Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 18, Problem 18.6IP
To determine
The reason why the estimated cost exceeds the actual cost.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Moe Green estimates the cost of future projects for a large contracting firm. Mr. Green uses precisely the same techniques to estimate the costs of every potential job, and formulates bids by adding a standard profit markup. For some companies to whom the firm offers its services, no competitors exist, so they are almost certain to get them as clients. For these jobs, Mr. Green finds that his cost estimates are right, on average. For jobs where competitors are also vying for the business, Mr. Green finds that they almost always end up costing more than he estimates. Why does this occur?
HP has developed a new, high-end, high-resolution printer, which can print 40 pages per minute. Its market research identified two target segments of customers: 3,500 large businesses and 6,500 university labs. A large business has a valuation of $900 for the new printer, whereas a university lab has a valuation of $630. HP’s variable cost for the printer is $450/unit; all fixed costs are sunk. Assume that each customer needs at most one new HP printer (i.e., no customer will buy multiple units).
(a) Suppose that HP cannot price discriminate the two segments of customers, i.e., it can charge only one price for its printer. What is HP’s optimal price for the new printer? What is its maximum profit? (b) Suppose that HP can install an extra chip in the printer to slow down printing to 15 pages per minute. Such a chip costs HP $20 to make and install for each printer. The slower version of the printer is valued at $700 by a large business customer and $600 by a university lab. With…
You operate a Caribbean destination resort. You currently offer plans for a cruise departing from the resort and plans for a casino stay. It is expected that in 2021 there will be some return to more normal travel. You will re-launch your advertising for 2021 announcing that customers will be able to do both for one price. Your marginal cost per customer across both tours is $4800.
Customer Preferences
Cruise
Casino
Customer 1
$7,000
$3,000
Customer 2
$2,000
$6,000
Given the preferences, would bundling improve profits over the high-price strategy? Support your conclusion by showing if (by how much) profits differ under each strategy, bundle versus high price.
Chapter 18 Solutions
Managerial Economics: A Problem Solving Approach
Knowledge Booster
Similar questions
- per pair You are the CEO of a company that advises clients on pricing strategies. Bilbo Baggins is a profit maximizing client who produces uniquely styled shoes and hires you for pricing advice. The graph shows the demand and marginal revenue (MR) curves faced by Bilbo's company for two different groups of consumers. Assume Bilbo can prevent the reselling of his shoes, faces constant marginal cost (MC) equal to $20/pair, can identify varying consumer groups, and has no fixed costs (so, MC ATC). Use the graph to answer the questions. = Price $100 90 80 70 60 50 40 B What price should Bilbo charge? He should charge the more elastic group $60/pair and the less elastic group $70/pair. 30 30 20 10 10 MR 2 Demand 2 He should shutdown in the short run because price is not greater than fixed costs. 0 100 200 300 40C He should price discriminate and produce where P = MC and charge $20/pair. He should produce where MR = MC and charge $70/pair.arrow_forwardOnly Typing answer I need ASAParrow_forwardThe demand function facing a resort hotel is PH = 300 - Q in the high season and PL = 100 - Q in the low season. The resort's marginal cost is $50 per night. The resort has 100 rooms. Using a peak load pricing strategy what price will the resort charge for room during the high season and during the low season. Please show your calculations. (a) During the period of low demand please determine the price the resort would charge per room and how many customers will it get. Please show our calculations. (b) During the period of high demand please determine the price the resort would charge per room and how many customers will it get. Please show our calculations.arrow_forward
- An existing firm offers to supply one unit of a good to a potential buyer by writing a contract in period 1 for delivery in period 2. The contract specifies a price of $210 and a breach of contract fee of $150. The buyer would be willing to pay $330 and the existing firm has a marginal cost of $120. A potential entrant firm has costs uniformly distributed and competes in Bertrand competition with the existing firm if entry occurs. It is known that the entrant's costs are less than or equal to $240. How much extra profit would the entrant earn if there were no contract in place between the existing firm and the buyer? Select one: O a. $31.50 O b. none of the other answers O c. $28.50 O d. $25.50 O e. $22.50arrow_forwardAn existing firm offers to supply one unit of a good to a potential buyer by writing a contract in period 1 for delivery in period 2. The contract specifies a price of $210 and a breach of contract fee of $150. The buyer would be willing to pay $330 and the existing firm has a marginal cost of $120. A potential entrant firm has costs uniformly distributed and competes in Bertrand competition with the existing firm if entry occurs. It is known that the entrant’s costs are less than or equal to $240. How much extra profit would the entrant earn