Part I. Breakeven analysis : Speciality Chocolate Company One-time Fixed
Cost
Rent of Facility Plant Maintenance Advertising Employees' salary Insurance
Total Fixed Cost
800,000 300,000 400,000 400,000 500,000
2,400,000
Annual Variable Costs per box sold
Electricity
Cost of Packaging Cost of Ingredients Production Labor
Total Variable Cost
3,200,000 1,600,000 2,400,000 800,000
8,000,000
Price to Consumer Quantity Sold/Yr
$10 1,000,000
Note: Assume no excess inventory
(Q1) Calculate total revenue for the company (Show work)
(Q2) Calculate the margin for this company. (Write down the equation and solve the problem)
(Q3) How many units (Chocolate boxes) must this company sell to breakeven? How many years will it take? Show your work.
(Q4) Does this feel like a good business for your client to be in? Yes, No, or Unclear. Explain your reasoning for what constitutes a "good business."
(Q5) Your employee tells you that the cost of building the factory for the company has lowered the margin for the product. Does this make sense? Why or why not?
Part II. Use the following model to answer questions in this section (Note: Coefficient values are in percentage terms)
Quant. Demanded of Starbucks Coffee in the market = 5.83
+ 1.30 (Price of Starbucks Coffee)
+ 0.75 (Average income in geography) + .50 (Price of McDonalds Coffee)
- .43 (Price of dairy creamer)
+ .003 (Price of local coffee shop) - 1.20 (Age)
Assume that our model is a complete model of the factors affecting Qd.
(Q1) Are you able to interpret elasticities directly from this model? Explain why or why not. Given this, how do you interpret the "Age" variable?
(Q2) Interpret the coefficient of the price of Starbucks Coffee. What is it saying literally? Does this interpretation make sense? Why or why not?
(Q3) What are the independent variable(s) and dependent variable(s) in this model? (You can label them on the equation)
Part III.
(Q1) Imagine that Pepsi has a monopoly in the market. For the holidays, they offer one soda can at the normal price and a "special edition" can with faces of famous American celebrities. The special edition costs 20 cents more than the regular can. In a different promotion at a different store, Pepsi offers a discount to individuals willing to buy 5 bottles or more of the regular can. Are these examples of the same type of price discrimination? Answer "Yes" or "No" and explain the logic behind your answer.
(Q2) For the volume discount example above, explain why this move results in more (or less) profits for a monopolist compared to a monopolist offering a single price.
(Q3) Trader Joe's charges $2 / bottle for its house brand of wine in California and $3 for the same bottle in Chicago. Provide one example in which the price difference is due to price discrimination and another in which it is not.
(Q4) What is the fundamental difference between second-degree price discrimination from first degree price discrimination?
(Q5) Imagine that you are selling telephones with two segments of monthly users: individuals who make very few calls, versus those who make many. Based on the example in the notes/class, how might you price this product in the market (per
month)? What is the critical piece of information that you need to know about low volume users' willingness to pay in order to solve this problem efficiently?
Part IV. Please use the following pricing schedule to solve this problem. The following table contains willingness to pay data ($) for printers and printer ink across two segments of consumers "A" and "B." Note: the numbers for Ink represent willingness to pay for the first, second, third, fourth, and fifth unit of ink, respectively (e.g., Segment A is willing to Pay $15 for the first ink, $12 for the second, etc.).
Printer WTP
INK 1 2 3 4 5
SEG A) 250 SEG B) 110
15 12 10 5 0 16 12 11 0 0
(Q1) Ignore the price of ink for a moment. If only the printer were being sold in the market, what price should they be sold for to maximize profits? Who will buy the product at that price?
(Q2) Based on what we discussed in class, under what market conditions would a company choose to bundle the printer and the ink?
(i.e., what is the major point of metered pricing?)
(Q3) Write down the steps for analyzing a product line pricing problem.
Part V. Please use the following price schedule for the first two Questions in this section. Imagine that you are trying to sell the showing rights of two movies to two television channels who have the following willingness to pay for each movie.
Movie 1 Movie 2
Customer A Customer B Customer C
8,000 2500 7000 3000 6,000 6,000
(Q1) If you sold the movies separately, what price would you charge for Movie 1 and Movie 2, respectively, in order to maximize profits?
(Q2) What is the maximum price that you could charge for a bundle of BOTH movies in order to maximize profits?
Part VI. Basic Economics
(Q1) Which products have steeper demand curves, elastic or inelastic products? Are products more elastic or inelastic in the long-run? Explain.
(Q2) Is a demand for Lagunitas Beer more elastic or inelastic than Beer drinks generally? Explain.
(Q3) Imagine you have two equations:
Quant. Demanded of i = 7000 - 600Pi - 200Pj + 0.1 INCOME. What is the relationship between product i and product j in the market?
(Q4) Imagine that you take out a loan and use it to purchase a car in the year 2013. Deflation occurs in the following year. Is the person who took out debt better off or worse off? Explain why or why not.
(Q5) What function do banks have that help the overall economy grow on a GDP basis? Explain.
Part VII. Hedonic Analysis (Use the following Equation. Units are in Dollars)
Imagine that you are hired to help Huang Electronics enter the high-end TV market where Samsung has established itself as the market leader: You decide to conduct a conjoint/hedonic analysis on potential consumers that examines the difference between Huang televisions and other competitive televisions. Prices paid in the market are depicted by the following model:
Price Paid = 2000 + 350 (Weight = Super Light) + 350 ( Screen = "Hi End Retina") + 200 (Internet Ready = Yes) + 200 (Sound = Advanced) + 100 (SAMSUNG Brand)
The Reference product is as follows: Brand = Huang, Weight = Standard, Screen = Regular , Internet Ready = No, Sound = "Regular"
(Q1) What is the price of the reference product? What is the price paid if the standard product is a "Samsung" (rather than the brand for the reference product)?
Imagine Huang conducts an ad test in which consumers who are asked to sit in an unbiased product comparison sales pitch (Huang vs. Samsung) at a retail outlet like Best Buy. After the experiment, the following hedonic model is estimated from consumers who saw the sales pitch:
Willingness to pay = 2000 + 350 (Weight = Super Light) + 350 ( Screen = "Hi End Retina") + 200 (Internet Ready = Yes) + 200 (Sound = Advanced) + 45 (SAMSUNG Brand)
(Q2) What is the effect of this test ad on the willingness to pay for the Huang TV? Based on this research, would you go ahead with this ad strategy? (Hint: think about why you would or wouldn't engage in this strategy BEFORE answering this question).
(Q3) Imagine that the new product made by Huang in the previous question is essentially a perfect copy of the Samsung TV. What does that tell HUANG about the Samsung?
Part VIII. Case Analysis
(Q1) Think back to the Heineken case: imagine that a consultant told you that the best solution for that case was to improve the product formula/taste in order to become competitive in the global market? Is this a good idea or bad idea? Why?
(Q2) Imagine that the Sealed Air Case took place during the growth of the Euro zone trading area. Is that good or bad for Sealed Air's current market position based on what we learned in the case? Explain.
Part IX. Consumer Psychology
(Q1) Rosser Reeves discussed the notion of the "unique selling proposition." What were the basic standards that he believed were necessary for advertising products? Why did his methods stop working well by the 1960s? How did advertisers adjust their ad plans in response?
(Q2) What is the difference between a "lexicographic" decision-making rule and a weighted-additive model in consumer choice? Which do economists assume that people use? Is this a practical assumption?