Problem', with one or two little twists. Part

(a) is answered by using the formula: B k _ Fixed costs rea even - p . M . 1 nee - argma cost To answer part

(b), find the opportunity loss corresponding to each combination of act and event (production or demand equal to 1000, 1200, etc.). Then convert the frequency to a probability distribution, and find the action to minimise opportunity loss. The answer to part

(c) requires the use of the failure rate probability distribution so that the expected number of saleable loaves is 1200. The expected failure rate is 0.095, so 1326 must be produced to give an expected 1200 saleable loaves (1326 x 0.905 = 1200). Then the expected cost of producing 1300 (saleable) loaves must be calculated with or without the overhaul, to see if the expected savings from overhaul exceed the 11 per day the engineer would cost. Finally, marks would be wasted by omitting part (d).

4. This is a straightforward question, looking at the Hicksian definition of profit and its relevance for decision-making purposes. Is this definition useful in practice.

5. Profitable price discrimination requires that markets be separable and have differing price elasticities of demand. Answers to parts (b) and (c) can be found either graphically or mathematically. Personally I prefer to use the mathematical approach, since graphs need to be drawn with considerable precision. In either case, find aggregate demand and therefore marginal revenue, and set equal to aggregate marginal cost to find total output (and price in the absence of price discrimination). Then set individual marginal revenue equal to marginal cost to find price in each market. The opportunity cost (to the firm) of the law is just the difference in profits with and without price discrimination.

6. An optimal inventory policy is one that minimises the sum of stock purchase and acquisition (holding, ordering and stock-out) costs. It is easy to show that under carefully defined circumstances this occurs when the marginal increase in holding costs equals the marginal fall in order costs. However each of the specified conditions deviates from these circumstances, and has implications for an optimal stock policy. For example uncertain demand introduces the possibility of profitable sales forgone, and thus increases the average stock level.

7. Outline the explanatory and extrapolatory methods, listing the benefits/disadvantages of each, and show how each could be used to estimate demand for the new food processor. Note that past experience may not be.

Answering part (b) requires that differing price and income values be used with the elasticity estimates to estimate sales revenue under different conditions. The answers (i) to (iii) generate enough information to set up simultaneous equations that can be used to answer (iv).

8. Explain what is meant by the discounting approach to investment appraisal, and contrast this to more ad hoc methods such as payback. Show that there may be circumstances where information is inadequate for discounting, and where other methods more adequately reflect the firm's objectives. Finally discuss the empirical evidence (which seems to point to the use of other methods in smaller companies, but that discounting is increasingly used by large corporations).

9. This question is a spillover from the previous course, alth 8 might help towards an answer.

10. A difficult question that asks you to judge the effects of advertising in shifting the demand curve. Whether adverts are persuasive or informative is a matter of psychological judgement: whether advertising shifts the demand curve is a matter of empirical observation. The determination of an optimal advertising budget requires a comparison of the costs and benefits of advertising that may proceed in a number of ways, from marginalism through the Dorfman-Steiner theorem to an informational approach.