Bus640 Week 2 Assignment

Consumer Demand Analysis and Estimation Applied Problems

BUS 640: Managerial Economics

Instructor Zhimin Huang

January 17, 2016

Problem 1

Patricia is researching venues for a restaurant business. She is evaluating three major attributes that she considers important in her choice: taste, location, and price. The value she places on each attribute, however, differs according to what type of restaurant she is going to start. If she opens a restaurant in a suburban area of Los Angeles, then taste is the most important attribute, three times as important as location, and two times as important as price. If she opens a restaurant in the Los Angeles metropolitan area, then location becomes three times as important as taste and two times as important as price. She is considering two venues, respectively, a steak restaurant and a pizza restaurant, both of which are priced the same. She has rated each attribute on a scale of 1 to 100 for each of the two different types of restaurants.

a. Which of the two options should Patricia pursue if she wants to open a restaurant in a suburban area of Los Angeles? Calculate the total expected utility from each restaurant option and compare. Graph is not required. Describe your answer, and show your calculations.

a. According to the description, if Patricia opens up in suburban area then taste is the most important (3x) which means the steak restaurant is the best option. The location would be pizza restaurant, and for price the steak restaurant is the best option. After calculating the total expected utility they are both 415 which does not give a precise answer to which restaurant is better. This means that the each area has to be looked individually according to Patricia’s preference. Although the location may not be the best, the steak restaurant is going to be the better pick if Patricia is planning to move in the suburban area.

b. Which of the two options should she pick if she plans to open a...