if there were no contract in place between the existing firm and the buyer? Select one: a. $22.50 b. none of the other answers c. $31.50 d. $28.50 e. $25.50 Clear my choice Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism.Answer completely.You will get up vote for sure.arrow_forwardConsider a market with a single manufacturer M that sells its product via two retailers. The manufacturer does not incur any costs. There are two retailers, R₁ and R, that face no cost of distribution. Retailers compete in quantities. Inverse demand is given by p= 12-Q, where Qq+q2 is the total quantity offered by both retailers. The manufacturer offers contracts on a take it or leave it basis to the two retailers. Retailers observe the contracts signed by all retailers before retailers simultaneously chooses their quantities, a) Suppose offers the same per-unit wholesale price w to both retailers. What is the resulting market price depending on w? b) What is the optimal choice of w for the manufacturer. Is there a problem of double marginalization?arrow_forward
- Microsoft is the market leader in office software with its MSOffice. Its marginal cost of production c is 1 dollar per unit. Home users demand 40 million licenses and are willing to pay 50 dollars, whereas businesses demand 60 million licenses and are willing to pay 100 dollars. Microsoft also produces a home version of MS Office at a marginal cost of c'=2. Home users and businesses are willing to pay 60 and 40 dollars, respectively, for the home version. Which is the best pricing strategy for Microsoft? O Selling MSOffice Professional at 100 Selling MSOffice Home at 40 Selling MSOffice Professional units at 100 and MSOffice Home units at 40 Selling MSOffice Professional at 80 dollars and MSOffice Home at 40 dollarsarrow_forwardNote: The answer should be typed.arrow_forwardThe petrol industry in Dubai has become increasingly concentrated in recent decades. The number of firms in the industry has dropped by 40 per cent since a 1999 peak, while the remaining firms “swelled in size.” In order to enter the industry, the owners of the companies must have significant capital at their disposal and they consider the impact of their decisions on competitors and the reactions of their competitors on themselves. Older firms tend to rest on their laurels, having little incentive to innovate. They spend less on research and development, and instead acquire growth through mergers or acquisitions and expand margins by raising prices on consumers. As at 2020, Cyril Tech has become the largest player in the market providing 80 per cent of the petrol output. The remaining players control 20 per cent of the output. a) State what market structure existed in the petrol industry subsequent to 1999. Can excess profit be earned in this industry in the long run. Explain.b) State…arrow_forward
- After graduating, you start work as a management consultant. You are paid $210 per hour. One morning before work, you decide to buy a new car. You know the exact model you want, and you know that in your area the price ranges from $39,000 to $41,000, with the average price you can expect to pay being $40,000. You can choose among hundreds of dealers, but you don't know which dealer will give you the best price. Time is literally money, since every hour you spend searching is an hour you don't get paid. Each visit to a dealer takes an hour. Your expected marginal benefit of another search is the difference between the current dealer's offer and the average price. The first dealer you go to asks $40,500 for the car. Should you accept the price or keep searching? (Keep in mind that each visit to a dealer takes an hour.) Keep searching. Accept the price. Suppose you kept searching, and the next dealer you go to asks $40,150. Do you think you should accept this price or keep searching? O…arrow_forwardAn industry has four firms, each with a market share of 25 percent. There is no foreign competition, entry into the industry is difficult, and no firm is on the verge of bankruptcy. If two of the firms in the industry seek to merge, this action would most likely be opposed by the government because the Herfindahl index for the industry is Multiple Choice 2,500 and the merger would increase the index by 1000. 5,000 and the merger would increase the index by 2000. 3,000 and the merger would increase the index by 2000. 2,500 and the merger would increase the index by 1250.arrow_forwardQuestion Consider a market with an inverse demand Function p = 60 -4*Q. There are two firms, an incumbent and an entrant. There is a constant variable cost of 6 and a unit capacity cost of 6. In the first stage, the incumbent chooses capacity. In the second stage, the entrant decides whether or not to enter and all active firms choose quantities (where the entrant also has to simultaneously choose its capacity in the second stage, if it enters). a. For a capacity of 5 units, what is the best response function of the incumbent in the second period? b. What is the Cournot-Nash equilibrium of the second stage if the incumbent chose a capacity of 5 units in the first stage conditional on the entrant entering? c. For a capacity of an arbitrary k units, what is the best response function of the incumbent? d. What is the Cournot-Nash equilibrium of the second stage if the incumbent chose a capacity of k units in the first stage conditional on the entrant entering? e. Solve for the subgame…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning