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Answer the questions in the attached file. ( Please only if you’re a 100% sure of the answers)
_exam_1.pdf

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Section I
Answer the following three questions. Each is worth 25 points.
1. The Pear Computer Company just developed a totally revolutionary new personal
computer. It estimates that it will take competitors at least two years to produce
equivalent products. The marginal (and average variable) cost of producing the
computer is (constant) \$900. Using the following information, determine the optimal
single price and optimal output for the computer.
PRICE
QUANTITY
SOLD
\$2,400
200,000
\$2,200
600,000
\$2,000
1,000,000
\$1,800
1,400,000
\$1,600
1,800,000
\$1,400
2,200,000
TOTAL REVENUE
MARGINAL
REVENUE
MARGINAL COST
Given the price and quantity you have identified, what will be Pear’s total profit
(ignoring fixed costs)?
2. The Pear Computer Company (from question 2) is considering an alternative pricing
strategy of “price skimming.” It plans to set the following schedule of prices over the
next two years.1
TIME PERIOD
PRICE (\$)
QUANTITY SOLD
1
\$2,400
200,000
2
\$2,200
200,000
3
\$2,000
300,000
4
\$1,800
300,000
5
\$1,600
500,000
6
\$1,400
500,000
Note that at a price of \$2,400, PCC expects to sell 200,000 units. Then when they drop the price to
\$2,200, they expect to sell an additional 200,000 units, and so on.
1
(a) Calculate the contribution to profit and overhead for each of the 6 time periods
and prices.
(c) Explain the major advantages and disadvantages of price skimming as a pricing
strategy.
3. The following figure represents the potential outcomes of your first salary negotiation
after graduation. Assuming that this is a sequential-move game with the employer
moving first, indicate the most likely outcome. Does the ability to move first give the
employer an advantage? If so, how? As the employee, is there anything you could do to
realize a higher pay-off? Explain.
Employee Accepts:
Employee gets \$100
Employer gets \$75
High Salary Offer
Employee Walks:
Employee gets 0
Employer gets 0
Employer
Employee Accepts:
Employee gets \$75
Employer gets \$100
Low Salary Offer
Employee Walks:
Employee gets 0
Employer gets 0
4. The profitability of the leading cola syrup manufacturers (PepsiCo and Coca-Cola) is
very different from that of the bottling companies that turn their syrup into the
carbonated beverages we consume. PepsiCo and Coca-Cola enjoy an 81 percent
operating profit as a percentage of sales, while bottlers receive only a 15 percent
operating profit as a percentage of sales. Use Porter’s Five Forces to explain why
one type of business is so profitable relative to the other.
5. Last year, a toy manufacturer introduced a new toy truck that was a huge success.
The company invested \$2.5 million for a plastic injection-molding machine (which
can be sold for \$2 million) and \$100,000 in plastic injection molds specifically for
the toy (not valuable to anyone else). Labor and the cost of materials necessary to
make each truck are about \$3. This year, a competitor has developed a similar toy
that has significantly reduced demand for the toy truck. Now, the original
manufacturer is deciding whether it should continue production of the toy truck. If
the estimated demand is 100,000 trucks, what is the break-even price for the toy
truck? A search for toy trucks on Amazon revealed that prices for larger toy trucks
are currently between \$14 and \$19. Should the company shut down?
10. Royersford Knitting Mills, Ltd., sells a line of women’s socks. The firm now sells
about 20,000 pairs a year at an average price of \$10 each. Fixed costs amount to
\$60,000, and total variable costs equal \$120,000. The production department has
estimated that a 10 percent increase in output would not affect fixed costs but
would reduce average variable cost by 40 cents. The marketing department
advocates a price reduction of 5 percent to increase sales, total revenues, and
profits. The elasticity of demand with respect to prices is estimated at -2.
Evaluate the impact of the proposal to cut prices on (i) total revenue, (ii) total
cost, and (iii) total profits.

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