Description

Assignment 1

There are a total of 50 points available on this assignment. Be sure to clearly explain your answers and show your work to receive full credit.

1. (12 points) Use supply and demand to explain the following real-world situations graphically and in a short paragraph. Be sure to explain what happens to the market quantity and price with a supply and demand diagram as accurately as possible.

a.       (4 points) The price of restaurant meals increased from February 2020 to November 2020, while fewer meals are consumed at restaurants.  For example, the price of a Jucy Lucy at the Groveland Tap increased by several dollars. 

b.      (4 points) The price of a 65 inch OLED TV drops from $2299 in November 2019 to $1699 in November 2020.

c.       (4 points)  The price of an apartment in San Fransico fell by 20.4% from October 2019 to October 2020, according to the San Fransico Chronicle. (https://www.sfchronicle.com/bayarea/article/Bay-Area-rents-keep-plummeting-especially-in-15613722.php)

2. (12 points) Latvia,  Lithuania, and the Netherlands

Latvia, Lithuania, and the Netherlands have 30 weeks of workers' time that can be used to produce apples or vodka.  They want gift boxes that contain one apple and one bottle of vodka.

Each nation's payoff is the number of gift boxes with an apple and a bottle of vodka. Latvia's payoff is equal to whatever number is smaller: the number of apples or the number of bottles of vodka. Lithuania's payoff is equal to whatever number is smaller: the number of apples or the number of bottles of vodka. Similarly, the payoff to the Netherlands is the smaller of the number of apples or the number of bottles of vodka.

Suppose Latvia, Lithuania, and the Netherlands can produce apples and vodka as shown in this table:

Latvia can produce 2 apples per week of work. Latvia can produce 2 bottles of vodka per week of work.  Lithuania can produce 4 apples per week of work. Lithuania can produce 2 bottles of vodka per week of work.  The Netherlands can produce 5 apples per week of work. The Netherlands can produce 3 bottles of vodka per week of work. 

a.       (2 points) Who has an absolute advantage in producing apples? Why?

b.      (2 points) Who has an absolute advantage in producing vodka? Why?

c.       (2 points) Who has a comparative advantage in producing vodka? Why?

d.      (2 points) How many gift baskets of one apple and one bottle of vodka can Lithuania make without trade?

e.       (2 points) Forecast what item Latvia will tend to make in a world of trade.

f.       (2 points) Forecast what item the Netherlands will tend to make in a world of trade.

3. (8 points)  Globex Conglomerate

Congratulations!  You are the CEO of Globex Conglomerate, a very diversified international, publicly-traded firm.  Your CFO provides you with the following financial information for the most recent month (in thousands).  He expects the numbers to remain unchanged going into the future.  The CFO reports that your central office costs $21,000 (in thousands) per month regardless of the number of divisions within Globex Conglomerate.  You face the challenging task of determining what divisions to eliminate and what divisions to keep.  Clearly explain your decision and reasoning to your board of directors in your answer.

4.  (12 points)  Lit Lighting

Lit Lighting sells LED lighting panels that can be placed on walls.

Lit Lighting has estimated its daily demand to be:  P = 200 – 2Q

where P is the price charged per unit of the product, and Q is the number of units of the product demanded per day.  Lit Lighting has estimated its total cost function to be: TC = 400 + 20Q

where Q is the number of units of the product produced per day. 

a.       (7 points) Determine the profit-maximizing volume of production for Lit Lighting.  Answers may be expressed in either integer or non-integer values.  Using your solution above, compute the price that Lit Lighting should charge for each unit of the product to maximize profit.  What are the highest possible daily profits for Lit Lighting?

b.      (5 points) Google Adwords will sell Lit Lighting advertising at a daily cost of $60, which will increase the daily demand for Lit Lighting to P = 235 – 2Q.  Should Lit Lighting buy this advertising?  Why or Why not?

5. (6 points) Goal Alignment at a Fridley Tool and Die

The owners of Fridley Tool and Die, a small manufacturing business, have hired a manager to run the company with the expectation that he will buy the company after five years. The new vice president's compensation is a flat salary plus 75% of first $140,000 of profit, and then 10% of profit over $140,000. The purchase price for the company is set as 4½ times earnings (profit), computed as average annual profitability over the next five years. Does this contract align the incentives of the new vice president with the goals of the owners?  Why or why not? Please use marginal thinking in your answer.