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1. (10 pts.) Stella Ann Freeman is having a difficult time deciding whether or not to purchase a new car. How would understanding the concept of opportunity costs help her make a decision?

 

2. (10 pts.) Referring to the table below, hiring a driver costs $10. Each machine costs $100. Which method should he use and why?

 

 

 

3. (10 pts.) Enron will be an example of a dysfunctional company for many years to come. It was clearly a company riddled with fraud and excess and its conduct drove it into bankruptcy. The text argues that individual behavior was not at the core of Enron’s problems. What were the problems with this corporation from an organizational architecture point of view?

 

4. (10 pts.) For many corporations such as utility companies, a major portion of the cost of production is fixed in the short run. Should these very large fixed costs be ignored when the executives are making output and pricing decisions? Why?

 

5. (10pts.) Choose a real-life example of a firm that you think is part of an oligopoly market and describe the characteristics of the market structure that explain why the firm would be classified as such.

 

6. (10 pts.; 2 pts each) You are the manager for Dunkin Donuts and know the following elasticities:

 

η= 1.5 η _I = 1.2 η _xy1 = 0.5 η _xy2 = -0.5

 

η is the price elasticity of demand for Dunkin Donuts (DD) glazed doughnuts, η_xy1 is the cross elasticity of demand between DD glazed doughnuts and Krispy Kreme (KK) glazed doughnuts, η_xy2 is the cross elasticity of demand between DD glazed doughnuts and DD French Vanilla coffee, and η _I is the income elasticity of DD glazed doughnuts.

 

1. If you want to increase your sales of glazed doughnuts by 30%, in what direction and by how much do you need to change the price?

 

 

1. If you make the percentage price change that you calculated in part a) will total revenue increase or decrease?  How do you know?

 

1. Krispy Kreme lowers its price of glazed doughnuts by 20%.  The demand for Dunkin Donuts glazed doughnuts will change by what percentage and in what direction?
2. Dunkin Donuts raises the price of its French Vanilla coffee by 15%. The demand for Dunkin Donuts glazed doughnuts will change by what percentage and in what direction?

 

 

1. If average income increases by 5% by what percentage and in what direction will the demand for Dunkin Donuts glazed doughnuts change? Are DD glazed doughnuts a normal good or an inferior good and how do you know?

 

7. (10 pts.) Westinghouse and General Electric are competing on the newest version of clothes washer and dryer combinations. Two pricing strategies exist: price high or price low. The profit from each of the four possible combinations of decisions is given in the following payoff matrix:

 

		Westinghouse’s price
		High ($4000)	Low ($2000)
General Electric’s price	High ($4000)
	Low  ($2000)
		Payoffs in dollars of profit.

 

 

1. a) (2 pts.) Which strategy offers both Westinghouse and General Electric the best financial outcome?

 

1. b) (2 pts.)  Does either firm have a dominant strategy? If yes, which firm and what strategy?

 

1. c) (4 pts.) The Nash equilibrium is for Westinghouse to set its price at __________ and earn a profit of __________ and for General Electric to set its price at ______________ and earn a profit of _____________.

 

1. d) (2 pts.) Why do we see that the strategy that results is not the strategy that offers both players the best financial outcome?

Struggling with where to start this assignment? Follow this guide to tackle your assignment easily!

This assignment covers a range of core microeconomic topics from opportunity cost to elasticity and strategic pricing. Use the guide below to help break down each question and approach it step by step like an economist would.

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✅ Question 1: Opportunity Cost and Decision-Making

What to do:

• Define opportunity cost in simple terms: the value of the next best alternative you give up.

• For Stella Ann Freeman, list two options: (1) buy a new car, (2) keep her current car.

• Then, discuss what she gives up by choosing each option—e.g., reliability vs. money spent.

• End with how understanding opportunity cost helps her make an informed, rational decision.

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✅ Question 2: Cost Comparison with Table (Drivers vs. Machines)

What to do:

• Start by noting the cost per driver ($10) and machine ($100).

• Reference the table (assumed to show production outcomes for different combinations).

• Calculate the total cost of each production method.

• Identify the least-cost combination that yields the desired output.

• Conclude with a recommendation and a short explanation of why that method is economically best.

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✅ Question 3: Enron & Organizational Architecture

What to do:

• Define organizational architecture: the structure of decision-making, reward systems, and monitoring.

• Explain how Enron’s architecture failed:

  • Lack of oversight or accountability

  • Incentive systems that encouraged unethical behavior

  • Poor internal controls

• Connect these points to how structure—not just individual behavior—led to systemic issues.

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✅ Question 4: Fixed Costs in Production Decisions

What to do:

• Define fixed costs: costs that don’t change with output (e.g., rent, equipment).

• Explain that fixed costs are sunk in the short run and should not influence marginal decision-making.

• Focus on marginal cost and marginal revenue for pricing/output decisions.

• Summarize: fixed costs are important for long-term planning, but not for short-run output decisions.

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✅ Question 5: Real-Life Oligopoly Example

What to do:

• Pick a firm (e.g., Boeing, Pepsi, or Verizon).

• Define oligopoly: few dominant firms, barriers to entry, interdependence.

• Describe:

  • Market share and limited competition

  • Similar products with slight differentiation

  • Strategic behavior (e.g., price wars, advertising)

• Conclude with how these features apply to your chosen firm.

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✅ Question 6: Elasticities at Dunkin Donuts

What to do for each part:

a) Price change needed for 30% demand increase
Use the formula:

$$\%\Delta Q=\eta \times \%\Delta P\Rightarrow 30\%=1.5\times \%\Delta P\Rightarrow \%\Delta P=20\%\text{ decrease}$$

b) Impact on revenue
Since demand is elastic (η > 1), lowering price increases total revenue.

c) KK lowers price by 20% → Effect on DD demand

%ΔQ=ηxy1×%ΔP=0.5×−20%=−10%\%\Delta Q = \eta_{xy1} \times \%\Delta P = 0.5 \times -20\% = -10\%%ΔQ=ηxy1​×%ΔP=0.5×−20%=−10%

→ Demand for DD decreases by 10%.

d) DD raises coffee price by 15% → Effect on doughnuts

%ΔQ=ηxy2×%ΔP=−0.5×15%=−7.5%\%\Delta Q = \eta_{xy2} \times \%\Delta P = -0.5 \times 15\% = -7.5\%%ΔQ=ηxy2​×%ΔP=−0.5×15%=−7.5%

→ Demand for DD doughnuts falls 7.5%.

e) Income increases 5% → Effect on demand

%ΔQ=ηI×%ΔI=1.2×5%=6%\%\Delta Q = \eta_I \times \%\Delta I = 1.2 \times 5\% = 6\%%ΔQ=ηI​×%ΔI=1.2×5%=6%

→ Demand increases by 6%; since elasticity > 0, DD doughnuts are a normal good.

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✅ Question 7: Game Theory and Pricing (GE vs. Westinghouse)

a) Best financial outcome for both:

• Usually when both choose High price, maximizing joint profits.

b) Dominant strategy?

• Examine if one firm always benefits from choosing one strategy regardless of the other’s choice.

c) Nash equilibrium:

• Find where neither player would want to change strategy unilaterally.

• Fill in profits in the matrix and identify the stable pair.

d) Why best outcome isn’t chosen:

• Due to prisoner’s dilemma logic: each firm has an incentive to undercut, even if it reduces total profit.

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