BACKGROUND: You have been promoted to the position of Vice President in a business consulting firm. This firm provides business consulting to a variety of businesses. The president of firm, Max Profit, has written you the following memo describing some challenges facing our clients and has asked for your recommendations and analysis.
1. One of our clients is a university in the Midwest specializing in adult education. Enrolment has significantly increased over the past five years because of the need for advanced education in the workplace. However, costs for heating buildings, administration and wages have increased (higher salaries have been necessary to attract and retain talented professors.) Describe the supply and demand changes (and prices) which are taking place for this market (graphs would help in showing these changes.) What future changes do you think will occur in the supply and demand characteristics for this university and what recommendations would you have for this client?
2. Collectables Inc., a major client for our consulting services, is considering a change in production. Right now, the firm produces ornamental bird baths for residential lawn and garden areas. However, a plan has been developed to change production in this plant to also make statues of famous racehorses for display in gardens. Since the plant is operating at capacity, this would mean fewer ornamental bird baths could be produced. However, the operations manager of the plant is opposed to any changes and says that revenues exceed accounting costs every year and we should leave things alone. How can the economic concepts of opportunity cost and comparative advantage be used to evaluate this situation? What are the opportunity costs of switching some production from bird baths to race horses? What additional information should be gathered to decide this issue?
3. An inquiry arrived from a client, Noise Unlimited Inc. This firm sells luxury stereo systems through its retail outlets. At a price of $800 per system, NU, Inc. sold about 600 systems per month. The new general manager for this product, Eli Sticity, decided that they needed more revenues and increased price to $1200. However NU, Inc. is now only selling 100 systems per month at that price. What is the price elasticity for this product (need to calculate this and show your work?) Define price elasticity and explain how it should be used for pricing this product. What do you recommend for the pricing of this product (i.e. Should it stay at $1200, be increased, decreased, how do we find the optimal price?)
4. Many of our e-commerce clients are worried that sales taxes may be imposed on sales of their products over the Internet. What would be the effect on our clients' sales if a national sales tax were implemented for all purchases made over the Internet? How should companies decide whether the sales tax should be passed along to consumers in the form of higher prices or absorbed by the business? What would you recommend our e-commerce clients do if it appeared highly likely that sales taxes were to be imposed on their products?