Exercise

1. What information would you like to have when planning advertising spending?

2. Offer examples of attribute-based product differentiation and information-based product differentiation.

3. Two physical therapy firms want to merge. The price elasticity of demand for physical therapy is 0.40. Firm A has a volume of 10,400, fixed costs of $50,000, marginal costs of $20, and a market share of 8 percent. Firm B has a volume of 15,600, fixed costs of $60,000, marginal costs of $20, and a market share of 12 percent. The merged firm has a volume of 26,000, fixed costs of $100,000, marginal costs of $20, and a market share of 20 percent.

a. What are the total costs, prices, revenues, and profits for each firm and for the merged firm?

b. How does the merger affect markups and profits?

4. A local hospital offered to buy Firm A in Exercise 5 for $5,000, and the offer was refused. However, many observers now perceive that Firm A is in play and may be sold if the right offer comes along.

a. In successful transactions, purchasers have typically paid 10 times current profits. How much would Firm A be worth to a buyer from outside the industry?

b. Would you expect that Firm B would be willing to pay more or less than an outside buyer?c. What is the most Firm B would be willing to pay for Firm A?

5. Two clinics want to merge. The price elasticity of demand is 0.20, and each clinic has fixed costs of $60,000. One clinic has a volume of 7,200, marginal costs of $60, and a market share of 2 percent. The other clinic has a volume of 10,800, marginal costs of $60, and a market share of 4 percent. The merged firm would have a volume of 18,000, fixed costs of $80,000, marginal costs of $60, and a market share of 6 percent.

a. What are the total costs, revenues, and profits for each clinic and for the merged firm?

b. How does the merger affect markups and profits?

6. What would each of the clinics in Exercise 5 be worth to an outside buyer (using the guideline of 10 times annual profits)? What would each of the clinics be worth to each other?