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
|
Steak |
Pizza |
|
|
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.
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.
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.
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.
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.
Calculate the price elasticity of
demand for Newton’s Donuts and describe what it means. Describe your answer and
show your calculations.
Derive an expression for the inverse
demand curve for Newton’s Donuts. Describe your answer and show your
calculations.
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)?
Should Newton’s Donuts spend more on
advertising?
Required Text
Douglas, E. (2012). Managerial
Economics (1st ed.). San Diego, CA: Bridgepoint Education.
