07mid-term - You have from 9.30-12.30 to answer the...

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You have from 9.30-12.30 to answer the following questions. You must answer each question below and each question carries equal weight or counts equally to your overall grade for the mid-term. Question 1. Jewel Equipment manufactures magnetic card readers for medical applications. A critical component of the card reader is the CPU (central processing unit). Jewel’s card reader can use two standard types of CPUs, Z-1 and Z-2. Although the Z-1 and Z-2 CPUs are identical in terms of the finished card reader’s functionality, for complex technical reasons, the Z-1 works slightly better in Jewel’s manufacturing process, resulting in fewer rejects and disruptions to the manufacturing process. Jewel’s industrial engineers have estimated the benefits of Z-1 over Z-2 at about $5/unit. Jewel is in the process of procuring a 3 month supply of CPUs. Acme, a leading manufacturer of CPUs, has offered to sell Jewel Z-2 CPUs at $35/unit, whereas Beta, another CPU producer, has quoted Jewel a price of $38/unit for its Z-1 CPUs. Jewel is about to begin negotiations with a third firm, Condor, which only manufactures the Z-2 CPU. Assume for Question 1a and 1b that Acme and Beta have quoted firm prices. a. In negotiating with Condor, what is Jewel’s BATNA? (2 points) b. In negotiating with Condor, what is Jewel’s reservation price, i.e., the most it will pay for Condor’s Z-2 CPU? (2 points) Now assume that although Beta’s price is firm, your purchasing manager believes that there is a 50% chance that she might be able to negotiate a 20% reduction from Acme (to $28/unit). c. How has Jewel’s BATNA changed? (2 points) d. What is Jewel’s new reservation price, i.e., the most it will pay for Condor’s Z-2 CPU? Assume that Jewel makes decisions on the basis of Expected Monetary Value (EMV), as per decision tree analysis (hint recall Carter Racing). (2 points) Condor’s largest customer, 40% of Condor’s sales, recently declared bankruptcy. As a result, Condor has an excess supply of Z-2 CPUs. If Condor is unable to sell its supply of Z-2 CPUs to Jewel, Condor estimates that there is a 20% chance that they will
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be able to sell the CPUs to one of Jewel’s competitors for $30/CPU and an 80% chance that they will have to liquidate their stock for $15/CPU. e. What is Condor’s BATNA? (2 points) f. What is Condor’s reservation price? Assume that Condor makes decisions on the basis of EMV. (2 points) g. Assuming Jewel’s reservation price from Question 1d, what is the Zone of Possible Agreement? (2 points) h. A decision maker is risk averse if he or she always prefers the EMV of a certain event to the uncertain event. For example, a risk averse decision maker would prefer $50 for sure to a 50-50 chance at $100 or $0 respectively. Moreover, he or she would prefer $100 p for sure to a p chance at $100 and a 1- p chance at $0. Now suppose that Condor is risk averse. How would Condor’s reservation price change? (2 points) i. What are the risks of losing track of one’s BATNA in a negotiation? (2
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This note was uploaded on 06/01/2008 for the course MBAC 6040 taught by Professor Hayward during the Fall '07 term at Colorado.

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07mid-term - You have from 9.30-12.30 to answer the...

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