Economic

Instructions:

1. You may consult any text book, the Internet, or any other academic resource. However, the solutions submitted must be your own.

2. Some problems specifically require a spreadsheet model. Don't forget to attach spreadsheets with your submission.

3. I expect you to write a professional memo (where required). You may submit your write-up in word or pdf format. DO NOT submit a hand written solution.

4. There are 4 problems in total (95 points). Another 5 points are for presentation of your work. I have only one formatting requirement { simply delight me!

5. While summarizing your findings in a memo, make sure you use proper formatting and submit it as a word or pdf document.

START HERE

1. Blue Pill Development Dilemma

Matrix Inc. is a conglomerate with huge investments in technology, space travel, and virtual reality industries. Morpheus - the President of the company has ambitious goals for expansion and is looking for opportunities in fields related to company's existing businesses. He appointed Neo as the director of innovative product development with a seed money of $300 million. After months and months of hard work Neo's team has developed a Blue Pill that they believe may enhance human brain capability. Controlled usage of the Blue Pill will enable humans to learn new things 5x faster and process information as fast as a Pentium-I processor. He presented the findings at a board meeting and claimed that Matrix Inc. can make huge profits if it decided to market the pill. He presented three possible scenarios of projected revenue and cost of goods sold (COGS) which are summarized in Table 1

Trinity questions the team if there are potential side effects of the drug? To every- one's surprise, no proven clinical tests have been done so far but Neo insists there are absolutely no side effects of the drug since it is made from all organic natural materials. He asks for an additional $250 million for conducting the clinical trials and makes it clear that the probability of a successful clinical trial is only 0.3. Morpheus is furious to hear that all the seed money has already been spent and the project cannot progress without additional funding. He thinks the project should be abandoned. However, Oracle and Trinity convince him to give Neo a chance and invest $250 million in a clinical trial. At this point, Neo tells the board that he would require another $25 million for FDA approval if the clinical trials are successful. He believes there is a 60% chance that FDA will approve the Blue Pill. With all these unexpected details unfolding, the board is wondering what they should do. Should they just absorb the loss of $300 million or should they further invest $275 million? Neo points out that perhaps they should hire someone to help them solve this dilemma. Morpheus says he have had enough and all he can approve is to hire an unpaid intern. Oracle suggests getting someone from UALR as they have an excellent MBA program.

Congratulations!

a. Neo has decided to hire you as the unpaid intern for this assignment. Conduct a formal analysis of the decision problem and calculate expected value of the project. (Hint: a decision tree could be a good idea).

b. Write a one page memo to Morpheus that summarizes your findings and final recommendations. Regardless of your decision, you must build a compelling case in the memo, one that clearly follows a rational thinking process and is supported by your analysis in part (a) above.

2. Crazy Cocktails

After the successful launch of Blue Pill, Neo has come up with another brilliant idea: Launch a range of Crazy Cocktails. He has already bought a manufacturing facility that can make different types of drinks. As a first step he is considering to introduce three types of cocktails: Tangy Moscow Mule, Crazy Spanish Mule, and Crazy Cosmo. Neo believes that the cocktails will be a great hit and he can sell all his production without any problem.

Each product requires certain amount of ginger beer, vodka, lime juice, Licor 43. Unfortunately there is a shortage of good quality ingredients. At best he can get 900 oz of ginger beer per day, 500 oz of vodka, and no more than 500 oz of Licor43. Lime juice availability is also low and only 300 oz per day can be secured. You have been provided the following data and asked to determine the daily production quantity of each cocktail so as to maximize the daily profit.

Construct an Excel Model that can be used for decision making. You may not find the maximum profit but your model should show which cocktails are you making, how much quantity, and what is the daily profit. Write a memo that summarizes your conclusions and recommend if Neo should introduce all three products or not?

