Midterm Assignment

The Principle of Opportunity Cost

The book determines that the cost of using a resource for a certain course of action does not affect its worth. Stella Freeman must fully comprehend this principle in order to make rational economic decisions. First and foremost, she must find commercially sustainable solutions. Stella must make a sacrifice in order to buy a new vehicle. Perhaps she will have to postpone her travel to Europe or the servicing of her credit cards, among other things. Stella Freeman would be able to make the right economic decision if she breaks out opportunity costs directly and indirectly. The explicit value is worth a lot of money. If it costs her more for maintenance of her car monthly, it’s advisable that she places an exaggerated usefulness on using those funds to acquire a new car. Implicit cost does not have a monetary value Purchasing a new car may bring some comfort for Stella Freeman. This will influence her decision of acquiring a new car. She also needs to do a budget feasibility analysis to determine whether her payment of the car and the associated insurance cover costs, versus what she is currently paying. This will influence her decision making. Marginal benefits should exceed marginal cost when determining alternatives in the decision to purchase a new vehicle.

Comparison of Different Methods

Method 1: (20 drivers @10=$200) + (10 machines @ $100= $1000)=$1,200

Method 2 (50 driver @ $10=$500) (2 machines @ $100= $200) =$700

Method 3 (100 drivers @ $10 =$1000) + (0 machines @$100=$0) =$1000

Method 4 (10 drivers @ $10=$100) + (12 machines @$100=$1200) =$1300

The optimum utility of the trucker is to deliver 50 spots on a monthly basis. He is willing to give up some drivers to be able to purchase machinery. Based on the figures calculate above, and basing our argument on utility maximization of this company, the second method is the most desirable option. Compared to method 1, with 30 more drivers and eight fewer machines, he can still get fulfill his goal and save up to 500%. If the trucker company wishes to acquire new machinery, method three definitely cannot be an option. Method 4 provides a very high cost and fails to provide any additional efficiency for the trucker because he will have fewer drivers. Plotting the methods above on an indifference curve, all combinations of machines and drivers would equal the same utility. Method 2 shows maximum utility. Now, if the process of machinery decreases, the trucker can re-evaluate to determine if method 2 is still the most optimal choice.

Competitive Organizational Architecture

According to the book, the aspects below should be addressed in a competitive organizational architecture.

The mission of decision rights within the company

The methods of rewarding individuals

The structure of systems to evaluate the performance of both individual and business units

Factors Leading to the Enron Turmoil

There are several factors the led to the turmoil of Enron. AS stated above, the first key aspect is assigning where most of its decision were arrived at without the oversight of top management. By doing this, Enron couldn’t be part of the control process which led to the lack of transparency and omission when the in the filing of reports. Another crucial concept is recognizing the efforts of individuals. Mostly Enron was determined on closing deals and ensure the growth of their numbers at the end of every quarter. No money meant no job for you. Being honest was not their strength when closing deals. The most important element of your business is your employees, not you clients. Enron’s lacked in the employer-employee relation aspect on the evaluation of performance. He placed a significant incentive on work performance. Workers were encouraged to close deals at any cost, even if it mean dishonestly. The inexperience and lack of proper management allowed employees this safety net to make the riskier decision as long as the deal was close. Enron management charts, new honest levels of rewards and performance evaluations, Enron may have avoided its downfall.

Fixed Costs in the Short Run and Long Run

No. there is flexibility in the long-run. Therefore no fixed costs, but variable costs only. The short run is usually more of an operating phase. Fixed costs are of the vast essence because fixed costs will be incurred even if no unit of goods is sold. On the other hand, the long-run is more of a planning phase. IF the company is setting new output and pricing decision, a new pricing structure must be determined to establish the breakeven point to determine the price. If the executives are planning on expanding, they must prepare to create a sunk cost. Fixed costs are vital in determining output as well as pricing decisions because they attribute to the total cost of production and are require no matter what the input is.

Oligopolistic Market and Strategies

The textbook states the within an oligopolistic market; few firms dominate the industry. Comcast and Directtv dominantly are the powerhouses of the cable industry. Within this industry, consumer demand is not a factor because mostly everyone requires cable and internet service. These companies make staggering amounts of money and are only worried about each other, not about two firms joining the industry. The government has restricted entry to this industry by setting some high costs as a requirement. The text books state that oligopolistic industries react to most of their policy decision. For example, when Comcast came out with its triple bundle for $99 a month, Directv was panicked. They can only provide cable service, and not Internet and phone. Directv came up with a new strategic initiative to create a partnership with CentryLink and provide a rate equivalent Comcast to compete with their service. The textbook states that within these types of industries strategy thinking is vital for a firm to thrive through the economic storms. Currently, there is no vast difference between what one offers and the other. In my option, the benchmark off of each other. Nash equilibrium principle dictates that firms are at equilibrium when each firm does their best, given the actions of their competitors. Oligopolists are not exempted.

Elasticity of Demand

N-price elasticity of demand for DD glazed =1.5 (elastic)

N1-income elasticity of Demand glazed=1.2

Nxy1=cross price elasticity of demand between DD glazed and KK glazed= .5 (substitutes)

Nxy2= cross elasticity of demand between DD glazed and DD FV coffee= -.5 (complements)

Price Elasticity =% Change in Q/% Change in P

1.5=30%/x

x=20

Since the prices elasticity is >1, price sensitivity is heighten. If the aim is to heighten revenue by 30%, the price of daunts must be decreased by 20%

Total revenue will increase because the price elasticity is >1, a decrease in price will result in an increase in revenue. Price elasticity means sensitiveness by the price increase. Therefore, consumers are more sensitive to prices.

% change in Q of DD/ %change in prices of KK

.5=x/20%

x=10%

Due to KK cutting its prices by 20%, the demand for DD will consequently decrease by 10%

% change in Q of DD/ % change in P of FV

-.5=X/15=-7.5%

Since the two are complements, a change in the prices of DD donuts may directly impact the demand for French Vanilla and vice versa. Therefore, the demand for DD falls by 7.5%

Income Elasticity = % change in Q of DD/ %change in Income

1.2=X/5

x=6

The income elasticity is positive, therefore it is a normal good. As income rises, demand rises.

Game Theory and Optimal Strategies

a) High-High is the optimal strategy. High-High strategy gives returns of $10,000,000 per piece, which is the optimal returns for both. This combination is stable

b) The Nash equilibrium is low-low. Each firm’s optimal strategy is to go as low as possible.

If GE goes High, it will result in WH going low (GE 16 million > WH 10 million)

If GE goes low, it will results in WH going low (WH 4mil>GE-4 mill)

If WH goes low, it will result in GE going low (WH4 mill >GE-4 mill)

If WH foes were high, it would result in GE going low (GE 16mill >ten mills)

c) $2,000/$4,000,000

$2,000/$4,000,000

d. They remain competitors. Both firms have to fight to keep their consumer demand at par. Strategic thinking, continuous improvement, and innovation are vital for such oligopolies because if one exits the market, the other will monopolize the market. The competition is stiff. They have to choose the optimal pricing strategies they have, based on what the strategies their competitors take. The combination gives them both the best return makes it the dominant strategy

References

United States. (2016). Supporting Youth Opportunity and Preventing Delinquency Act of 2016: Report (to accompany H.R. 5963) (including cost estimate of the Congressional Budget Office).

Applications: European Meeting on Game Theory, Saint Petersburg, Russia, 2015, and Networking Games and Management, Petrozavodsk, Russia, 2015. Cham: Springer International Publishing.