Fundamentals of the fast Decision theory - myassignmenthelp.com

Questions: 1. Your firm prints the novelty baseball cards that candy makers include in their bubble gum. Since you regularly sell 100,000 cards per week, you invested in four separate production lines that can each produce 25,000 cards in a standard 40 hour work week. Now a few of the candy makers are increasing their orders so that you will need to produce 150,000 cards per week, at least temporarily. If you produce these cards by adding a swing shift from 4 pm to midnight, you will have to pay workers time and a half. What does this imply for the shape of your short-run marginal cost curve? What does it imply for your pricing? 2. Noras Nicest Knick Knacks has produces a variety of products sold as souvenirs. She started out printing local sayings on tee-shirts, e.g., FDNY, and purchased plain tee-shirts from a single supplier. Since then, she has added coffee mugs, key chains, souvenirs spoons and many other items. For each of these, she has lined up one or more suppliers. How does the change in the sourcing of her inputs affect how much of the value she creates that she gets to capture? 3. Hanks Honkytonk is a local bar and nightspot. On weekends, it requires a $5 cover charge to defray the costs of the live musical acts Hank brings in. This has worked wonderfully, as it generates capacity crowds and a long line of people waiting to enter. However, after the cost of the acts, he still loses money on the weekends. What is his marginal revenue and marginal cost of a patron on weekends and how should he attempt to fix his unprofitability problem? 4. The Six Flags Over Texas amusement park in the middle of the Dallas-Fort Worth Metroplex has a tie-in marketing campaign with Coca-Cola during the summer. In local grocery stores, some Coke cans offer $5 off admission to the park. Why does Six Flags limit these cans so that none are sold further than 20 miles from the park? 5. A firm and its supplier are going to negotiate a deal every quarter. Since the suppliers cost is $10 million per quarter and the value to the firm is $14 million per quarter, there is $4 million per quarter to split between the two. However, they can hire a negotiation consultant for a quarter for $500,000. If neither hires the consultant, each expects to get half of the $4 million pot. If only one hires the consultant, it expects to get three-fourths of the pot minus the consultant costs. If they both hire consultants, they cancel each other out and they expect to get half the pot minus the consulting costs. They expect to repeat this process every quarter for the foreseeable future. Can they agree to ban the consultants? 6. A buyer for a department store must decide on which designs the stores will carry before he knows what the demand will be in the coming season. Choosing a poorly demanded design means lots of unsold merchandise and losses that are $200,000 on average. Passing on a highly demanded design means unsold merchandise and missing out on profits that are $300,000 on average. What probability of a designs success should he be in order to choose to carry it? 7. At an oral auction for a lamp, half of all bidders have a value. Answers: ANSWER 1 We note that the question is asking for two answers. One is the effect of an extra shift on short run marginal costs. The second is the consequent effect on pricing decisions due to this change in marginal costs. The key lies in differentiating between variable and fixed costs. Variable costs of production are costs that vary with output level. Typically wages are a good example as we need more workers who are paid in the form of wages to produce more. Fixed costs are costs that do not vary with how much is produced. A good example is rent paid for the factory premises. In this case of our firm a new shift will imply more workers and attendant usage of raw materials and electricity ( to possibly run the machines). The added costs of wages of the workers in this shift and the costs of electricity and materials constitute variable costs. From economic theory we know that when variable costs rise, the marginal cost curve shifts upwards (from MC1 to MC2) to reflect higher marginal cost f or unit production. The typical shape of the marginal cost curve is U shaped reflecting the law of variable proportions. The new shift may not change the shape of the curve but it will certainly shift the marginal cost curve upwards. As a consequence pricing policy needs a review. An equilibrium condition demands that marginal revenue equals marginal cost for a firm. The price that maximises profits for the firm is a price where MR and MC are equal for the last unit produced. As MC rises with the extra shift the effect on price will be to increase it from P1 to P2, and quantity produced in equilibrium rises from Q1 to Q2. Answer 2: We need to analyse the shift from 1 supplier to multiple suppliers for Nora Nicest Knick Knacks. There is another change that has occurred along with this supplier change- Nora has expanded her product offering to go beyond tee-shirts, and it now includes cups, mugs, key chains and many other items. This expansion in offerings is beneficial as Nora is able to cater to a wider customer group. This in itself will allow her to create more value as she caters to more customers with wider choices. She will be able to capture a larger part of this value creation with the right kind of pricing, keeping in mind consumer preferences. She can also gain value created from the expansion in supplier base. She is no longer dependent on a single supplier who could get away by capturing larger share of the value created due to the supplier-buyer relation. Multiple suppliers allows her to be flexible in her choice of suppliers and consequently she can take away a larger part of the value created from each supplier as compared to the value she got from a single supplier. Answer 3: The question tells us that Hank Honkytonks(HH) is not making profits on weekends, after charging a $5 charge from each patron. This charge is the revenue for HH. Its profits can be understood when we look at its costs as well, since profits are the difference between revenues and costs. Since we have no information on costs but know of its losses it is clear that costs exceed revenues. In this scenario the future course of action depends on variable and fixed costs components of costs. We distinguish between 2 cases. Case1: Revenues cover only the variable costs of running HH on weekends. This implies that variable Costs are covered by the revenues generated from $5 entry fee. The losses are therefore equal or less than the fixed costs. HH can continue its weekends programs in the hope that in the long run more patrons will come in and revenues will be enough to cover fixed costs as well. It can also seek to lower its fixed costs; a possibility is to take on a different band that charges lesser from HH. Alternatively HH can negotiate with the band to charge lower amount or charge in line with the number of patrons. The