3. Pawnee Bikes

Leslie Knope has been elected as the Mayor of Pawnee. She is very excited about it as she will be able to fulfill her dream of setting up a new park at the abandoned construction site. However, her dream is shattered when she comes to know that Ron Swanson and Tom Haverford have actually purchased the piece of land and are planning to set up a bicycle assembly unit there. They believe the new bicycles will be very popular as these will be manufactured from carbon fibers and will last much longer than any other bicycle available. The assembly plant and technology will be provided by LoTrump Inc. Mr. Trumpet, who is the owner of LoTrump, is very optimistic about the performance and sales potential of these bikes. Mr. Trumpet believes the bicycles will last for at least a million miles without any breakdowns. However, an independent research company has conducted extensive tests and their report shows an average life of 67,900 miles. Tom thinks they should give a guarantee of 100,000 miles while Ron is more inclined to go for 66,000 miles. You have recently been hired by Ron as an assistant manager and are assigned to the marketing team. While going through the test results you notice that the analysis mentions a large number of tests that were conducted and that the test data followed a normal distribution with a mean of 67,900 miles and a standard deviation of 2,050 miles. You quickly figure out that a guarantee of 100,000 miles might become a disaster for the _rm. You mention this 3 issue to Tom but he is too busy (and of course dumb) too give it a serious thought. Instead he asks you to submit a report with your recommendations.

Conduct an analysis of this problem that should address (at least) the following:

a. Is 100,000 miles guarantee a good idea? Why or Why not? Quantify your answer

What about 66,000 miles?

b. If they decide to go for 66,000 miles, What percentage of bikes will meet this minimum criteria? What percentage will not meet the criteria?

c. Assume that if a bike does not meet the minimum mileage warranty it will have to be replaced. What should be the claimed mileage if you want no more than 4% of the bikes to be replaced?

d. Ron plans to sell 50,000 bikes in the first year. Suppose he sets the minimum mileage to your solution in part (c) above and each bike replaced will cost $500. Further assume that not all customers whose bikes breakdown sooner than the guarantee period will make a claim. In fact historical data shows probability of such customers making a claim for replacement is only 0.45. If that is true then what is the expected cost of bikes replacement (assume a sold volume of 50,000 for this calculation)?

e. Write a memo to Ron and Tom, presenting your findings, conclusions, and recommendations.

4. Pawnee NewLight Co.

Congratulations! You have been offered the position of corporate strategic planner for Pawnee NewLight Co. The business of LED light bulbs is growing faster than anyone had expected. The firm is now considering to establish brick and mortar stores across the country. Leslie also wants to rebrand the bulbs and your first assignment is to propose three brand names for the new bulbs. Your second assignment is to choose a location for setting up the first brick and mortar store. Your team has narrowed the search for a new facility location to four cities. The annual fixed costs (land, property taxes, insurance, equipment, and buildings) and the variable costs (labor, materials, transportation, and variable overhead) are as follows:

a. List the three brand names you suggest for the bulbs

b. Build an Excel model for this decision model. Your model should be able to calculate total cost for each location. Construct a single data table to calculate costs for each option for shipping case quantity Q = 0, 1000, 2000,. . . ., 30,000

c. Draw a graph showing the cost lines for each option as calculated in part-b.

d. Which location would you recommend if the sales quantity was estimated to be 6250 shipping cases?

e. How will your recommendation change if the quantity was 20,000 shipping cases?

5. SW Airlines Overbooking

SWA faces the problem of 'no shows' for most of its flights. Their flight SW221 flies on a busy route from Little Rock to Chicago. Usually the flight is fully booked, however, some passengers would not show up on time despite reservations. The airline is collected historical data for this flight which shows that for any given full flight there will be zero, one, two, or three 'no shows' with probabilities 0.25, 0.5, 0.15, and 0.10.For SWA there is a loss of $300 for each passenger who makes a reservation but does not show up. They are tempted to overbook the flight as it appears to be a good strategy. However, they have no clue of how many seats should be overbooked 1, 2, or 3? It is estimated that the airline will lose $500 per overbooked passenger if the passenger does not get a seat. For example: if they overbook three seats and one passenger is 'no show' then it costs the airline $1000, likewise it will cost them $300 if they don't overbook and one passenger does not show up.

a. Conduct a formal analysis of the decision problem and recommend how many seats should be overbooked on flight SW221 to minimize expected loss?

b. What is the maximum amount that SWA should be willing to pay for a perfect prediction of the number of no shows on SWA221?