ECON

Question #1
You are the purchasing manager of a company and are responsible for ensuring that necessary inputs are available to keep your factory operating. For each of the three types of purchases identified below, recommend whether your company should use spot purchases, contract purchase, or internal production. Support your answer using economic concepts from this course. To what extent is your decision and any contract terms affected by the variability in the demand for your product and thus your need for the product purchased?
a. A subsystem that is similar to but not exactly the same as subsystems used by competitors; several large companies offer to make modifications to the subsystem to fit your requirements.
b. A part that is unique to your company and requires significant capital investment in order to produce. Your company is the only one using this part but several vendors have offered to manufacture it for you.
c. Light fixtures and light bulbs used to illuminate the factory floor.

Question #2
Discuss each of the pricing strategies below. What conditions are necessary to make each strategy successful in terms of increasing profits? Explain your answer.
a. A local restaurant/bar offers discounted drinks during “happy hour,” from 5 to 6 PM on weeknights.
b. The price Company X charges for its ink cartridges is nearly as much as it charges for a printer.
c. Packs of 5 T-shirts cost $10 while an individual T-shirt costs $4.
d. Coupons for specials at a local grocery store can be downloaded from an online site.
e. Computer and appliance manufacturers promote service contracts.
f. Microsoft Office includes several programs in one package.

Question #3
Which of the following two examples illustrates adverse selection and which illustrates an incentive problem? Explain your answer. In each case, give one method that the restaurant might use to reduce the problem.
a. A restaurant offers an all-you-can-eat buffet sold at a fixed price. The customers for the buffet are not the restaurant’s usual clientele, but new customers who have big appetites. The restaurant discovers it is losing money on the buffet.
b. The restaurant owner hired a new manager who promised to work at least 8 hours per day. If the owner is not on site, the manager leaves work early, reducing restaurant profits.
Question #4
Explain how natural monopolies cause market failure? How is the deadweight loss associated with this form of market failure measured? What is a typical form of government intervention to correct it? How effective is this type of intervention? Use the material from this course to support your answer.

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