BADM 560 FIRM AND INDUSTRY ANALYSIS

PROBLEM SET ONE QUESTIONS

1. Each student in the team/group should identify one company with which they would like to
interview for employment. Write a strategy statement for each company. You may collaborate on
the statements.
2. If the demand for sugar decreases when the price of tea increases, are tea and sugar complements,
substitutes or unrelated to each other? Explain.
3. Researchers have just discovered that antibacterial agents in toothpaste are harmful to human
health. At the same time, the price of toothpaste-making equipment has fallen. What definitely
happens in the toothpaste market after these events occur (i.e., what are the new equilibrium price
and quantity of toothpaste? Higher, lower, or the same)? Show with graphs.
4. When you left your job at McDonalds, you expected that your days of dealing with potatoes were
over. Yet, given your extensive potato background, and armed with an MBA from the prestigious
McDonough School of Business at Georgetown, you are hired as a market analyst in, of all things,
the potato market. For the last several years, production, demand and prices have been stable. Last
year the quantity of potatoes transacted in the United States was 450 million cwt (cwt is agriculturespeak for 100 pounds), and prices were $8MM per million cwt. Econometric estimates have
determined that, at this level, the own-price point elasticity of demand is 0.8.
a. Assume that demand is linear. Derive the slope and intercept of QD(P), a linear demand
function.
b. A marketing campaign touting the health benefits of rice has produced a recent forecast that
the demand for potatoes will fall over the next year by 20 percent. If this report is accurate,
what would the new equilibrium price for potatoes be? Use the linear demand function derived
above, and assume that the supply curve is given by QS(P) = 56P.
5. Now consider the market for branded designer dog tags. Economic consultants have estimated a
linear approximation to the market demand curve:
QD(P) = 120 30*P,
where the intercept and slope terms are in millions. The industry association, which coordinates the
marketing efforts of the firms in the market, is considering a 10% increase in its marketing efforts
from $40MM to $44MM. For the campaign to be successful it must increase revenues by at least
$8MM given the costs of production. Assume that the current price of $1 per unit would be unlikely
to change in reaction to the marketing efforts.
a. To make the marketing campaign worthwhile, what is the smallest magnitude that the
advertising elasticity of demand could be?
b. How might one obtain information on what the advertising elasticity of demand actually is?
6. The price of oil has fallen into the range of $45-$50 dollars per barrel, down from over $90 per
barrel just a few years ago. Explain the likely impact of this price decrease on the market for
gasoline and the market for small cars.

7. You are the manager of a midsized company that assembles personal computers. You purchase
most components such as random access memory (RAM) in a competitive market. Based on
your marketing research, consumers earning over $80,000 purchase 1.5 times more RAM than
consumers with lower income. One morning, you pick up a copy of the Wall Street Journal and read
an article indicating that input components for RAM are expected to rise in price, forcing
manufacturers to produce RAM at a higher unit cost. Based on this information, what can you
expect to happen to the price you pay from RAM? Would your answer change if, in addition to this
change in RAM input prices, the article indicates that consumer incomes are expected to fall over
the next two years as the economy dips into recession? Explain.