John Snow-Rain, an entrepreneur from London, has managed to raise 1 million in Berlin for his sustainable paper product company in 2022. Together with Mary, his associate and also a fan of sustainability, they have set up their office in Germany with a team of 10 motivated members. They have created a mini marketing and sales department, a production & logistics department, one of quality assurance, another of finance and a final one in HR. There are several things that they need to figure out, which is why they have hired you, an expert consultant in managerial economics, to help them out. John and Mary now present part of their challenges and their corresponding questions, expecting a your analysis with concrete recommendations. First Issue: the bamboo & paper-processing machine. Over the next five years, we expect the machine to deliver a total revenue in the following form, given the sales of the paper and bamboo products derived from the machine 2022 20.000 2023 55.000 2024 75.000 2025 80.000 2026 100.000 The machine costs us 220.000 if we pay it upfront, otherwise we have to advance 100.000 from our capital and 120.000 from a loan. For the loan, we would pay monthly outlays of 10.000 with a 10% compound interest to a bank, compounded monthly. We have heard something about net present values, can you tell us if paying up front makes sense or should we take the loan? Would the investment make sense in both scenarios? Please give us your thoughts on the results! Help Note: calculate the NPV and contrast that scenario with the compound interest scenario: note that the principal is 120.000, n=12, t=5, 10%, consider that New Sum = Principal (1+1) nt Second issue: Pricing and cool new insights. So, dear consultant, we have heard about behavioral economics, heuristics and biases. We have no idea how to apply the lessons of BE on our pricing strategy. We have thought of pricing everything very highly without caring much about similar products, because we are awesome and pretty luxurious. Can you help us out bringing in key aspects from behavioral economics and even game theory for our pricing strategy? Third issue: moral hazard and uncertainty Dear consultant. We have a cool strategy, but we don't want to tell people about this, you know, just you. We can reduce the amount of sustainable materials in the products (forks, plates, etc) and replace them with plastic of the same color, but only after we have gathered trust. Someone mentioned something about moral hazard and principal-agent theory dilemmas, but we don't understand that (we actually don't care, but you know, the investor is always monitoring us). Should we do this? What do you recommend? We firmly believe that there is no risk to getting caught, because simply in the last 10 months, no one has been caught changing the product features. What is your take on this one, dear consultant? Fourth issue: elasticities Dear consultant, why should we care about price elasticities in our business? We are definitely so cool that I don't think we have time for that. What is your take on this one