BADM 685_Assignment 2

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Apr 3, 2024

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Question One (1): 1. To determine whether Daniella would accept the trade of one of Michael's books in exchange for one of her pens, we can compare their respective marginal rates of substitution (MRSPB for Michael and MB/PG for Daniella). Michael's MRSPB = 1.62, meaning he is willing to give up 1.62 books for one pen. Daniella's MB/PG = 0.75, meaning she is willing to give up 0.75 books for one pen. Since Daniella values books less than Michael (0.75 < 1.62), she would accept the trade of one of Michael's books in exchange for one of her pens. 2. To determine who has a stronger preference for pens, compare their MRSPB and MB/PG values. Michael's MRSPB is 1.62, while Daniella's MB/PG is 0.75. Michael has a stronger preference for pens because he is willing to give up more books to obtain a pen. 3. If they were allowed to exchange at the rate of one pen for one book, neither Michael nor Daniella would end up with more books than they initially had. The exchange rate is equal, so the number of books and pens each person has will remain the same. Question Two (2): 1. To determine if Michael is currently optimizing his budget over peanut butter (P) and jelly (J), we need to calculate the marginal rate of substitution (MRS) and compare it to the price ratio (Pj/Pp). MRS (J for P) = 0.85 Price ratio (Pj/Pp) = $2/$1.5 = 4/3 ≈ 1.33 Since MRS (J for P) < Price ratio (Pj/Pp), Michael is not currently optimizing his budget. He should adjust his consumption to make MRS equal to the price ratio for optimal allocation.
2. If Michael is not currently optimizing his budget, he should buy more of the product with the lower price per unit. In this case, he should buy more jelly (J) because it has a lower price ($2 per unit) compared to peanut butter (P) at $1.5 per unit. Question Three (3): 1. Princess's demand curve for amusement park visits per month is given by the equation: Qd = 10 - 0.5P 2. To find out how many visits Princess would make per month if the amusement park charged a price equal to its marginal cost ($10 per visit), substitute P = $10 into the demand equation: Qd = 10 - 0.5 * 10 = 10 - 5 = 5 visits per month. 3. Princess's consumer surplus at the price determined in question two can be calculated as the area of the triangle formed by the demand curve and the price ($10) for 5 visits: Consumer Surplus = (1/2) * (10 - 0) * (5 - 0) = $25 4. The amusement park could charge Princess each month for a membership fee equal to her consumer surplus, which is $25. Question (4): In the first scenario: The firm has revenue of $5.5 million. Total costs are $7.5 million (breakdown: fixed cost = $3 million, variable cost = $4.5 million). The net loss is $2 million.
Short-term decision: The firm should consider cost-cutting measures to reduce the net loss and aim for short-term profitability. This could involve reducing variable costs or exploring pricing strategies to increase revenue. Long-term decision: The firm should assess its business model and financial sustainability. If it continues to incur losses over an extended period, it may need to evaluate the viability of its operations, consider restructuring, or seek additional funding or investment. In the second scenario: The firm has revenue of $5 million. Total costs are $7.5 million (breakdown: fixed cost = $3 million, variable cost = $4.5 million). The net loss is $2.5 million. In this case, the net loss has increased, indicating a more significant financial challenge. The firm should take immediate action to address the worsening financial situation, which may include aggressive cost-cutting, seeking new revenue streams, or even considering more drastic measures such as downsizing or restructuring to restore financial stability.
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Activity Five YOUR NAME Department of NAME HERE (BUSINESS ETC), University of the Cumberlands BADM532:  Organizational Behavior Dr. Christie Oliver September 11, 2023

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