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ECO380H1 (2)


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University of Toronto St. George
Carlos Serrano

UNIVERSITY OF TORONTO Faculty of Arts and Science 1 October 2012 PROBLEM SET 1 ECO380 - Managerial Economics I Carlos J. Serrano DUEDATESOCTOBER2ATT HEBEGNNNGO FTHEL CTURE **************************************************************************** Coloainonrbemesitogy encouraged, but copying the answers from someone else is not allowed and will be considered plagiarism. Acknowledge the names of the people that collaborated with you in the top right corner of your problem set. If other student helped you, write their full name. If a private tutor helped you, write his/her full name and private tutor in parenthesis. If a peer mentor helped you, write their full name and peer mentor in parenthesis. If a former student helped you, write their name and former student in parenthesis. If somebody else helped you, write their full name and your relationship to him/her. **************************************************************************** Question 1: Industry analysis [30 points] Consider the following case study of the Dell Computer Corp., which you can download from the course page in Blackboard. Let me remind you two concepts we discussed during the first two lectures. Definition 1 Competitive advantage is a position that afirm occupies in its competitive landscape. Michael Porter posits that a competitive advantage, sustainable or not, exists when a company makes economic rents, 2 that is, their earnings exceed their costs (including cost of capital). Definition 2 Strategy is the way in which decisions are made. For business, strategy is usually aimed at creating and sustaining high positive rents i.e., competitive advantage. Please read the article and answer the following questions: (a) What is Dell’s strategy? What is the basis on which Dell builds its competitive advantage? (5 points) (b) How do Dell’ control systems help execute the firm’s strategy? (5 points) (c) Discuss Dell’s strategy in the context of the product life cycle of the personal computer industry? Hint: re-read 2nd paragraph in page 2 (5 points) (d) Around March 2003 Dell decided to sell its own branded printers in addition to the ones from other manufactures. Prior to March 2003 Dell branded product line was mainly personal computers. Assume Dell’s decision to sell their own branded printer’s was profit maximizing, provide at least two reasons supporting their strategy. Discuss specifically the timing of the introduction of printers in the context of the product life cycle in the personal computer industry? (Dell was founded in 1984)? (15 points) 1The contents of this problem set are copyrighted by the University of Toronto. The sale, license, and bundling of the contents of the test will be prosecuted by the legal services of the University of Toronto. Please report unauthorized use to [email protected] 2Wikipedia. 3Similar to Preston McAfee. 1 Question 2: Product differentiation: Ipod and Zune music players [40 points] Two differentiated goods, Apple Ipod and Microsoft Zune music player, are located at the two extremes of a linear product space (a segment of length 1). Assume that the ipod is located at0 and the zune is at 1. The price of an ipod is  , the price of a zune is  . Like in the benchmark model explained during   the lecture, consumers are uniformly distributed along the unit line, the marginal cost of producing each good is zero, and there are no fixed costs of operation. The market is covered, i.e., all consumers make a purchase. The utility of a consumer located at  that consumes one Apple ipod is 2 −  −   The utility of a consumer located at  that consumes one Zune music play
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