After watching a movie about a young woman who quit a successful corporate career to start her own baby food company, Julia Day decided that she wanted to do the same. In the movie, the baby food company was very successful. Julia knew, however, that it is much easier to make a movie about a successful woman starting her own company than to actually do it. The product had to be of the highest quality, and Julia had to get the best people involved to launch the new company. Julia resigned from her job and launched her new company—Starting Right. Julia decided to target the upper end of the baby food market by producing baby food that contained no preservatives but had a great taste. Although the price would be slightly higher than for existing baby food, Julia believed that parents would be willing to pay more for a high-quality baby food. Instead of putting baby food in jars, which would require preservatives to stabilize the food, Julia decided to try a new approach. The baby food would be frozen. This would allow for natural ingredients, no preservatives, and outstanding nutrition. Getting good people to work for the new company was also important. Julia decided to find people with experience in finance, marketing, and production to get involved with Starting Right. With her enthusiasm and charisma, Julia was able to find such a group. Their first step was to develop prototypes of the new frozen baby food and to perform a small pilot test of the new product. The pilot test received rave reviews. The final key to getting the young company off to a good start was to raise funds. Three options were considered: corporate bonds, preferred stock, and common stock. Julia decided that each investment should be in blocks of $30,000. Furthermore, each investor should have an annual income of at least $40,000 and a net worth of $100,000 to be eligible to invest in Starting Right. Corporate bonds would return 13% per year for the next five years. Julia furthermore guaranteed that investors in the corporate bonds would get at least $20,000 back at the end of five years. Investors in preferred stock should see their initial investment increase by a factor of 4 with a good market or see the investment worth only half of the initial investment with an unfavorable market. The common stock had the greatest potential. The initial investment was expected to increase by a factor of 8 with a good market, but investors would lose everything if the market was unfavorable. During the next five years, it was expected that inflation would increase by a factor of 4.5% each year. #2) Ray Cahn, who is currently a commodities broker, is also considering an investment, although he believes that there is only an 11% chance of success.  What do you recommend? #3) Lila Battle has decided to invest in Starting Right.  While she believes that Julia has a good chance of being successful, Lila is a risk avoider and very conservative. What is your advice to Lila? #6) Julia D.

1. After watching a movie about a young woman who quit a
successful corporate career to start her own baby food company,
Julia Day decided that she wanted to do the same. In the movie,
the baby food company was very successful. Julia knew,
however, that it is much easier to make a movie about
a successful woman starting her own company than to actually
do it. The product had to be of the highest quality, and Julia had
to get the best people involved to launch the new company.
Julia resigned from her job and launched her new company—
Starting Right. Julia decided to target the upper end of the baby
food market by producing baby food that contained no
preservatives but had a great taste. Although the price would be
slightly higher than for existing baby food, Julia believed that
parents would be
willing to pay more for a high-quality baby food. Instead of
putting baby food in jars, which would require preservatives to
stabilize the food, Julia decided to try a new approach. The
baby food would be frozen. This would allow for natural
ingredients, no preservatives, and outstanding nutrition.
Getting good people to work for the new company was also
important. Julia decided to find people with experience in
finance, marketing, and production to get involved with Starting
Right. With her enthusiasm and charisma, Julia was able to find
such a group. Their first step was to develop prototypes of the
new frozen baby food and to perform a small pilot test of the
new product. The pilot test received rave reviews. The final
key to getting the young company off to a good start was to
raise funds. Three options were considered: corporate bonds,
preferred stock, and common stock. Julia decided that each
investment should be in blocks of $30,000. Furthermore, each
investor should have an annual income of at least
$40,000 and a net worth of $100,000 to be eligible to invest in
Starting Right. Corporate bonds would return 13% per year for

