Assignment:
Required Resources
Text
Please read the following chapters in: Managerial Economics:
• Chapter: Consumer Demand Analysis
• Chapter: Market Demand Analysis and Estimation
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version].
Article
Hainer, R. (2010). Social smokers aren't hooked on nicotine, just smoking. Cable News Network.
Websites
Bloomberg
Cable News Network
The Economist
Recommended Resources
Multimedia
TED. (2004, February). Malcolm Gladwell: Choice, happiness and spaghetti sauce [Video file].
TED. (2005, July). Barry Schwartz: The paradox of choice [Video file].
Discussion 1. Marginal Rate of Substitution
What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate.
Guided Response: In 300 words or more, please, provide your response to the above discussion question. Find two goods from your own consumption basket and explain how the MRS changes for the two products as you substitute one for the other. Respond substantively to at least two of your classmates' postings. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.
Discussion 2. Demand Elasticity
Please, read the article Hainer, R. (2010), provided in the required readings section for this week. The tobacco industry is a prime example to consider when talking about price elasticity of demand. While nicotine use can be addictive for many users, it is not addictive for the so-called "social smokers".
What can we say about the price elasticity of demand for nicotine products (such as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the group of "social smokers"? Can we say whose demand is likely to be more elastic? Why?
Guided Response: Provide your response to the discussion question in 300 words or more. Further, comment on the effectiveness of government policy aimed at reducing the negative effects of smoking on health. For example, consider high taxation on producers? - is that effective? Respond substantively to at least two of your classmates' postings. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.
Assignment
Consumer Demand Analysis and Estimation Applied Problems
Please complete the following two applied problems:
Problem 1:
Patricia is researching venues for a restaurant business. She is evaluating three major attributes that she considers important in her choice: taste, location, and price. The value she places on each attribute, however, differs according to what type of restaurant she is going to start. If she opens a restaurant in a suburban area of Los Angeles, then taste is the most important attribute, three times as important as location, and two times as important as price. If she opens a restaurant in the Los Angeles metropolitan area, then location becomes three times as important as taste and two times as important as price. She is considering two venues, respectively, a steak restaurant and a pizza restaurant, both of which are priced the same. She has rated each attribute on a scale of 1 to 100 for each of the two different types of restaurants.
|
Steak Restaurant
|
Pizza Restaurant
|
|
Taste
Location
Price
|
80
55
65
|
70
80
50
|
Show all of your calculations and processes. Describe your answer for each question in complete sentences.
a. Which of the two options should Patricia pursue if she wants to open a restaurant in a suburban area of Los Angeles? Calculate the total expected utility from each restaurant option and compare. Graph is not required. Describe your answer, and show your calculations.
b. Which of the two options should she pick if she plans to open a restaurant in the Los Angeles metropolitan area? Describe your answer, and show your calculations.
c. Which option should she pursue if the probability of finding a restaurant venue in a suburban area can be reliably estimated as 0.7 and in a metropolitan area as 0.3? Describe your reasoning and show your calculations.
d. Provide a description of a scenario in which this kind of decision between two choices, based on weighing their underlying attributes, applies in the "real-world" business setting. Furthermore, what are the benefits and drawbacks, if any, to this method of decision making?
Problem 2:
The demand function for Newton's Donuts has been estimated as follows:
Qx = -14 - 54Px + 45Py + 0.62Ax
where Qx represents thousands of donuts; Px is the price per donut; Py is the average price per donut of other brands of donuts; and Ax represents thousands of dollars spent on advertising Newton's Donuts. The current values of the independent variables are Ax=120, Px=0.95, and Py=0.64.
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
a. Calculate the price elasticity of demand for Newton's Donuts and describe what it means. Describe your answer and show your calculations.
b. Derive an expression for the inverse demand curve for Newton's Donuts. Describe your answer and show your calculations.
c. If the cost of producing Newton's Donuts is constant at $0.15 per donut, should they reduce the price and thereafter, sell more donuts (assuming profit maximization is the company's goal)?
d. Should Newton's Donuts spend more on advertising?