last option will convert the band charges to variable costs, wiping out losses. Case 2: If the revenues are not covering the variable costs then HH has no option but to close down/ shut down operations. This conclusion is based on economic theory which relies on differentiating between fixed and variable costs. It also assumes that the firm can make no changes to its costs or revenues. If we allow some changes then things can be different. For example HH can try to increase revenues and/or lower costs. One way to increase revenues is to increase entry fee without loss of patrons. If the demand for HH is inelastic then a rise in fees will not lower the number of patrons, and will boost revenues as well. It can also lower costs by changing the band that plays on weekends or renegotiating with the band to charge a lower price. It may also work on partnership basis with the band where revenues/losses are shared, so that fixed costs can be lowered. Answer 4 the answer here lies in the concept of price discrimination. It refers to a concept where a firm charges a different price from each consumer depending on a variety of aspects of the consumer his preferences, time of use, quantity bought and willingness to buy. The Six Flags Over Texas amusement park would like to charge a higher price from the tourists who visit it, and a lower price from the local people. This is possible as tourists have a higher willingness to pay for the park attractions, as compared to local people who have little novelty value for these attractions, and are willing to pay a lower price for the park attractions. The discount is meant for locals who may visit the park as their willingness to pay is lower. The use of the Coke can effectively lowers the price of entry into the park for such locals whose willingness to pay is lower than tourists. Such locals may not visit the park at full price as the price exceeds their willingness to pay for the park attractions . The tie up with Coke is purely to attract more customers as Coke sells widely. A discount of $5 may encourage Coke drinking locals and tourists to visit the park. However it is also desirable that this $5 discount is not used by tourists, as they are willing to pay more. So the limit of 20 mile radius is imposed to limit the use of this scheme by tourists from far away. This implies that the park considers people in this radius to be locals who may be encouraged to use the Coke can to get cheaper entry. Tourists can also use the discount, but they will have to be in the 20 mile radius to be able to buy the can. (values in $ million) HIRE(firm) NOT HIRE(firm) HIRE(supplier) 1.5, 1.5 1, 2.5 NOT HIRE (Supplier) 2.5, 1 2, 2 Answer 5 Each player the firm (F) and its supplier (S). has two options- to hire the consultant or not hire the consultant. If both do not hire the consultant then payoffs to each are $2 milion. If the firm only hires then its payoff equals * 4million -500000= 250000. The supplier gets *4 million = 1 million. If the supplier hires then he ends up with 250000 while the firm gets 1 million. If both hire ten each one gets 2mllion 500000 or 150000 each. This is shown in the table below. The best response of the firm is to HIRE irrespective of what the supplier does as the payoff from hit=ring are more than that from not hiring for each action of the supplier. ( 1.5 1) and ( 2.5 2). The dominant strategy for firm is to HIRE. A similar logic makes HIRE the dominant strategy for the supplier. So the Nash equilibrium is that both will hire and end up with 1.5 million. This result assumes no dialogue between them. However if they can sit down and share the table between them then they realise tha t they are better off not hiring. However there must be some trust between them that the other player will not hire. If the other one hires then the player that does not hire is left with $1 Million, while the player that hires gets $2.5 million. Since the game is repeated it can be expected that past behaviour is good sign of future behaviour. If both have not been hiring in the past we can have the same equilibrium in the future. If they can negotiate and sit down together then they can agree to not hiring as it is in mutual interest to do so. Answer 6: Demand is uncertain and this forces two options on the buyer here. One is to have a poor design choice and the other is to choose a design in high demand. If a poorly demanded design is ordered then the losses equal $200000. The other option fetches a profit of $300000. These values are the payoffs from two alternate choices in an atmosphere of uncertainty. Next we need to have an objective in mind in terms of expected profits. For example the buyer may want to try to avoid any losses, so that expected profits can be equated to zero. Let p stand for the probability of choosing poorly demanded design, while 1-p is the chance for a high demand design to be ordered. Expected profits is the sum of weighted profits( or losses) where the weights are the probabilities associated with each choice. So expected profits = p*300000 +(1-p)*(-200000) = 0 A minus sign signifies loss of 200000 Solving this we get p = 2/5 or 40%. So the probability of a designs success must be 40% for the firm to order it. This figure assumes that the firm is aiming at zero loss / zero profit. If the objective is changed to ( say) an expected profit of 50000 then we have expected profits = p*300000 +(1-p)*(-200000) = 50000 now p= 0.5 or 50%. Answer 7 The expected winnings from an event depend on two things. The first is the amount of winnings promised if the participant wins and the associated loss if she does not win. The second requirement is the probability or chances of winning itself, along with the list of all possible options (win, loss or nothing). In this case we are not exactly winning or losing, but the analysis is similar. There are two options here- high value bid ( $70) and low value bid( $50). The chances of a high value bid are 0.5 as we have 2 bidders out of 4 who have a value of $70. The winnings/losses from the bid are the value of the bid made- $70 or $50. The expected winning bid equals the weighted average of all possible bids, where the weights are the probability of the bids. Expected winning bid= Sum of product of the bid amount and the probability/chance of this amount = .5*70 +.5*50 = $60. The number of bidders does not directly form part of the answer as we have used it to calculate the chances of each possible bid value. Assume that 3 bidders had a value of $70 and one bidder has $50 value. Then the probability of $70 bid would be =0.75 so that expected winning bid would equal .75*70 +.25*50 = 52.5 + 12.5 = $65. Reference Mausam, n.d. Fundamentals of Decision theory. [Online] Available at: https://courses.cs.washington.edu/courses/cse573/12au/slides/05a-decisiontheory.pdf [Accessed 9 Jan 2018]. siue.edu, n.d. A very fast intro to decesion theory. [Online] Available athttps://www.siue.edu/~evailat/decision.htm [Accessed 8 Jan 2018]. Anon., n.d. 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