2. the next five years. Julia furthermore guaranteed that investors
in the corporate bonds would get at least $20,000 back at the
end of five years. Investors in preferred stock should see their
initial investment increase by a factor of 4 with a good market
or see the investment worth only half of the initial investment
with an unfavorable market. The common stock had the greatest
potential. The initial investment was expected to increase by a
factor of 8 with a good market, but investors would lose
everything if the market was unfavorable. During the next five
years, it was expected that inflation would increase by a factor
of 4.5% each year.
#2) Ray Cahn, who is currently a commodities broker, is also
considering an investment, although he believes that there is
only an 11% chance of success. What do you recommend?
#3) Lila Battle has decided to invest in Starting Right. While
she believes that Julia has a good chance of being successful,
Lila is a risk avoider and very conservative. What is your
advice to Lila?
#6) Julia Day has been told that developing the legal documents
for each fundraising alternative is expensive. Julia would like
to offer alternatives for both risk-averse and risk-seeking
investors. Can Julia delete onwe of the financial alternatives
and still offer investment choices for risk seekers and risk
avoiders?
Microsoft Surface Tablet Venture
Doug Peterson
ECO/561
August 19th 2013

3. Xiaodong Wu
1
2
Microsoft Surface Tablet Venture
Microsoft has been a household name for its Windows software
application package since 1975. Since becoming public in
1986, the company has become the largest software maker in the
world, and a fortune 10 company. Competition has become
fierce since initially owning the market. There has been a
steady decline in PC computing, and consumers have become
increasingly demanding for the latest innovation. Microsoft is
now battling for market share in multiple industries from
competitors such as Apple, Sony, Google, and Samsung. This is
a new frontier, and Microsoft is shaking up there go to market.
Examples include creating a search engine called Bing,
acquiring Skype, and creating the Windows Phone. One of the
largest steps in turning the corner to being seen as the
innovative juggernaut that Microsoft once was, began with
creating a tablet pc. Microsoft responded with launching the
Microsoft Surface Tablet.
Identification of Market Structure
The tablet industry has been the rage in computing since
Apple first introduced the iPad in 2009. The market structure
would be considered an oligopoly because the top four
competitors constitute more than 40% of the total market share.
According to Yahoo! Finance, the market share of the top four
players of Apple, Samsung, AsusTek and Lenovo, are 60%,
18%, 3% and 2% respectively. Microsoft is not currently in the

4. top four but is making headwinds recently. The tablet industry
has done nothing but speed up. Yahoo also shows us that tablet
sales for the most recent quarter (April – June) increased 60%
year over year (worldwide-market-share, August). Microsoft is
a leader in the software industry, however the hardware industry
they have clearly been a laggard.
Elasticity of the Product and How Pricing Relates to Elasticity
Price elasticity of demand shows the relation of demand in
response to a change in price. This means if the price of a
tablet computer is changed whether up or down, will consumers
buy more, less, or the same (McConnell, Bruce & Flynn, 2009).
Numbers show that the Microsoft Surface is a highly elastic
product. A drop in the total price will be reflected by an
increase in total sales. The original price of the Microsoft
Surface Tablet (64GB – base model) was $700. The total
number sold was 1.4 million units. The original sales were
dismal, and far below analysts’ expectations. The larger price
tag was primarily a way to price up to its competitors; however
the model did not justify the premium price tag (Information
Week, July). Microsoft has recently made a series of cuts in
total cost and now the model is sold at $518 with most retailers.
Total sales increased to 2.3 million units.
When evaluating the elasticity of demand formula, a value
less than one means the good is inelastic. This would infer that
there is very little, if zero change in quantity demanded with a
change in price. A value greater than one means the good is
elastic and responds heavily to price. This formula can be seen
as; Price Elasticity of Demand = % change in quantity / %
change in price.
Percent change in quantity (Q1 = 1.4, Q2 = 2.3) = 64.3%
Percent change in price (P1 = 700, P2 = $518) = -26%
Ed = 64.3/26 = 2.47
A value of 2.47 further proves that the Microsoft Surface
tablet is an elastic good, and Microsoft must evaluate their cost
structure in order to evaluate and estimate total sales of its
product.

