CEE_594_Solutions_PS__3_F.07

CEE_594_Solutions_PS__3_F.07 - Professor Schuler...

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Professor Schuler CEE594/ECON 494 Fall 2007 Problem Set 3 Solutions Problem 1 a. Q = 15000 - 2 . 8(7000) + 150(52) + . 3(4000) + . 35(15000) + . 2(8000) = 11250 The elasticity of each variable is dQ X dX Q where X is the variable. So, own price: η P = (2 . 8)(7000 / 11250) = 1 . 742, very sensitive advertising: η A = (150)(52 / 11250) = . 693, less than proportional positive impact PC price: ηP pc =( . 3)(4000 / 11250) = . 107, very insensitive minicomputer price: ηP m =( . 35)(15000 / 11250) = . 467, somewhat sensitive, a substitute competitor price: ηP c =( . 2)(8000 / 11250) = . 142, very insensitive Your competitor must have a bad product. Focus on your own price and your advertising budget in trying to maximize your profits, and to a lesser extent, the prices of the mini PCs that seem to be your closest competitors. Note that for every $1000 spent of advertising, you sell 150 more computers at $7000. Your revenue maximizing price is $5509, so depending on your MC , lowering your price might be your most profitable strategy. b. Certainly, you should consider the MIPS as a performance index, both in absolute terms (e ff ects demand for all computers) and relative to your closest competitor (the mini PC here). Changing interest rates a ff ect the opportunity cost of acquiring a computer, and then again because your workstation and competitor’s workstation have similar prices, interest rates may have a greater e ff ect on overall demand. But since the mini is your real competitor and it costs almost twice as much, rising interest rates should have the biggest impact on you by raising the minicomputer’s usage cost (rental rate). 1
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Professor Schuler CEE594/ECON 494 Fall 2007 c. Eleven years is an eternity in this industry with rapid technological change. I’d re- estimate the entire model with recent data, particularly using performance measures. One can estimate the model with last year’s data, then forecast this year’s sales and compare with actuals to get a sense of which model performs best. Problem 2 a. Looking at the first five years alone, assuming all cash flows and the 12% cost of capital are real values then (in thousands), 0 NPV = 5 5 1 1 55 1 250 55 (1.12) 1 t t t t r β = = - + = + . Let us also define 5 1 t t s β = = 3.60478. Therefore, 250 55 51.737.
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