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Questions and Answers of Economics

Chillman Motors, Inc., believes it faces the following segmented demand function:a. Indicate both verbally and graphically why such a segmented demand function is likely to exist. What type of
1. Characterize the product space for mobile phones when Iridium began.2. What trends did Nokia pursue as it designed mobile phone products in the late 1990s? 3. What might a more proactive Motorola
Suppose that two Japanese companies, Hitachi and Toshiba, are the sole producers (i.e., duopolists) of a microprocessor chip used in a number of different brands of personal computers. Assume that
Consider the following payoff matrix:a. Does Player A have a dominant strategy? Explain why or why not.b. Does Player B have a dominant strategy? Explain why or whynot.
Suppose that two mining companies, Australian Minerals Company (AMC) and South African Mines, Inc. (SAMI), control the only sources of a rare mineral used in making certain electronic components. The
Two insurance companies that manage employee benefit programs are bidding for additional business in their area of expertise at a market rate of $200 per hour. The potential customers refuse to leave
How does the analysis and the strategic equilibrium outcome differ in Exercise 4 if the other firm enjoys a cost advantage (e.g., $35 at AA&D)? Then does the order of play (i.e., who goes first in
Consider an ongoing sequence of pairwise marketing competitions between three companies with promotional campaigns of varying degrees of success. Each campaign involves comparative advertising
People who are regularly late often don€™t bother to carry watches. In response, other people tend to adjust to their tardiness by starting meetings 10 minutes after they€™re
Nike and Adidas face the following coordination problem in trying to decide whether to conduct heavy or light combative advertising against the other firm. What should each firmdo?
The outcomes in the bottom half of the game tree describing the last (the 20th) submarket of the chain store paradox in Figure are labeled N.A. (not applicable). Why? What specific equilibrium
Suppose you have announced you will “meet the competition” in response to entry threats by a potential rival who has done marketing research in your target market and is offering a lower price
Calculate the eight-hour-shift costs of operating a taxi with a medallion license that cost $125,000 borrowed at 10 percent interest assuming two shifts for 365 days per year, plus a $25,000 car that
A math graduate student explains to her friend how to approach a group of smart attractive guys who have brought along famous actor Russell Crowe. What should her friend do? Ignore Russell Crowe or
1. In light of the foregoing payoffs, why did Airbus go ahead with the A380 Superjumbo even though its $10.7 billion development cost required as many as 250 planes to break even by 2010?2. In 2004,
Dunkin’ Donuts and McDonald’s McCafé have entered the specialty coffee business pioneered at Starbucks’s 5,439 locations. Prices are 20% lower (99 cent espresso shots versus $1.45 at
Sony’s PlayStation 2 (PS2) dominated the game console market 1997–2003 with 123 million units sold. Today, Nintendo’s Wii has 62 percent of the market. Prices to achieve this spectacular growth
The price elasticity of demand for a textbook sold in the United States is estimated to be −2.0, whereas the price elasticity of demand for books sold overseas is −3.0. The U.S. market requires
The price elasticity of demand for air travel differs radically from first-class (−1.3) to unrestricted coach (−1.4) to restricted discount coach (−1.9). What do these elasticities mean for
American Export-Import Shipping Company operates a general cargo carrier service between New York and several Western European ports. It hauls two major categories of freight: manufactured items and
Sort the following products into those priced with two-part tariffs, user charges only, or lump sum access fees only: pay-per-view movies on cable TV, pay phones, Netflix, iTunes, country club
Phillips Industries manufactures a certain product that can be sold directly to retail outlets or to the Superior Company for further processing and eventual sale as a completely different product.
In the face of stable (or declining) enrollments and increasing costs, many colleges and universities, both public and private, find themselves in progressively tighter financial dilemmas that
General Medical makes disposable syringes for hospitals and doctor supply companies. The company uses cost-plus pricing and currently charges 150 percent of average variable costs. General Medical
The Pear Computer Company just developed a totally revolutionary new personal computer. It estimates that it will take competitors at least two years to produce equivalent products. The demand
Explain the effect on capacity reallocations of advance sales data indicating mean demand of 55 rather than 60 during a slow travel week for business class, using the information in Figure, Table,
Suppose the frequent-flyer program raised the cost of high-yield spill twofold because business customers who are denied boarding now take their business to other carriers for several future trips,
An aircraft with 100 seats serves passengers through two types of fares: full ($550) and discount ($250). Extra passengers have $50 marginal cost. Demand for discount tickets is unlimited, while
Suppose an enhanced effectiveness of cooperative advertising occurs if the distributor shares its superior on-the-spot information about current trends in the marketplace with the manufacturer.