5. Using Marginal Cost and Marginal Revenue to Increase
Revenue and Determine Profit Maximizing Quantity
Marginal cost and marginal revenue is a key metric to evaluate
and consider when a company is evaluating whether to pursue or
cease operation. Marginal cost is seen as the “additional” cost
created by one more units, and marginal revenue is the
“additional” revenue generated by one more unit. In other
words, what additional costs will Microsoft incur by producing
the Surface tablet, and will it be worth the resources, time, and
effort to continue. Examples of marginal costs incurred by
creating the Surface tablet have been additional retail space
needed to promote the Surface (as well as the Windows Phone).
The strategy for Microsoft has been quantity rather than quality
in order to enter the market quickly, and reach its target
audience efficiently. Other marginal costs have been the
additional workers hired to showcase the product, additional
labor hours creating and licensing the product, and also the
costs of the product itself.
Marginal revenue has been the increase in sales of the
Surface tablet. Since the Surface is a new product for
Microsoft, then all of the sales are additional and new sales at
this point. Marginal revenue is measured not only in the
additional revenue gained from the Surface tablet, but also the
revenue generated within the product on application and
software sales. The tablet will consistently generate new
revenue once it is in the user’s hands. The idea is to cease
production once marginal cost exceeds that of marginal revenue.
Currently marginal costs far exceed the additional revenue
generated with the Surface tablet, however Microsoft is
continuing to evaluate alternative to promoting its products to
shift this trend.
Pricing/Non-Pricing Strategies and Barriers to Entry
Since Microsoft’s entry into the tablet industry, and its
oligopoly market structure, they have worked to differentiate

6. themselves with product quality. Customers have more choices
than they have ever had before, therefore it will take a strong
differentiation in product to move from a potential buyer to
buyer. Key industries Microsoft has been targeting are
students, doctors, and business professionals. Examples of
differentiation include highlighting that the Microsoft Surface
is a tablet that could take the place of an entire lap top. They
can run any Windows 8 or 7 software including Microsoft Word
and Excel. Surface also provides a convenient pen coupled
with applications that translate handwriting into a text
conversion viewable and storable on the Surface. This is can be
seen especially useful to these three markets, considering the
amount of notes they may take.
Barriers to entry have been numerous. One such barrier is
lack of brand name in the tablet field. Rather than being on the
forefront as Apple was (they literally created the industry),
Microsoft was far behind, and are currently paying dearly for
this. Another large barrier is the lack of retail development for
tablet exposure to target consumers. Most consumers in target
areas have seen the Apple store, and have had the opportunity to
experiment on a potential purchase. Microsoft was again late to
this frontier, and has just recently begun popping up brick and
mortar retails stores across the US. The last major barrier for
Microsoft in the tablet industry has been the amount of
competition. Microsoft has been able to dodge competition for
many years, in multiple fields, as they have been the industry
leader. Now they are in the position of the underdog, creating a
very new experience and feeling for the blue chip company.
Conclusion
Microsoft’s entry into the tablet field has been anything
but smooth. Other players such as Apple have been able to stay
in the forefront, making Microsoft most continue to reevaluate
their product, price, and differentiators, in order to gain market
share.
References

7. Information Week. (July 13th, 2013). Microsoft Surface.
Retrieved from
http://www.informationweek.com/hardware/handheld/microsofts
-cheaper-surface-tablet-8-key/240158353
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009).
Economics: Principles, problems, and policies (18th ed.).
Boston, MA: McGraw-Hill Irwin
http://finance.yahoo.com/news/worldwide-market-share-tablet-
computers-213603283.html. (August 5th, 2013). Worldwide
market share for tablet computers. Retrieved from
http://finance.yahoo.com/news/worldwide-market-share-tablet-
computers-213603283.html