II. Room Pricing in the Off-Season (Modeling)

The data in the table, from a survey of hotels with comparable rates on Hilton Head Island, show that room occupancy during the off-season (November through February) is related to the price charged for a basic room.

The goal is to use these data to help answer the following questions.

1. What price per day will maximize the daily off-season revenue for a typical hotel in this group if it has  rooms available?

2. Suppose that for this typical hotel, the daily cost is  plus  per occupied room. What price will maximize the profit for this hotel in the off-season?

The price per day that will maximize the off-season profit for this typical hotel applies to this group of hotels. To find the room price per day that will maximize the daily revenue and the room price per day that will maximize the profit for this hotel (and thus the group of hotels) in the off-season, complete the following.

1. Multiply each occupancy rate by  to get the hypothetical room occupancy. Create the revenue data points that compare the price with the revenue, , which is equal to price times the room occupancy.

2. Find an equation that models the revenue, , as a function of the price per day, .

3. Use maximization techniques to find the price that these hotels should charge to maximize the daily revenue.

4. Find a model for the occupancy as a function of the price, and use the occupancy function to create a daily cost function.

5. Form the profit function.

6. Use maximization techniques to find the price that will maximize the profit.

Investment Timing Option: Option Analysis

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%.

Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project's rate of return is 0.0654 and that the risk-free rate is 8%. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

Use computer software packages, such as Minitab or Excel, to solve this problem.

$   million

1. Sjcam used a penetration pricing strategy to introduce its Legend action camera to compete with the latest GoPro offering. Which of the following conditions would argue for using a penetration pricing strategy when introducing this new camera?

a. A large potential market exists, even at a high price.

b. Technological problems still exist for competitors, prohibiting their entry into the market for at least six months.

c. Increasing volume substantially reduces production costs.

d. Consumers perceive a price-quality relationship.

e. The product is relatively price insensitive (price inelastic).

2. Apple offers its iPhone XS for $999, under the presumption that consumers see the smartphone as priced at “something over $900” rather than “about $1,000.” This is an application of what pricing strategy?

a. prestige pricing

b. below-market pricing

c. odd-even pricing

d. target pricing

e. customary pricing

3. Which of the following would be an example of a variable cost for a hotel like the Marriott Marquis Hotel, which caters to an upscale clientele?

a. the average daily rate paid by women in targeted demographics staying at the hotel

b. cleaning supplies and housekeeping wages

c. the salary of the hotel manager

d. the rent for a parking garage used by employees

e. the price charged for renting a ballroom in the hotel

4. Uber and Lyft customers often complain about the practice of “surge” or “prime-time” pricing used by these companies during periods of peak demand. This is an example of a __________ pricing policy.

a. promotional

b. competitive

c. discount

d. dynamic

e. customer

Compare the Greek arts to the Roman arts. When the Romans came to power, their art was heavily influenced by the Greeks, but with some changes. In what ways did the Romans change the Classics of the Greek artistic legacy? Include examples of how the Romans transformed Greek philosophy, architecture, theater, and sculpture and reinterpreted it into their own unique Roman style.   

Q1)According to economists, the biggest “cost” of unemployment is

            a.         increased “welfare” expenditures.                           c.         the value of foregone output.

            b.         lost tax revenue.                                                       d.         none of these.

Q2)

Which of the following statements is LEAST correct?

            a.         Inflation is a period of time during which the value of money is rising.

            b.         Affluent people – with assets other than money – can and often do benefit from inflation.

            c.         Both World War II (during the early 1940s) and the Vietnam War (during the late 1960s)

generated what’s known as demand-pull inflation.

            d.         “The Energy Crisis” of the 1970s generated what’s known as cost-push inflation.

Q3) The type of unemployment that economists find most concerning is

            a.         frictional unemployment.                                           c.         structural unemployment.

            b.         cyclical unemployment.                                              d.         voluntary unemployment.

In 2007, the British bank ________ experienced the first bank run to occur in the United

Kingdom in over 100 years.

A) the First National Bank of Keystone

B) Indymac

C) Northern Rock

D) Barclays Bank, PLC

The largest bank failure rate occurred during the:

A) early 1930s.

B) late 1970s.

C) early 1890s.

D) mid-2000s.

Immediately after being sworn in as president in 1933, ________ declared ________.

A) Herbert Hoover; the end of the Great Depression.

B) Franklin D. Roosevelt; a bank holiday.

C) Alexander Hamilton; the establishment of the First Bank of the United States.

D) Harry S. Truman; higher taxes on bank profits.

The name of the government agency that insures commercial bank deposits is the:

A) Federal Savings and Loan Insurance Corporation.

B) Federal Deposit Insurance Corporation.

C) Federal Reserve System.

D) Office of the Comptroller.

Computation of deferred taxes under IFRS is slightly different from GAAP. For example, in the United Kingdom (which follows IFRS), companies use the crystallisation approach. An equivalent concept in the United states is “realization”. The concept underlying this “crystallisation” approach is that companies recognize deferred income taxes only if the taxes are expected to crystallize. Therefore, if a liability is deferred indefinitely, then the present value of that liability is zero. No deferred tax liability is recognized if the accumulated deferred tax amount is expected to increase each year, thereby delaying indefinitely the ultimate liquidation of this obligation. Compare and contrast the theory behind the “crystallisation” approach with the interperiod allocation approach used in the U.S. How might this same concept be applied to the recognition of liability for accounts payable? That is, if accounts payable are expected to increase each year, should the crystallization concept apply to this liability? Why or why not? How reasonable does this approach seem? Explain.

Illustrate the following with supply or demand curves:

a. In 2017, the Motiva refinery at Port Arthur, Texas, was forced to shut down due to Hurricane Harvey. It was the largest refinery in the United States. Along with Motiva, other refineries in the area were also shut down, accounting for almost 20 percent of the country's capacity. Which way would you expect the price of oil to go?

b. A sudden frost during the spring season leads to a large number of cherry trees to lose their flowers. Which way will the price of cherries go?

c. In 2018, the United Kingdom witnessed one of the hottest summers according to the Met Office. The average temperature was 15.8⁰ C (60.4⁰ F), similar to what is was in 1976, 2003, and 2006. With Britain in a prolonged period of heat, mobile air conditioners gained popularity. Which way will the price conditioners go?

Computation of deferred taxes under IFRS is slightly different from GAAP. For example, in the United Kingdom (which follows IFRS), companies use the crystallisation approach. An equivalent concept in the United states is “realization”.

The concept underlying this “crystallisation” approach is that companies recognize deferred income taxes only if the taxes are expected to crystallize. Therefore, if a liability is deferred indefinitely, then the present value of that liability is zero. No deferred tax liability is recognized if the accumulated deferred tax amount is expected to increase each year, thereby delaying indefinitely the ultimate liquidation of this obligation.

Compare and contrast the theory behind the “crystallisation” approach with the interperiod allocation approach used in the U.S.

How might this same concept be applied to the recognition of liability for accounts payable? That is, if accounts payable are expected to increase each year, should the crystallization concept apply to this liability? Why or why not?

How reasonable does this approach seem? Explain.