1. You work for a chain of restaurants that is considering expanding into a new market. You estimate that there is a 25% chance that the restaurant in the new market will earn $200,000, a 25% chance that the new place will earn $100,000 and a 50% chance it will lose $80,000.
a.Calculate the expected value and the variance.
b. Suppose that your manager chooses not to open the new restaurant but instead makes improvements at an existing location that he knows will increase profits by $30,000. If these are really mutually exclusive alternatives, what does this tell you about his attitude towards risk. (Explain carefully.)
c. Suppose the author of your textbook, read the question above and made the following comment: "good enough question, but it also provides an opportunity to illustrate the difference in decisions made by managers at a chain of restaurants and the decisions that might be made by the owner/manager of a single restaurant." In a two or three sentences, explain what he might mean by this.
2. Six-Flags Over Texas is planning a special concert on July 4, the same day that The Texas Rangers have a baseball game. Neither organization has set the time for the event, but both would prefer to set up an evening event, capped off with fireworks. They realize, however, that if the schedule at the same time, the traffic will be terrible and their customers would be angry. The table below gives payoffs for each outcome (the first entry is the payoff to the Rangers, the second payoff is for Six-Flags.
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Rangers
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Afternoon
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Evening
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Six-Flags
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Afternoon
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3,4
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5,3
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Evening
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2,7
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1,2
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a. Identify any Nash equilibrium
b. Is this a prisoner's dilemma (explain)?
c. Explain what you think will happen (both with and without coordination).
3. The world of consumer electronics is apparently on the verge of another battle between competing technologies, this time the format for the HD DVD's. (Here's a link to a short article http://www.pcworld.com/news/article/0,aid,116471,00.asp). The problem resembles a very common game that we discussed in class. Explain the analogy and also any insights the game might offer as to how the issue is likely to be settled.
4. A well-known economist recently wrote in favorable terms about the French economy stating "it's true that France's G.D.P. per person is well below that of the United States but...". Describe precisely what is being measured by GDP and what might follow the "but". (That is, why GDP might not fully describe the economic conditions in the country.)
5. If the Chinese were to allow the yuan to freely float against the U.S. dollar it is widely expected that the dollar will fall in value in relation to the yuan, making Chinese goods more expensive in America and American goods less expensive in China. However, there would be other consequences, both desirable and undesirable, as well. Discuss these, both from the American and Chinese perspective.
6. Your company is thinking about opening large manufacturing operation and also to capture a significant market share in The Kingdom of Elbonia. At a recent board meeting one of the members made the following statement. "Sure, Elbonia has long had a stable, prosperous economy with GDP growth rates of more than 4%, but they also have a huge current account deficit. This deficit must indicate that there is some real underlying weakness." Criticize this statement.