Instruction: Please write your answers on the booklet provided with your name on it. The points for each question are in parenthesis next to the number of the question.
1. A book store opens across the street from the University Book Store (UBS). The new store carries the same textbooks but offer a price 20 percent lower than UBS. If the cross-elasticity is estimated to be 1.5, and UBS does not respond to its competition, how much of its sales is it going to lose?
2. Three college students consider the option of forming a lawn care and landscaping business during summer break. They estimate the following costs:
Equipment Rental Fees :$1000
Fuel and Supplies :$4 per lawn served
Miscellaneous Expenses :$2 per lawn served
The projected revenue depends on the number of lawns served. The price for each lawn service is $30. The going wage for a typically unskilled college student is about $2400 for the summer months.
a.Compute economic profit as a function of sales of lawn service.
b.Compute the number of lawns that must be served during the summer in order for the business to break even in the accounting sense.
c.The business is expected to serve 200 lawns during the summer. Should the three students start the business?
3 You are the manager of a gas station in a small town, and your goal is to maximize profits. Based on your experience, the elasticity of demand of B.C. residents for a car wash is -2, while that of non-BC residents is -1.5. Your marginal cost is $6.
a.Are the conditions necessary for price discrimination to be an effective means of enhancing profits being met? Explain.
b.What is the profit-maximizing price to charge a BC resident for a car wash?
c.What is the profit-maximizing price to charge an Albertan for a car wash?
4. CPT Inc. is a local manufacturer of conveyer systems. In an effort to reduce cost of steel it uses, CPT now uses an online procurement procedure that is best described as a first-price, sealed-bid auction. The bidder in these auctions utilize the steel for a variety of purposes. This suggests that bidders value the steel independently, although it is perceived that bidder valuations are evenly distributed between $8,000 and $25,000. You are the purchasing manager at CPT and are bidding on three tons of six-inch hot-rolled channel steel against four other bidders. You company values the three tons of channel steel at $16,000. What is your optimal bid?