a) What is the Bullwhip Effect and why does it occur?
b) Why is Bullwhip Effect management economically important for a firm? How can it be
a) LIDL, the supermarket, decides to raise the wages of its workers.
i) What is the likely outcome on prices and quantities of LIDL products if the supermarket
industry is a perfectly competitive industry? Explain.
ii) What is the likely outcome on prices and quantities of LIDL products if the supermarket
industry is a monopoly? Explain.
b) Assume LIDL and Tesco operate in an oligopolistic market. They can charge a high price for
their products or a low price. If TESCO charges £100, it earns low profits if the LIDL charges
£100 also, and high profits if the LIDL charges £200. On the other hand, if TESCO charges
£200, it earns very little profit if the other company charges £100, and medium profits if the other
company charges £200 also. Draw the decision box for this game, show what the Nash
Equilibrium is, and identify an outcome that would be better than the Nash Equilibrium for both
companies. How can this better outcome be achieved?
a) You run a firm that provides private clowns. Sad people can walk in from the street to
your shop and you provide clowns to try to cheer them up. Graph the likely cost structure
of your operations. Explain any prominent features of your graph.
b) Now assume clowns are skilled but homogenous. That is, each clown is about the
same as any other, but non-clowns cannot do clown work.
Each clown, on average, earns you £30 per hour. You currently employ 5 clowns and pay
them each £20 per hour.
Batman and Joker are two clowns who are willing to work for you at £25 per hour (each).
Do you hire none, one, or both of them? Explain.
c) What is meant by a tournament compensation scheme and why do companies use it? What
can be the major disadvantages of such schemes?