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Various managerial economics exercises

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Question 1.

Southwest Airlines begins a "Bags Fly Free" campaign, charging no fees for a first and second checked bag. Does this situation best represent
a) Producer-producer rivalry?
b) Consumer-consumer rivalry?
c) Producer-consumer rivalry?

Explain your choice.

Question 2
What is the maximum amount you would pay for an asset that generates an income of $ 250,000 at the end of five years of the opportunity cost of using funds is 8 percent?

Question 3

Jaynet spends $30,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm- one offer was for $110,000 per year, and the other was for $80,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 25 paintings per year at a price of $8,000 each:
a. What are her accounting profits? Show your steps leading to your answer
b. What are her economic profits? Show your work!

Question 4.

Brazil points to its shrimp-farming industry as an example of how it can export shrimp in the world market. One decade ago, Brazil exported a meager 400 tons of shrimp. Today, Brazil exports more than 58,000 tons of shrimp, with approximately one-third of that going to the United States. Brazilian shrimp farmers however, potentially face a new challenge in the upcoming years. The Southern Shrimp Alliance- a U.S. organization representing shrimps-producing countries is selling shrimp below "fair market value." The organization is calling for the United States to impose a 300 percent tariff on all shrimp entering the United States to impose a 300 percent tariff on all shrimps entering the United States' border. Brazilian producers and the other five countries named in the complaint counter that they have a natural competitive advantage such as lower labor costs, availability of cheap land, and a more favorable climate, resulting in a higher yield per acre and permitting three harvests per year. In what many see as a bold move, the American Seafood Distributors Association- an organization representing supermarkets, shrimp processors, and restaurants- has supported Brazilian and other foreign producers, arguing that it is the Southern Shrimp Alliance that it is engaging in unfair trade practices.

a) Describe the various rivalries depicted in this scenario, and
b) Then use the five forces framework to analyze the industry.

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Solution Preview

Question 1
Southwest Airlines begins a "bags Fly Free" campaign, charging no fees for a first and second checked bag. Does this situation best represent
a) Producer-producer rivalry?

Market interactions defitions
Producer-producer rivalry - when consumers are but a few, producers compete with one another for the right to serve a customer
Consumer-consumer rivalry = on ther other hand, when the products available in the market are but a few, then consumers compete with one another for the right to buy the ...

Solution Summary

Distinguish Producer-producer rivalry, Consumer-consumer rivalry, and Producer-consumer rivalry.
Determine amount of maximum price that you will buy an asset.
Compute for accounting profit and economic profit.
Analyse the shrimp industry using the five forces.

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Strategy Simulation Game (Tata Interactive System)

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Required Reading:

Porter, Michael E., The Five Competitive Forces That Shape Strategy: In HBR's 10 Must Reads on Strategy
Grant, Robert M. The Resource Based Theory of Competitive Advantage: Implications For Strategy Formulation, California Management Review, Vol. 33, Number 3, Spring 1991.
Grant, R.M. (2008). Contemporary strategy analysis (6th ed.). Malden, MA: Blackwell. Chapters 3-5. (Optional)

Multimedia:
YouTube - The Five Competitive Forces That Shape Strategy
YouTube - How to Develop Competitive Advantage
MBA Reference Guides
Competitive Advantage
Porter's Five Forces
Porter's Generic Strategies

The following is a highly educational interactive exercise which visually demonstrates the impact of various strategic decisions that you can make, under different kinds of industry characteristics. Play the simulation.

Tata Interactive Systems. Economics for Managerial Decision Making. Retrieved April 29, 2005, from http://info.umuc.edu/mba/public/TIS/economics/market/economics_market_part1.swf

NOTE: You may have to copy this link and put it directly in your browser window to reach the simulation.

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