Stephanie J.

Jones MBA 540 Mid Term Exam

1) Should Stella purchase a new car? Use opportunity costs to help her make the right choice. There are a few things that Stella must consider before making her decision on whether to buy a new car. For instance, she should consider her salary and monthly budget. How would the cost of a new car payment, fit into her monthly budget? Also, are there other transportation opportunities to consider, such as carpooling or bicycling to and from work? Does she live in a big city that offers public transportation? Last, could her money be used wisely elsewhere, if she does have other transportation options? If so, could she save or invest the money for a future need or investment? If Stella invests her money on purchasing a new car, her return on an investment should be worth it. For example, if she lives in a large city where driving her car on a regular basis isnt required, it wouldnt be wise to purchase a new automobile. Her opportunity costs must be lower than her investment in buying a new car.

2) Referring to the table below, hiring a driver costs $10. Each machine costs $100. Which method should he use and why?

The truck driver needs to base his decision on the most cost efficient method. Method 1: Cost = 20*10+10*100=1200 20 drivers * 10 + 10 machines * 100

Method 2: Cost = 50*10+2*100=700 Method 3: Cost = 100*10 +0*100=1000 Method 4: Cost = 10*10=12*100=1300 The truck driver would go with Method 2, because it is the most cost effective.

3) Outside of individual behavior, what problems brought Enron to their catastrophic downfall? Explain from an organizational architecture POV. Basically, Enron overpromised and undelivered. Because of their arrogance in assuming the company would be able to complete projects and meet their deadlines accordingly, Enron didnt pay attention to the minor details needed in order to ensure their success. Instead, they were overpromising their clients with the great expectations to come, when the end result was failure to complete their objective. Instead of looking at what was wrong and how to fix it, they chose to play with the numbers in accounting, to avoid a financial catastrophe. Enron has gross misuse of funds as well, during this time, using company money for buying houses and flying on corporate jets, to personal locations. In the end, these indiscretions assured them of the financial catastrophe they were avoiding and many serious legal ramifications, too. From an organizational architecture point of view, Enrons didnt have a solid foundation or strategy, when operating the company. In order for a company to be successful, its strength can be measure in the firms strategy and architecture (Brickley, Smith & Zimmerman, 2009, p. 272).

4) Should fixed costs be used long term or short term? Explain why. No, large fixed costs cannot be ignored long term. They can use short term, temporarily, when they dont vary with output and pricing (Brickley, Smith & Zimmerman, 2009, p. 158). If a company uses fixed costs long term, they will eventually shut down and cease operating, due to this method. Long term costs are variable, such as fuel, labor, and raw material.

5) A firm with an oligopoly market and characteristics of their structure.

The soft drink industry is an example of an oligopoly market. Coca Cola and Pepsi dominate the market with their soft drinks, producing the most goods for the consumers. Their pricing and output depends on what the competition is doing (or in this case, what the other is doing). Not only are they in competition to get consumers to drink their product, but, they have to compete with each other re: pricing too. For example, Coke would not increase their price to $1.00 more per 6 packs to gain more customers and ultimately profit. They would lose customers because Pepsi would still be a $1 less per six packs, than Coke. So, in order for them to gain profit, the will always competitively price their products to Pepsis current prices. In an oligopolistic market, pricing and output decisions are based on Nash equilibrium, as the above example indicates to you (Brickley, Smith & Zimmerman, 2009, p. 192). Coke and Pepsi both do their best in this market, under the circumstances, competing against one another.

6) Example of Dunkin Donuts Manager/elasticities: = 1.5 I = 1.2 xy1 = 0.5 xy2 = -0.5

is the price elasticity of demand for Dunkin Donuts (DD) glazed doughnuts, xy1 is the cross elasticity of demand between DD glazed doughnuts and Krispy Kreme (KK) glazed doughnuts, xy2 is the cross elasticity of demand between DD glazed doughnuts and DD French Vanilla coffee, and I is the income elasticity of DD glazed doughnuts. A) How much does the price change (up/down), to increase glazed doughnuts sales by 30%. P elasticity+% change in Q/%change in P. Therefore, the price increase needs to be 20%. B) Will the revenue increase or decrease if the manager changes the price by 20%? Yes, because there will be an increase in revenue (profit) as the prices and number of doughnuts increase. Revenue (money coming in) is the result of p and q. C) Krispy Kreme lowers their doughnut prices by 20%. The Dunkin Donuts consumer demand would increase, because .5=% change in Q of Dunkin Donuts/% in p of Krispy Kreme. Dunkin Donuts would be .5*20=10% demand D) French Vanilla coffee 15% price increase, Dunkin Donuts. What will this do to the demand of their doughnuts (will it increase/decrease)? -.5=%change in Q of DD/%change in P of vanilla. Therefore, % change in Q of DD=-.5*15=-7.5%-demand decreases by 7.5%

E) By what percentage and direction will the demand for Dunkin Donuts glazed doughnuts change, if the mean income has a 5% increases? Are DD glazed doughnuts a normal good or an inferior good? Explain. 1.2=% change in Q of DD/% change in income, so, the change in Q is 1.2*5=6% demand will increase. Dunkin Donuts is a normal good, because of the positive income elasticity. The cost of the good increases with income (Brickley, Smith & Zimmerman, 2009, p. 119).

7) Westinghouse/General Electric Example from MBA540 Midterm. High offers the best returns of 10 million to both. However, its not the Nash equilibrium solution. Does either firm have a dominant strategy? If so, explain strategy. Both companies have the same strategy, to go low. So, they maintain a low, low balance. If Westinghouse goes low, GE will go low (4000>-4000) If Westinghouse goes high, GE will go low (16000000>10000000), making low dominant for GE. If GE goes high, Westinghouse will go low (16000000>10000000) If GE goes low, Westinghouse will go low (4000>-4000), making low dominant for Westinghouse.

The Nash equilibrium is for Westinghouse to set its price at 2000 and earn a profit of 4000000 and for General Electric to set its price at 2000 and earn a profit of 4 million. Why do we see that the strategy that results is not the strategy that offers both players the best financial outcome? Obviously, they are in competitions with one another. Therefore, they cant work together to strategize. It defeats the purpose. So, both companies use their best strategy based on what the other does/will do.

Reference: Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial economics and organizational behavior (5th edition ed.). New York: McGraw-Hill, Irwin.