Class Notes (807,639)
Canada (492,765)
Economics (1,562)
ECO380H1 (2)


4 Pages
Unlock Document

University of Toronto St. George
Carlos Serrano

UNIVERSITY OF TORONTO Faculty of Arts and Science 1 October 2012 PROBLEM SET 1 ANSWER-KEY ECO380 - Managerial Economics I Carlos J. Serrano 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, that is, their earnings exceed their costs (including cost of capital).2 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. 3 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) Delivering the best possible customer experience. Dell could best understand consumer needs and ef- ficiently provide the most effective computing solutions to meet those needs by selling computer systems directly to customers. (b) How do Dell’ control systems help execute the firm’s strategy? (5 points) The use of facts and data in daily decision making and evaluation of unit managers. Dell reduced the number of steps along the line from ordering to shipping a computer. The company outsourced the creation computer parts. In addition, the company took orders from customers and fulfilled them by buying and assembling the needed components. Customers obtained what they desired and time fastest possible time. Dell reduced its need for plant, equipment and R&D. In summary, the primary financial objective that guided managerial evaluation at Dell was return on invested capital (ROIC). (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) The industry is in the maturity stage. Consumers are aware of the computer technology and there is no need for education. Thus, alternative distribution methods (like the ones Dell used) to reach the customers are possible (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) Since the computer industry is in maturity stage, growth is not the unique driving force of the industry. Dell chose to diversify their product line to pursue new growth strategies. In addition, printers and other electronic gadgets are complementary goods of computers. Dell waited because the computer industry had averyhiowthueel.r 1 The 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] 3Wikipedia. Similar 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 i  , the price of a zne 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 −  −   The utility of a consumer located at  that consumes one Zune music player is:  − (1 − ) −    where     0  0 The utility of a consumer located at  that consumes nothing is zero. The utility of a consumer located at  that consumes both an ipod and a zune is the maximum of the two utilities (i.e., the purchased of the less desirable product is wasted). For your information, note that the notation concerning the location of the consumer is different than the one I used during the lecture (I want to make sure that you understand the production differentiation independently of the notation used.) The second differenc isthat   (I want to make sure that you understand that it is possible that firms may charge different equilibrium prices.) The rest of the assumptions are essentially the same ones we considered in the lecture. Consider an equilibrium where each consumer buys at most one music player and that both goods are sold. (a) Calculate the demand functions for Apple Ipods and Microsoft Zunes. What are the market shares of the Apple Ipod and the Microsoft Zune music players? The market share is defined as the proportion of units sold of one product among the total number of units sold of all products (15 points) We first calculate the consumer who is indifferent between the two goods  −  −  =  − (1 − ) −      − + (1 − ) =  − −  +   2 2 − + (1 +  − 2)= −    +  2 2 − +  +  − 2 =  − −  +    − 2 =  −  −  +      ∗ − +    +  = 2 The demand for Apple and Microsofie:r  = − +    +  2  −  +  −  +   −  +  −  +   =1 −     =     2 2 Market shares as a function of prices are siml ( 
More Less

Related notes for ECO380H1

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.