540 Midterm Essay

Words: 1293
Pages: 6

1. Opportunity costs are most simply defined as cost in terms of foregoing alternatives. This means what you potentially lose in making a choice for one thing in a decision. Stella would need to be aware that whatever resources she allocates to paying for the new car, will be removed from using them for other purposes. She should consider how much the car will cost in comparison with the other uses for her funds combined with the cost of another means of transportation. In short, for this to be a good choice, the cost of the car should be lower than the cost of the alternative uses + the cost of alternate transportation if she wishes to maximize this decision. http://wordnetweb.princeton.edu/perl/webwn?s=opportunity%20cost 2.
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Companies should not offer higher prices than their competitors (even though they wish to maximize profit) as consumers may go elsewhere to fulfill their desired services. This usually means that prices are similar across the field of competition. Usually there are other ways that these organizations use to differentiate themselves; such as customer service standards and the implementation of Six Sigma and other high level efficiency and accuracy programs. Price is not the only factor that can present competition between firms; Non-price competition can be much more prevalent and it can sometimes benefit your consumers (and organization) more than a better price.

. You are the manager for Dunkin Donuts and know the following elasticities:

η= 1.5 η I = 1.2 η xy1 = 0.5 η xy2 = -0.5

η is the price elasticity of demand for Dunkin Donuts (DD) glazed doughnuts, ηxy1 is the cross elasticity of demand between DD glazed doughnuts and Krispy Kreme (KK) glazed doughnuts, ηxy2 is the cross elasticity of demand between DD glazed doughnuts and DD French Vanilla coffee, and η I is the income elasticity of DD glazed doughnuts.

6. A. P elas = Percent change in Q / Percent change in P. We should raise prices by 20%

6. B. Since revenue is the product of p and q, it should rise just as price and quantity have risen (p elas is positive).

6. C. 0.5 = Percent change in Q of DD / Percent change in p