Final Exam Answers

Topics: Economics, Marginal cost, Marketing Pages: 5 (962 words) Published: September 25, 2014
Final Exam
PMBA 8030
TRACI’S SALON
1) Retail Hairstyling Industry
Number of firms – many
Entry conditions – easy
Product type – few to many
Conduct of firms – less aggressive

Retail hairstyling industry is considered to be a monopolistic competition where there are many firms selling similar but not identical goods and services. In monopolistic markets, there are a large number of sellers and they can easily enter or leave the market. This is most common market in the U.S. economy, especially in general retailing. In this industry, firms are most likely to engage in non-price competition, such as advertising, promotion, and customer service initiatives.

2) Traci’s Hairstyling Salon – Cost & Revenue Data

3) Demand, Marginal Revue, Marginal Costs, & Average Total Cost Curves

4) Maximizing Profits:
a. Price charged – $30
b. Maximizing Quantity – 4

5) Total Profit when Maximizing Profits - $84 total profits when 4 haircuts sold

6) In Perfect Competition – What is Market Price & Output Level

In a perfect competition, demand equals marginal revenue. The market price would be around $10 at an output level of 6 where marginal revenue and marginal cost intersect. Because demand price and marginal revenue are the same, long-run equilibrium occurs where marginal revenue, marginal cost, and the lowest long-run average cost intersect.

7) Define Economic Profits – Will they earn positive economic profits in the long run? Explain.

Economic profit (also commonly known as the economic value added) measures an entity’s economic profit by using accounting earnings before deducting interest and deducts from that the dollar value of opportunity cost associated with long-term debt and shareholders’ equity. Opportunity cost is defined as cost of capital. The basic formula for economic profits is:

EVA = Earnings before interest – [(Opportunity Costs) x (LT Debt + SE)] Not likely due to the law of diminishing returns. Economic resources are not properly allocated for monopolistic firms in the long run. If experiencing short run profits, it is possible to experience profits in the long run as long as the salon can maintain lower average cost curves compared to the competition, which will also increase in the long run. As shown in the graph in question 3, the average total cost curve is slightly higher or above than the market price where marginal revenue intersects marginal costs.

SEAWORLD CASE

1) Market Structure of the CFR theme park industry
a. Number parks in industry
Few, even fewer in central locations like CFR
b. Concentration of industry
Minimal competing rivals

2) Competition
a. Price Competition
Firms in oligopolistic markets will usually avoid price competition for fear of creating a price war. b. Non-Price Competition
Rely heavily on non-price competition, such as marketing/advertising, promotion, and customer service initiatives.

3) Market Structure of the CFR theme park industry

Oligopoly – This market exists when there are few providers of a good or service, firms usually offer homogeneous products (or differentiated products sometimes), and market entry is restricted. To avoid price wars, firms will usually engage in overt or tactic collusion. Overt collusion is illegal in the U.S., and firms will engage in tactic collusion.

4) Based on demand functions and cost curve estimated,

a. What should SeaWorld charge in order to maximize profits
In the short run firms maximize profits where marginal revenue equals marginal costs, $294.00/9 Guests = $32.67/guest

b. How does this compare to the “50 bucks” Disney is charging The price charged by SeaWorld is cheaper compared to the $50 charged by Disney, but this is with a demand of 8 guests. For one ticket purchased by a single guest, they pay a higher price of $66, a $16 increase.

5) Explain how use of marketing tools such as discount daily tickets and reasonably priced season...
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