Question

(40 pts) Consider the von Thunen Model discussed in class. Alternative uses of one acre of land

around a city is summarized as follows:

Revenue, output sold in the city

Nonland cost of production

Cost of transportation

1. Milk

$1000

$200

$80/mile

2. Wheat

$800

$200

$30/mile

3. Potato

$600

$200

$10/mile

(a) (10 pts) What is the bid-rent curves for milk producers, wheat producers, and potato pro-

ducers, respectively?

(b) (10 pts) What is the land-use pattern (what is produced on the land as a function of its

distance to the city)?

(c) (10 pts) Now suppose people just learned that eating wheat is healthy. As a result, the price

of wheat (produced on one acre of land) in the city increases from $800 to $900. How does

the land-use pattern change?

(d) (10 pts) Suppose the value of wheat produced on 1 acre of land is still $800. Suppose a new

model of truck just became available which reduces the transportation cost for potato from

$10 to $5 per mile. How does the land-use pattern change

Answer 1

Starting with one central location in Memphis, Tennessee (now called its superhub), the $39 billion firm has added a European hub in Paris, an Asian hub in Guangzhou, China, a Latin American hub in Miami, and a Canadian hub in Toronto. FedEx’s fleet of 687 planes flies into 375 airports worldwide, then delivers to the door with more than 80,000 vans and trucks. Here the establishment cost for the company matters. if the company has an ample amt of surplus funds to invest we can do it.

Location Provides Competitive advantage for FedEx Global Company Profile FedEx. At the FedEx hub in Memphis, Tennessee, approximately 100 FedEx aircraft converge each night around midnight with more than 5 million documents and packages.At the preliminary sorting area, packages and documents are sorted and sent to a secondary sorting area. The Memphis facility covers 1.5 million square feet; it is big enough to hold 33 football fields. Packages are sorted and exchanged until 4 a.m. Oliver Berg/EPA/Newscom AP Wide World Photos. Here the company has a competitive advanced benefit.

What and Why for Memphis as a location? - The location advantage

(1) It is located in the middle of the U.S. (2) It has very few

hours of bad weather closures, perhaps contributing to the firms excellent flight-safety record. Each night, except Sunday, FedEx brings to Memphis packages from throughout the world that are going to cities for which FedEx does not have direct flights. The central hub permits service to a far greater number of points with fewer aircraft than the traditional City-A-to-City-B system. It also allows FedEx to match aircraft flights with package loads each night and to reroute flights when load volume requires it, a major cost savings. Moreover, FedEx also believes that the central hub system helps reduce mishandling and delay in transit because there is total control over the packages from pickup point through delivery.

China, it set the stage for “round-the-world” flights linking its Paris and Memphis package hubs to Asia. When Mercedes-Benz announced its plans to build its first major overseas plant in Vance, Alabama, it completed a year of competition among 170 sites in 30 states and two countries. When Hard Rock Cafe opened in Moscow, it ended 3years of advance preparation of a Russian food-supply chain. The strategic impact, cost, andinternational aspect of these decisions indicate how significant location decisions are Firms throughout the world are using the concepts and techniques of this chapter to address the location decision because location greatly affects both fixed and variable costs. Location has a major impact on the overall risk and profit of the company.

Once a firm decides which country is best for its location, it focuses on a region of the chosen country and a community. The final step in the location decision process is choosing a specific site within a community. The company must pick the one location that is best suited for shipping and receiving, zoning, utilities, size, and cost. Again, Figure 8.1 summarizes this series of decisions and the factors that affect them. Besides globalization, a number of other factors affect the location decision. Among these are labor productivity, foreign exchange, culture, changing attitudes toward the industry, and proximity to markets, suppliers, and competitors.

Labor Productivity - When deciding on a location, management may be tempted by an area’s low wage rates.

Employees with poor training, poor education, or poor work habits may not be a good buy even at low wages. By the same token, employees who cannot or will not always reach their places of work are not much good to the organization, even at low wages. (Labor cost per unit is sometimes called the labor content of the product.)

Exchange Rates and Currency Risk

Although wage rates and productivity may make a country seem economical, unfavorable exchange rates may negate any savings. Sometimes, though, firms can take advantage of a particularly favorable exchange rate by relocating or exporting to a foreign country. However, the values of foreign currencies continually rise and fall in most countries. Such changes could well make what was a good location in 2013 a disastrous one in 2017.

Costs - We can divide location costs into two categories, tangible and intangible. Tangible costs are those costs that are readily identifiable and precisely measured.

General Explanations for any Operations Management Case Study-

Case research is used for both hypothesis testingand thgeory developement.In most case resesrach there will be some intial hypotheses,which can be directly tested using the case data in particular with larger case sample sizes.

However,In much case research the focus also on theory developement and on shaping and developing new hypotheses from the data as well as testing and initial ones.