1.An engineering firm has applied for patents on two new products and

has just learned that only one application has been successful.

Compare and contrast the optimal pricing and promotional strategies

for each of these new products.

2. Critically examine the view that advertising can be . seen as the

334 Managerial Economics7.10

provision of information valuable to the consumer, for which the

consumer will be prepared to pay extra.

3. (a) Briefly analyse the effect of an increase in interest rates on the

investment portfolio of a profit maximising holding company.

(b) The University is contemplating building a new squash court,

adjacent to its new hall of residence. To secure local support for

its planning application, the University has offered to open the

court to local players at student rates for the first five years.

After five years, the University can charge what it likes for the

courts. Consequently, the University estimates that net revenue

from the court will be 1000 for each of the first five years, rising

by 10% (compounded) in each of the sixth to tenth years. In the

eleventh and twelfth years rising maintenance costs will completely offset rising fees so that net revenue stays at tenth year

level. At the end of the twelfth year, the site is due for

redevelopment.

The cost of building the squash court is estimated to be 6000.

To finance the court, the University must draw from its reserves, currently earning 12% in Local Authority Bonds. Selling

sufficient bonds would involve legal and administrative costs of

320. Advise the University on the viability of the project. What

other factors should the University take into account?

4. A firm has an annual demand of S units for a good whose purchase

cost is c per unit. Each order costs a to place, and the cost of

holding stock is b% of the average value of stock per annum.

Determine the optimal order quantity.

A local firm uses 2000 units of a particular component each year. The

component has a purchase price of 4/unit, while the cost of holding

stock is estimated at 20% of the average stock value. If the cost of

placing each order is 12.50, find the optimal number of orders placed

each year. Suppose the component supplier offers a discount of 2%

on the purchase price if orders are placed in units of 1000. Is the

discount worth accepting?

Suppose that instead of a single figure you had been given a

probability distribution for the number of units used each year.

Indicate the effect on stock policy.

6. Analyse the effects of an increase in interest rates on the investment

activity of a profit maximising firm. Does it matter if inflation

increases in proportion to the increase in interest rates?

7. (a) Show that an increase in the unit value of stock will lead to a less

than proportionate fall in the optimum amount of stock held.

What assumptions underlie your answer?

(b) A firm faces a uniform annual demand of 100 000 units. The

purchase cost of stock is 10 per unit, whilst the cost of ordering

stock is 20, and the cost of holding stock is 14% of the average

stock value. Find the Economic Order Quantity and the Minimum Acquisition Cost.

How are your answers affected by:

(i) the fact it takes two weeks between placing an order and

stock arriving;

(ii) the offer of a 1% discount off the purchase cost if stock is

ordered in lorry loads of 17 000 units.

8. 'The market allocates resources to the firms that best meet the needs

of consumers.' Discuss.

9. 'The force of competition, the desires of managers and the needs of

shareholders combine to ensure that firms maximise profit.' Discuss.