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Question 1 Assume that a Bulgarian Wine Company, the BulgarWine, has the following cost structure for the year 1995.  BulgarWine used old technology in year 1995 and suffered from inadequate marketing and brand recognition.

                        Price               MC                 AVC               AFC

BulgarWine     ------                 2.5lv                2.2 lv.                0.5 lv

Wine Industry             4.25lv.             2lv.                  2 lv.                   0.4 lv

(Average)

BulgarWine’s market share= 4% of the Bulgarian wine market

Elasticity of demand for BulgarWine = -3

Elasticity of demand for the Wine Industry=-1.5

a)               Consider the cost structure of BulgarWine. What is the minimum price that the company should charge to avoid a “shut-down” decision and stay in business in the short-run? What is the minimum price to be charged to be profitable?

b)               Is the company more or less efficient as compared to its competitors or the industry average? Explain why. What are the possible strategies the company can adopt to become more cost-efficient?

c)               Assume that in 1997-1998, the grape supply decreased due to bad weather conditions, leading to a significant deterioration in company’s cost structure as it was forced to purchase grapes at a higher cost than its competitors.  This raised the MC of wine production for the company to 2.75 and its AVC to 2.5 whereas the AFC stayed the same at 0.5 lv.  Should the firm stay in business in the short-run if it charged 2.5 lv per bottle of wine?  Will the company generate short-run profits at this price?

d)              Does the company have a great deal of market power in the Wine Industry? Based on the information given above, explain in reference to its price elasticity of demand and the market share.  Is there room for improving the market share of BulgarWine? What types of strategies should the company adopt to improve sales, reduce costs, and hence increase profits and market share? 

Question 3. Consider the case “AirNewZeland.pdf” posted on Canvas to answer the following questions.

New Zealand suffers from the geographical disadvantage of being at the end of most air-routes, where air traffic is relatively low. Air New Zealand’s fleet is smaller than those of Asian carriers Cathay Pacific and Singapore Airlines and European carriers British Airways and Lufthansa. Use the concept of scale economies to explain why ANZES’s wide-body aircraft maintenance operations are relatively inefficient. Could this service be also outsourced to save on costs? Describe the pros and cons of this strategy for outsourcing.

Question 4. (20 points= 5 points each) Apple in Smart-Phone Market. Consider the cost function C(Q) = 25000 + Q2  (or MC= 2Q) for Apple Inc. to produce the iPhone. Note that the company has fixed costs of $25,000.  Also, the demand for Apple’s iPhone is given by P = 400 - 3Q (and its MR = 400 - 6Q).

Using that cost function for the iPhone, determine the profit maximizing output and price for the iPhone as well as profits, and discuss its long-run implications, under three alternative scenarios. (Hint: Use Hand-written Class Notes to answer these questions.)

a. Apple’s iPhone is a perfect substitute with the Motorola Droid and several other smart phones that have similar cost functions and that currently sell for $200 each (as in perfect competition model). Should the company stay in business in the long-run?

b. Apple’s iPhone has no substitutes and so is a monopolist, and the demand for the iPhone is expected to forever be P = 400 - 3Q (or Q = 133.33 – (1/3)P) (as in monopoly) Should the company stay in business in the long-run?

c. Apple’s iPhone currently has no substitutes, and currently the demand for the iPhone is P = 400 - 3Q (or Q = 133.33 – (1/3)P), but Apple anticipates other firms to produce close substitutes in the future (as in monopolistic competition in the future) Should the company stay in business in the long-run?

d. If it operates in an oligopolistic market, how can Apple use price and non-price strategies (methods of competition) to compete effectively in the smart-phone market? (No need for calculations)