1. Danny Inez wants to start a business producing custom-made bicycles but hasn't started yet.He is uncertain about how many bicycleshe can sellsomewhere between 200 and 600 per year--and has three options for the size of his operations and type of equipment he can buy.He can spend either $300,000 to set up a small operation, $700,000 for a medium size operation or $1.0 million for a larger operation with more equipment. In all three cases, the land for the operation would cost an additional $200,000.He is hoping for at least a 10% return on his investment based on other opportunities that he has.He figures he will spend $30,000/year on additional overhead, regardless of the size of his operation.

His estimated variable costs (per year) at various output levels are given below.

a. If Danny is convinced that his sales volume will be 400 bicycles, which option should he choose and why?

1.b. After investing in his facility, there is a lot of real estate development in the neighborhood and property values are rising.Developers have indicated an interest in acquiring the site of Danny's operations to build a shopping mall.How would that affect Danny's estimate of the economic profit of his bicycle business?How would his estimate of economic profit be affected by whether or not there is a market for his used equipment so he could sell it if he chose to?

2.Patty Kisher works for Samsung, which is planning to launch a new generation of cell phones. Samsung's main competitor is, of course, Apple which is planning a similar launch. Patty knows that the best way to market a new cell phone is to charge a high price on the initial launch to take advantage of technology-loving consumers who will jump to buy anything new.The price can be lowered later to attract a wider market.She is sure that Apple knows this as well and expects that Apple's will be charging a high initial price as they have in the past.

Patty is surprised when Henry Trevort, his head of marketing advises against a high launch price."If Apple doesn't follow this strategy, it will kill our revenues", says Henry.

a.Using game theory, show a scenario which supports Henry's advice that Samsung should launch with a low price.

2.b. Can you identify a dominant strategy in your game?Why is it a dominant strategy? (If you can't identify a dominant strategy in your game, explain what a dominantstrategy is and why it doesn't occur in your game.)

3.Southern Textiles produces a variety of textiles for the wholesale market. In their last strategic planning meeting Mary Hardbread suggested that the company should expand its business downstream by developing some branded products for the retail market. Mary said that this idea was prompted by some surprising data she received on a trip to Southeast Asia."I spoke with one of Ralph Lauren's suppliers in Indonesia, Mary explained."The supplier is charging Ralph Lauren $6 for shirts that sell in the US market for $60 retail.With a 1000% mark-up this has got to be a great business!"

The company's CEO asks for your opinion of Mary's proposal.

3.a. How would you characterize the market in brand name designer shirts (i.e., what economic concept(s) would you use to analyze this market)?

3.b.Does Mary's assessment of this market sound accurate?What additional information would want to have in order to see if Mary's idea is financially attractive?