prices by 3 to 4 percent, and this could undermine Coke's market share gains if Pepsi does not also raise its soft drink prices. 

The Wall Street Journal (April 27, 2011) reports that, in an effort to continue 'winning the market share battle,' Kent plans to maintain relatively low prices in soft drinks by raising prices disproportionately higher in other categories such as fruit juices and sport drinks. The WSJ raises the concern that 'winning market share may come at too great a financial cost.'"

Which of the following is a reason why Kent's suggestion is not a wise decision for Coke?

a. Since the beverages are such close substitutes, and since rising sugar costs are pushing up prices of soft drinks, Kent should also raise prices of juices/sport drinks, not lower them.

he rising costs in one drink category should lead to increased prices in all drink categories if Coke wants to maximize its profit.

b. Kent should ignore the change in Coke's costs (due to the rising sugar prices) and just match any price change of Pepsi, even potentially keeping prices the same if Pepsi doesn't change its prices.

Since the products are such close substitutes, Coke will maximize its profits by keeping its price as close as possible to Pepsi, regardless of its own costs.

c. The pursuit of market share neglects the MR = MC rule for pricing, so Coke would not be maximizing its total profit under such a strategy.

d. Kent is choosing to raise prices in juices/sport drinks when he should be pursuing low prices in all beverage categories. The company will maximize its profit by gaining market share in both soft drinks and juices/sport drinks.

Question 7

Do Applied Problem #4 on page 566 about laws restricting Sunday sales. Note that the trade associations attempt to represent the interests of all businesses in the industry.

"Some states have had laws restricting the sale of most goods on Sunday. Consumers, by and large, oppose such laws because they find Sunday afternoon a convenient time to shop. Paradoxically, retail trade associations frequently support the laws."

Which of the following is the most likely reason why merchants would support such laws?

a. The trade associations are attempting to increase demand on other days of the week by publicly supporting laws that supposedly encourage time spent with families.

If retailers are perceived as being family-friendly (by promoting quality time at home instead of at the store), then they stand to gain more customers on the other six days than they would by staying open on Sunday.

b. Merchants presume that, even if consumers say they oppose such laws, the likelihood that they would actually shop on a Sunday afternoon is low. The law helps to deflect criticism against the retailers who want to stay closed.

c. The retailers were in a prisoners' dilemma. They all wanted to close on Sunday to save money and not lose sales, but the temptation to cheat was high.

Those who stayed closed while others were open would lose a great deal of sales. The law essentially imposed a very costly deterrent to cheating.

d. Most retail trade associations, though purporting to represent the industry, often do not reflect the beliefs of their members. The association itself may support such laws, but individual retailers (even most of them) likely oppose such laws.

The following is a payoff matrix showing profit in millions of dollars when two companies simultaneously decide on various advertising budgets ($1 million, $2 million, or $3 million):

			Pizza Hut
		$1 mill	$2 mill	$3 mill
	$1 mill	$60/$55	$70/$60	$20/$65
Papa John's	$2 mill	$80/$40	$40/$55	$60/$50
	$3 mill	$85/$35	$67/$45	$65/$55

Question 8

In the first round of strategy elimination (when all three possible budgets are under consideration), which ad budget would the companies exclude?

a. Papa Johns would eliminate $1 mill; Pizza Hut would eliminate $2 mill.

b. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $1 mill.

c. Papa Johns would eliminate $2 mill; Pizza Hut would eliminate $2 mill.

d. Papa Johns would eliminate $2 mill; Pizza Hut would eliminate $1 mill.

Question 9

After the first round of elimination (previous question), would either company make a second-round elimination?

a. Both companies eliminate $2 mill in the second round.

b. Neither company would eliminate in the second round.

c. Papa Johns wouldn't eliminate either; Pizza Hut would eliminate $2 mill.

d. Papa Johns would eliminate $1 mill; Pizza Hut wouldn't eliminate either.

Question 10

What would be the likely outcome of this simultaneous advertising decision (i.e. what ad budget would each company end up choosing)?

a. Papa Johns would choose $3 mill; Pizza Hut would choose $1 mill.

b. Papa Johns would choose $1 mill; Pizza Hut would choose $2 mill.

c. Both would choose $2 mill.

d. Both would choose $3 mill.