The questions are provided in the attached document.
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finalexam.docx1. (20 points) Multiplant Operation. Hiro Nakamura is CEO of the Cola King Bottling Company, a small regional producer operating in the Pacific Northwest. Nakamura is considering two alternative expansion proposals:
1. Construct a single bottling plant in Phoenix, Arizona with a capacity of 40,000 cases per month, at a monthly fixed cost of $20,000 and a variable cost of $2.50 per case.
2. Construct 3 plants, 1 each in Phoenix, Arizona; Las Vegas, Nevada; and Albuquerque, New Mexico, with capacities of 15,000, 14,000 and 13,000 respectively; and monthly fixed costs of $11,000, $10,000 and $9,000 each. Variable costs would be only $2.30 per case due to lower distribution costs, but sales from each plant would be limited to demand within the home state. The total estimated monthly sales volume in the southwestern states, 37,000 cases, is distributed as: Arizona, 15,000 cases; Nevada, 14,000 cases; and New Mexico, 8,000 cases.
A. Using a wholesale price of $4 per case in each state, calculate the breakeven output quantities for each alternative.
B. Which alternative expansion scheme should Cola King follow?
C. If sales increase to production capacities, which alternative would prove to be more profitable?
2. (20 points) Short-run Market Supply. New Deli Credit Card Services, Inc., provides account balance and credit card information over the phone to credit card users in the United States. New Deli is a medium-sized service provider with the following total and marginal cost relations:
where Q is the number of phone inquiries answered per month. Assume that MC > AVC at every point along the firm's marginal cost curve, and that total costs include a normal profit.
1. Derive the firm's supply curve, expressing quantity as a function of price.
2. Derive the market supply curve if New Deli is one of 400 competitors.
3. Calculate market supply per month at a market price of $8.75 per inquiry.
3. (30 points) Competitive Market Equilibrium. Standardized Testing Services, Inc., based in Tempe, Arizona, provides practice exams and short courses for high school students studying to prepare for standardized college entrance exams. Relevant demand and cost relations for STS short courses are
where Q is the number of students attending a STS short course per year, and total costs include a risk-adjusted normal rate of return on investment.
1. Calculate the company's short-run profit-maximizing price/output combination and profit level.
2. Calculate the long-run price/output equilibrium in this competitive market if entry forces STS to operate at the average cost-minimizing price/output combination.
3. Calculate economic profits at the average cost-minimizing price/output combination.
4. (30 points) Utility Regulation. The Electric Company is under review by a state regulatory commission. Relevant revenue and cost curves including a Afair rate of return agreed upon by both the firm and the commission are as follows:
where P is price (in dollars), Q is output (in thousands of megawatt hours) and TC is total cost (in thousands of dollars).
1. If the firm were operating as a pure monopoly, what would be its optimal price/output solution and level of economic profits?
2. What price should be set if the commission wishes to eliminate economic profits?
5. (30 points) Joint Product Pricing. Pee-Wee Petroleum, Inc., operates oil and gas producing wells in the Overthrust Belt region. On average, for each barrel of oil pumped to the surface, one thousand cubic feet of natural gas is also recovered. Therefore, the company views oil and gas as joint products where each unit of production involves 1 bbl: 1 mcf. Marginal costs are $75 per unit of production. Although each output is sold in perfectly competitive commodity markets; transport, handling and related costs have the effect of reducing the net price received by Pee-Wee. The net price/output and marginal revenue relations for oil is:
where QO is barrels of oil and QG is mcf of natural gas sold per month.
1. Calculate the profit-maximizing price/output combination for oil and gas under current conditions.
2. Now assume that instability in the world oil market has caused the demand for domestic oil to double. Holding all else equal, calculate the new optimal price/output combination for oil and gas.
6. (20 points) Certainty Equivalents. The Hungry Heifer, Inc., is considering opening a new restaurant in Hanover, Indiana. Projecting net profits for such an outlet is quite subjective, but Norm Peterson, Hungry Heifer's marketing director, estimates:
During the past year, The Hungry Heifer opened new restaurants in four different markets. In analyzing these investment decisions, you discover the following:
1. Calculate the expected return, standard deviation and coefficient of variation of annual net profits for the Hanover restaurant.
2. Given Hungry Heifer's historical decisions, calculate the range for the maximum acceptable investment requirement for the Hanover restaurant given an anticipated ten-year project life, and a 6% risk-free rate of return.
