Question 1.
You are the purchasing manager of a company and are responsible for ensuring that necessary inputs are available to keep your factory operating. For each of the three types of purchases identified below, recommend whether your company should use spot purchases, contract purchase, or internal production. Support your answer using economic concepts . To what extent is your decision and any contract terms affected by the variability in the demand for your product and thus your need for the product purchased?
a. A subsystem that is similar to but not exactly the same as subsystems used by competitors; several large companies offer to make modifications to the subsystem to fit your requirements.
b. A part that is unique to your company and requires significant capital investment in order to produce. Your company is the only one using this part but several vendors have offered to manufacture it for you.
c. Light fixtures and light bulbs used to illuminate the factory floor.
Question 2.
Discuss each of the pricing strategies below. What conditions are necessary to make each strategy successful in terms of increasing profits? Explain your answer.
a. A local restaurant/bar offers discounted drinks during "happy hour," from 5 to 6 PM on weeknights.
b. The price Company X charges for its ink cartridges is nearly as much as it charges for a printer.
c. Packs of 5 T-shirts cost $10 while an individual T-shirt costs $4.
d. Coupons for specials at a local grocery store can be downloaded from an online site.
e. Computer and appliance manufacturers promote service contracts.
f. Microsoft Office includes several programs in one package.
Question 3.
Assume the operations manager at the company you own prefers to put in low effort rather than high effort. In order the manager to exert high effort, his expected financial gain must be at least $60,000 higher than if he puts in low effort. You are evaluating three possible compensation packages:
- A flat salary of $300,000
- A payment equal to 5% of the expected profits from the profit center
- A flat payment of $200,000 plus 5% of any profits over $10 million.
a. Discuss the effects of each of the compensation packages on company profits and the behavior of the manager. What assumptions are needed in order to compare the expected values and risks associated with each option?
b. How would a risk averse versus a risk neutral manager view the different compensation packages?
Question 4.
Explain how incomplete information can cause market failure. Give at least one example of this type of market failure and explain how government intervention has been used to correct the problem. How effective has this form of intervention been?