MBA 5010 Week 4

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Webster University *

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5010

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Business

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Feb 20, 2024

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MBA 5010 Week 4 Assignment S1 Part A (25 Points) Question 1 - Pepsi-Cola begins bottling and distributing a new drink called kombucha. If Pepsi-Colas begins bottling and distributing kombucha and replaces its cola products with kombucha, then the opportunity costs are the amount it previously costs to make the cola. For example, if it costs $5 to make the cola product and now it will cost $7 to make kombucha, then the opportunity costs is $5 (what it costs to make cola). Other foregone costs would be the input costs of bottling and distributing (machinery, labor, materials, transportation) that will be used to make kombucha instead of something else. Question 2 – Rihanna, a major pop start who generates $10 billion a year on her world tours, decides to pursue her MBA at Webster. The opportunity costs for Rihanna to pursue her MBA are foregoing (1) $10 billion (her world tour revenue), (2) her time spent touring (3) luxurious penthouse to live in the dorms (4) five-star dining by eating at the school cafeteria. Big Joe’s is a regional chain of pizzerias. They are best known for their Jumbo Veggie-Max Pizza. Question 3 – Create a list of five hypothetical Big Joe’s customers and for each provide a hypothetical reservation price. The reservations prices should range from $5 to $30. Assuming the actual price of the pizza is $15, calculate consumer surplus. What is the level of sales? Person Reservation Price Consumer Surplus (CS) Ana $30 $15 Bob $25 $10 Cathy $15 $0 Marginal Buyer Dawn $10 Not a buyer
Emma $5 Not a buyer Consumer Surplus = $ 25 (Anas $15 CS + Bob’s $10 CS) Cathy’s reservation price is $15 which is equal to Equilibrium price. She has no surplus. Dawn and Emma have no surplus as their prices were below what they were willing to pay. Total sales of 1 pizza is $30 + $25 +$15 = $70. (Purchase of one pizza by Ana/Bob and Cathy) Question 4 – Big Joe decides to celebrate his business anniversary by giving these customers a free pizza. What happened to consumer surplus? CS increased from $25 to $85. $85 is the amount that all 4 customers were willing and able to pay. Graphically shown below from figure a to figure b: Figure a: (Shaded blue triangle below is original CS) Figure b: The whole area (triangle) below the demand line and above the horizontal line is now the new CS. Price $30 S $15 D $0 P r i c e $ 3 0 $ 1 5 $ 0
It is important to note that by giving away his pizza for free, Big Joe has put the market at disequilibrium and the quantity supplied/quantity demanded on the supply side is not affected by the price drop from $15 to $0. Question 5 – Finally, is Big Joe “creating value” at the original price of $15? You’ll have to make some assumptions to answer this. Include these and your reasoning in your response. Limit yourself to 500 words, though fewer will suffice. Respond here Big Joe is “creating value” at the original price of $15 if the reallocation of his resources and input costs are greater than the price he sells the pizza. If making one pizza costs more than the original price of $15, then Big Joe will need to reallocate his resources to make something other pizza. The other option is for Big Joe to seek efficiency seeking approach to value creation by lowering his input costs. Instead of going to Farmer Joe who sells him organic tomato sauce, Big Joe can go to Farmer Sally who sells an inferior sauce that is non-organic and made with a different type of tomato. If he succeeds in lower those costs, Big Joe can continue to sell at that price. The third option that Big Joe can explore is the opportunity seeking option to keep his prices at a value price is for his to sell his pizza to other outlets (such as gas stations, corner shops). By selling his pizza elsewhere Big Joe will increase his customer base and assuming they are willing and able to buy his pizza at that price, he has created value to that customer who finds it convenient that they can buy Big Joe’s pizza at the gas station or their favorite corner shop. As far as value creation for his customers, only three of the five were willing and able to pay $15 or more for the pizza so from the customer’s perspective they say the value in the amount they were willing to pay and the actual cost of the pizza. Two customers’ reservation prices were too high, so they dropped out of the pizza market. Part B: S D
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