# case assignment week 7 | Economics homework help

Case Assignment week 7

Webster University BUSN 6021

1. You are the owner of a local Honda dealership. Unlike other dealerships in thearea, you take pride in your “no-haggle” sales policy. Last year, your dealer-ship earned record profits of \$1.5 million. In your market, you competeagainst two other dealers, and the market-level price elasticity of demand for midsized Honda automobiles is –1.3. In each of the last five years, your dealership has sold more midsized automobiles than any other Honda dealershipin the nation. This entitled your dealership to an additional 30 percent off themanufacturer’s suggested retail price (MSRP) in each year. Taking this intoaccount, your marginal cost of a midsized automobile is \$12,000. What priceshould you charge for a midsized automobile if you expect to maintain yourrecord profits?

2.The American Baker’s Association reports that annual sales of bakery goodslast year rose 15 percent, driven by a 50 percent increase in the demand forbran muffins. Most of the increase was attributed to a report that diets rich inbran help prevent certain types of cancer. You are the manager of a bakery thatproduces and packages gourmet bran muffins, and you currently sell branmuffins in packages of three. However, as a result of this new report, a typicalconsumer’s inverse demand for your bran muffins is now   P  = 8 – 1.5  Q  . If yourcost of producing bran muffins is   C   (  Q  ) = 0.5  Q  , determine the optimal numberof bran muffins to sell in a single package and the optimal package price.

3. Arisk-neutral consumer is deciding whether to purchase a homogeneousproduct from one of two firms. One firm produces an unreliable product andthe other a reliable product. At the time of the sale, the consumer is unable todistinguish between the two firms’products. From the consumer’s perspective, there is an equal chance that a given firm’s product is reliable or unreliable. The maximum amount this consumer will pay for an unreliable productis \$0, while she will pay \$100 for a reliable product.

a. Given this uncertainty, what is the most this consumer will pay to purchaseone unit of this product?

b. How much will this consumer be willing to pay for the product if the firmoffering the reliable product includes a warranty that will protect the consumer? Explain.

4. BK Books is an online book retailer that also has 10,000 “bricks and mortar”outlets worldwide. You are a risk-neutral manager within the CorporateFinance Division and are in dire need of a new financial analyst. You onlyinterview students from the top MBAprograms in your area. Thanks to yourscreening mechanisms and contacts, the students you interview ultimately differ only with respect to the wage that they are willing to accept. About 10 percent of acceptable candidates are willing to accept a salary of \$70,000,while 90 percent demand a salary of \$100,000. There are two phases to theinterview process that every interviewee must go through. Phase 1 is the initial one-hour on-campus interview. All candidates interviewed in Phase 1 arealso invited to Phase 2 of the interview, which consists of a five-hour officevisit. In all, you spend six hours interviewing each candidate and value thistime at \$900. In addition, it costs a total of \$4,900 in travel expenses to inter-view each candidate. You are very impressed with the first interviewee completing both phases of BK Books’ interviewing process, and she hasindicated that her reservation salary is \$100,000. Should you make her anoffer at that salary or continue the interviewing process? Explain.

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