1. Pear You are a consultant for Pear, an innovative firm founded by Steve Werks that produces the only smart bracelets in the world. The econometricians of the firm have estimated that the current price elasticity of demand for the bracelets is &p=-3. The average total cost is ATC(Q) = 2000/Q + 20 for a six-month production contract of Q units. The fixed cost covers the rent of the plant. According to the contract, if Pear decides to stop production any time after two months of operation, it can recover 1/10 of its fixed costs. a. In a meeting, Steve says he wants to increase the price from $31 to $33. He stares at you since you graduated from Wharton. You timidly say that this is the [RIGHT| WRONG - circle one] decision since, given the information, the next best guess of optimal price is Steve decides to trust you and change the price. Thanks to this variation in price, the econometricians of the firm can now estimate the six-month demand as follows: P=60 - Q/2. b. Pear [SHOULD | SHOULD NOT circle one) shut down its production in the short run (the next two months) because Steve organizes another meeting to discuss the long run vision of the firm. c. You quickly scribble on your PearPad to find that the optimal strategy is to [SHUT DOWN | NOT SHUT DOWN circle one] because 1. Pear You are a consultant for Pear, an innovative firm founded by Steve Werks that produces the only smart bracelets in the world. The econometricians of the firm have estimated that the current price elasticity of demand for the bracelets is &p=-3. The average total cost is ATC(Q) = 2000/Q + 20 for a six-month production contract of Q units. The fixed cost covers the rent of the plant. According to the contract, if Pear decides to stop production any time after two months of operation, it can recover 1/10 of its fixed costs. a. In a meeting, Steve says he wants to increase the price from $31 to $33. He stares at you since you graduated from Wharton. You timidly say that this is the [RIGHT| WRONG - circle one] decision since, given the information, the next best guess of optimal price is Steve decides to trust you and change the price. Thanks to this variation in price, the econometricians of the firm can now estimate the six-month demand as follows: P=60 - Q/2. b. Pear [SHOULD | SHOULD NOT circle one) shut down its production in the short run (the next two months) because Steve organizes another meeting to discuss the long run vision of the firm. c. You quickly scribble on your PearPad to find that the optimal strategy is to [SHUT DOWN | NOT SHUT DOWN circle one] because
