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Exam 4 Problems

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1. Probability Analysis. WD-50, Inc. has just completed development of a new spray lubricant. Preliminary market research indicates two feasible marketing strategies: developing general consumer acceptance through media advertising, or developing distributor acceptance through intensive personal selling by company representatives. The marketing manager has developed the following estimates for sales under each alternative:
Media Advertising Strategy Personal Selling Strategy
Probability Sales Probability Sales
0.1 $125,000 0.3 $250,000
0.4 375,000 0.4 375,000
0.4 625,000 0.3 500,000
0.1 875,000    
A. Assume that the company has a 20% profit margin on sales. Calculate expected profits for each plan.
B. Construct a simple bar graph of the possible profit outcomes for each plan. Which plan appears to be more risky?
C. Assume that management's utility function resembles the one illustrated below. Which strategy should the marketing manager recommend?
Problem 4 Graph
2. Standard Normal. University Savings, Inc offers personal checking accounts to commercial and individual customers. Although unit costs cannot be determined precisely, University anticipates that monthly costs will be normally distributed around a mean of $5 per unit with a standard deviation of $1 per unit.
A. What is the probability that University would make a profit at a checking price of $5 per unit?
B. Calculate the unit price necessary to give University a 90% chance of making a profit on an individual checking account.
C. If University offers its accounts at a price of $6, what is the probability that it will make a profit?
3. Rate-of-Return Analysis. New York City licenses taxicabs in two classes: (1) for operation by companies with fleets, and (2) for operation by independent driver-owners who have only one cab. It also fixes the rates that taxis charge. For many years, no new licenses have been issued in either class. In the unofficial market for licenses (medallions), their market value is currently roughly $250,000.
A. Does the $250,000 medallion price indicate that operators of New York taxicabs are earning only normal profits?
B. What factors would determine whether a change in the fare fixed by the city would raise or lower the value of a license?
C. Cab drivers, whether hired by companies or as owners of their own cabs, seem unanimous in opposing any increase in the number of cabs licensed. They argue that an increase in the number of cabs would increase competition for customers, and drive down what they regard as an already unduly low return to drivers. Is their economic analysis correct? Who would benefit and who would lose from an expansion in the number of licenses issued at a nominal fee?
Copyright 2008, by the Contributing Authors. Cite/attribute Resource . admin. (2009, January 27). Exam 4 Problems. Retrieved January 07, 2011, from Free Online Course Materials — USU OpenCourseWare Web site: http://ocw.usu.edu/economics/managerial-economics/exam4problems.htm. This work is licensed under a Creative Commons License Creative Commons License