6921 Assignment 2_SP23

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Youngstown State University *

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6921

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Economics

Date

Feb 20, 2024

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docx

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Uploaded by MajorSnow13343

OMBA 6921 – Industrial Economics WB Spring 2023 Assignment 2 – 45 points - Due Friday, March 31, 2023 1. (12) Use the article titled “Bagels and donuts for sale: A case study in profit maximization” to answer the following questions a. (4) Summarize the main findings of the article. b. (4) The article notes that the firm is operating on an inelastic portion of its demand curve . Can a profit maximizing firm operate on an inelastic portion of their demand? Briefly explain. c. (4) In maximizing profit, do firms tend to make better quantity decisions or better pricing decisions? Why is this the case? What could firms do to improve these decisions? 2. (11) Read the following article from Business Insider about Bronco “Two Buck Chuck” Wine Production then answer the following questions. a. (5) The article lists five reasons why Bronco Wine is able to keep costs per bottle so low. Categorize each reason as either a fixed cost or a marginal cost of production. b. (3) Is it evident from the article whether production of Bronco Wine exhibits economies of scale? Explain. c. (3) Suppose their cost function is given by C = F + c*q, where F is their fixed cost equal to $50 million; c is their constant marginal cost equal to $0.75, and q is output. Calculate their average total cost at: q=1,000,000; q=10,000,000; and q=50,000,000 3. (11) Suppose you are considering whether to purchase a house off of Lake Erie for $400,000. You expect the total costs of maintaining the property (utilities, repairs, etc.) to equal $15,000/year, and that you would be able to generate $35,000/year in revenue if you were to put the house on the short term rental market. a. (3) Suppose you are deciding between purchasing the home or whether to invest $400,000 in an interest-bearing account. If your objective is to maximize your own net income, what would the interest rate have to equal for you to invest in the interest-bearing account? b. (4) Suppose you decide to buy the house, and now you have to decide whether/when to list the house on the short term rental market (like Airbnb) or stay in the house yourself. Briefly explain what this decision would depend on. What are the implicit (opportunity) costs associated with renting the house to someone else on a given day? What are the implicit costs associated with the staying in the house yourself? c. (4) Suppose the house would cost $500,000 instead of $400,000, but everything else (revenue/maintenance costs) are the same. What is the new answer for question a.? Would this higher price change your answers for question b.? If so, how? 4. (11) Suppose you own a tax preparation services company, appropriately named “MYBA Services” (MYBA = ‘Minimize Your Burden of Assessment’) with fixed costs of $3,000/month and marginal costs of $25/appt. If the price is $60/appt, 500 appointments would be sold. If the price is $50/appt, 760 appointments would be sold. a.) (3) Use these figures to calculate the price elasticity of demand for your services. b.) (4) Calculate the monthly profits and profit margins (profit/revenue) associated with the price of $60/appt and $50/appt. c.) (4) Given these calculations, what price should you charge for your services, $50/appt or $60/appt? Explain.

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