eco204_summer_2009_practice_problem_21

eco204_summer_2009_practice_problem_21 - University of...

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Unformatted text preview: University of Toronto, Department of Economics, ECO 204 Summer 2009 S. Ajaz Hussain ECO 204 Summer 2009 S. Ajaz Hussain Practice Problems 21 Please help improve the course by sending me an email about typos or suggestions for improvements You can check your oligopoly calculations using this summary slide: Question 1 Ajax Microchip Corporation (AMC) manufactures and sells microchips. AMC's cost function is: C = 100 + 38 q1 where q1 ( note the subscript 1) is in `000s of units (i.e. 1,000 units would be q = 1). Assume AMC has the capacity to produce 10,000 microchips a month. Market demand is estimated to be P = 170 20Q where Q, the total market output, is in `000s of units and P is in dollars. (a) Suppose AMC is the only company producing microchips in this market. What is the optimal price, quantity and profits? Show all calculations. 1 University of Toronto, Department of Economics, ECO 204 Summer 2009 S. Ajaz Hussain (b) Now suppose AMC competes with another identical microchip manufacturer Murdock Microchip Company (MMC) as Cournot rivals. How many microchips will each company produce and what will the market price be? How much profit will each company earn? Show all calculations. (c) Now suppose AMC competes with another identical microchip manufacturer Murdock Microchip Company (MMC) as Stackelberg rivals in which AMC enters the market before MMC. How many microchips will each company produce and what will the market price be? Show all calculations. Question 2 (20082009 Test Question) In the DHL case, explain why country managers don't have the correct incentives to set optimal prices. Suggest a solution. Question 3 (2007 Final Exam Question) Here are some excerpts from the DHL case: "Industry revenues were split roughly 75:25 between parcels and documents .. the parcel sector grew 40%, while the document sector grew 15%" (p. 4) "The expressdelivery business in Europe is booming .. Measured by revenues, the European expressdelivery business is growing at a 28% compound annual rate. Big European companies are stocking products and parts in central locations and moving them by overnight express, instead of running warehouses in each country" (p. 4) Table C (p. 7) DHL's Document and Parcel Businesses Total Revenues Revenues Growth Document 60% + 14 % Parcel 40% + 28% Exhibit 9: Comparison of Prices Delivery Company DHL TNT FedEx $131 $143 $118 $120 $120 $39 Service 2 Kilogram DOX BrusselsHK 2 Kilogram WPX SingaporeSydney UPS $97 $34 2 University of Toronto, Department of Economics, ECO 204 Summer 2009 S. Ajaz Hussain From London First Kilo Parcel: To NY 27 To Switzerland 32 To Japan 34 (a) Provide some reasons for the differences in document and parcel prices in Table E above. (b) Based on the excerpts above, evaluate DHL's pricing of documents and parcels and offer recommendations for changes. Question 4 (20082009 Final Exam Question) The following table reproduces portions of Exhibit 11 from the DHL case. Exhibit 11 Revenue and Cost Lane Examples: DOX and WPX U.K. to United States (1990) DOX Revenue $5,723,000 Outbound Cost 2,392,915 Hub Cost 596,608 1 Line Haul 1,121,882 Delivery 1,376,953 Gross Margin 234,642 Gross Margin % 4.1 Shipments 231,139 Revenue/Shipment $24.76 Note: Please see footnote at the bottom of this page. WPX $2,342,000 667,712 490,436 647,915 386,049 149,888 6.4 68,580 $34.15 Table E: DHL Sample Prices First Kilo Document: 24.50 26.00 26.50 (a) Calculate the AVC of DOX and WPX for this lane. Show all calculations. (b) Suppose DHL's headquarters in Brussels sets prices to maximize profits. If Brussels raises the price of a document from $24.76 to $25.01 how many documents will be sent from the U.K. to the U.S? State any assumptions. (c) Compute the price elasticity of the WPX segment. (d) Suppose DHL lowers the cost of shipping packages through learning by doing. Assuming the elasticity in part (c) is constant, what must the MC of packages be in order for the price of a document to be equal to the price of a package on the U.K. to U.S. lane? Show all calculations. 1 Line haul refers to the air segment of the shipment 3 ...
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