Managerial Economics BM (2009-11) End-term Examination (06.09.

09) Full Marks: 30 Time: 90 minutes

This is a conventional closed book examination. You are not allowed to keep anything with you, except pens, pencils, rulers, erasers and calculators. Answer all the questions 1. Aspra is the only supplier of aspartame, a calorie free sugar substitute, in the

Republic of Taco. The annual market demand function is: P = 1000 0.01 Q. The prices are in US dollars per quintal and quantities are in quintals. The technology used in production of aspartame is such that the variable cost function is linear, and the cost of producing a quintal of aspartame is $ 700 for Aspra. Apart from the variable cost, Aspra incurs a fixed cost of $ 250,000 per year. How much should Aspra produce per year? At what price should they sell? How much is their annual profit? [1] [1] [1]

Holland Sweetener is planning to enter the market for aspartame in the Republic of Taco. Holland Sweetener will decide whether to enter only after Aspra announces its capacity expansion plan for the next one year. Holland Sweetener uses a similar production technology and their variable cost function is also linear, but their cost of producing a quintal of aspartame is $ 500. However, their annual fixed cost is $ 1,210,000. Aspra knows the cost function of Holland Sweetener. Under this threat of entry, Aspra is planning to revise its plant capacity. Is it possible for Aspra to deter entry by expanding its annual capacity? capacity, will you advise them to do so? 2. [4] [3] Even if it is possible for Aspra to deter entry of Holland Sweetener by expanding

A risk neutral (expected payoff maximizing) salesman, if he works hard,

generates revenue of Rs. 10,000 per week for the company with probability 0.8 and Rs. 2,000 per week with probability 0.2. If he shirks he generates revenue of Rs. 10,000 per week with probability 0.1 and Rs. 2,000 per week with probability 0.9. The money value

of his effort cost to the salesman is Rs. 700 if he works hard. If he shirks, the money value of his effort cost is Rs. 0 to him. What is the expected revenue when the salesman works hard? What is the expected revenue when the salesman shirks? plans. Plan A: The salesman gets a fraction of the revenue he generates. Plan B: The salesman gets a fixed wage and a bonus whenever he generates revenue of Rs. 10,000. Under plan A, what minimum fraction of generated revenue should be given to the salesman so that he is induced to work hard? as bonus so that he works hard? Which plan is better for the employer? 3. [3] [3] [2] Under plan B, what should be the minimum amount that should be given to the salesman [1] [1]

The employer cannot observe effort. She is contemplating two different compensation

A, B and C are members of a family, and they jointly own and manage the family

business. The profit is equally shared. However, the profit is a function of the number of family members putting in effort. Precisely, = 18000(1 + n), where is the profit earned in a month and n is the number of family members putting in effort. Cost of effort to each member is 9000 for a months effort. Every month the members have to decide whether to put in effort or not. Effort put in by one member is not observable to the other members during the month. So, consider it as a simultaneous move game. However, at the end of the month they can see the profit figures and infer how many members have actually put in effort. Represent the game in normal (strategic) form. Is there any strictly dominant strategy for any of the players? Find the Nash Equilibrium (or Equilibria) for the game in one shot. equilibrium where all the members of the family put in effort: Each member will put in effort this month, and in any month, if in all the preceding months all of them had put in effort. If at the end of any month any member observes [2] [1] [2]

Now consider the following understanding between the members in order to sustain the

that at least one other member did not put in effort, then from the next month he will not put in effort. Each member discounts the future and they all have the same discounting factor. Find a range of values of the discounting factor for which the above mentioned trigger strategy will be useful in sustenance of an equilibrium, such that all the members put in effort. [5]