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.
Show all of your calculations and processes. Describe your answer for each
question in complete sentences.
1.
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.
2.
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.
3.
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.
4.
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.
1.
Calculate the price elasticity
of demand for Newton’s Donuts and describe what it means. Describe your answer
and show your calculations.
2.
Derive an expression for the
inverse demand curve for Newton’s Donuts. Describe your answer and show your
calculations.
3.
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)?
4.
Should Newton’s Donuts spend
more on advertising?