If contract promises were not excused because of acts of war, would the clearing and settlements clients of Bank of New York change their behavior? If so, how? What reliance behavior would be
For each of the possible loan terms the commercial lender might offer, identify what choices by the lender would be the worst for combating the moral hazard problem inFigure.
If coal mine tonnage can be shipped elsewhere cheaply, but an adjacent coal-fired power plant is not redeployable to other uses, what organizational form would be adopted by the power plant owners?
Would warehouse operators insist on owning their own trucking companies? Why or why not? What coordination and control problems and contractual hazards would these companies encounter?
What organizational form would warehouse operators and truck hauling companies adopt?
In benchmarking sales representatives against one another, what problems arise from continuing to reassign the above-average trade representatives to previously unproductive sales territories?
Explain how the optimal incentives contract would differ if the less risk-averse bank officer (Dashing in Figure) had generated the smaller expected profit (i.e., the lower hill-shapedcurve).
In the Division of a Decaying Business game, what should you offer if the assets at the start of the game are $4 million rather than $3 million? Now is there a first-mover or second-mover advantage?
Analyze the pure Nash equilibrium and mixed Nash equilibrium strategies in the following manufacturer-distributor coordination game. How would you recommend restructuring the game to secure higher
1. Are Amazon.comâ€™s warehouses, Web pages, and one-click sales methods fully redeployable to other products? If so, name a few such products. If not, why not?2. Are Bordersâ€™ fixed
Specific Electric Co. asked you to implement a pay-for- performance incentive contract for its new CEO. Using your deeper knowledge of the principal-agent problem, try it again.
1. What should you as the lead underwriter offer and to whom?2. Is there anything unusual about the division of these fees across the syndicate?3. Why would any investment bank volunteer to be a
What auction design features reduce the winner’s curse and therefore reduce strategic underbidding?
What advantage does eBay’s open bidding provide to sellers? Why?
If some auction participants for crude oil field leases have estimates that the oil in the ground is worth $1.2 million, $1.3 million, or $1.5 million with certainty; and other auction participants
Distinguish common-value and private-value auctions; provide examples of each. Distinguish descending-price (Dutch) auctions and ascending-price (English) auctions; provide examples of each.
You are developing a bidding strategy for an ascending-price sealed-bid auction of a crude oil field worth between $1 million and $51 million to the seller. Because your extraction costs are lower,
How can a second-highest sealed-bid ascending-price auction design diminish the “winner’s curse” and reduce the strategic underbidding that arises in highest-wins- and-pays typical
Some newly issued T-bills are auctioned by discriminatory pricing in Dutch auctions, whereas other newly issued T-bills are auctioned by uniform prices second-highest sealed-bid ascending-price
Fast Second and Speedo are trying to decide what to bid for a license in a cellular phone auction where the possible values of the new license are $10 million, $20 million, $30 million, $40 million,
Show that not just overstatement but also understatement of cost is dominated by truth-telling in the joint venture of Motorola and Apple.
What payoffs would be required under an optimal incentives contract, similar to Table, if the cost overruns at Apple became as likely as those at Motorola?
We have assumed bidder’s valuations are independent, but suppose they are affiliated. That is, suppose on eBay you wish to affiliate with those who think Beatles albums are valuable, and that
1. What should Wireless Co. bid in a single-round sealed-bid common-value auction? What should PCS PrimeCo bid in this same auction?2. If Wireless goes first in a sequential posted-price auction with
1. Discuss the practice of selling upgrades as a mechanism design.2. What dual objectives are being served when a breakthrough new product is not equipped with all its known value added features?3.
An industry is composed of Firm 1, which controls 70 percent of the market, Firm 2 with 15 percent of the market, and Firm 3 with 5 percent of the market. About 20 firms of approximately equal size
Suppose an industry is composed of eight firms with the following market shares:Based on the (revised 1997) merger guidelines, would the Antitrust Division likely challenge a proposed merger
What are the incentives to innovate for a monopoly firm as compared with a firm in a competitive market if patent protection is not available?
Would you consider the fractional ownership jet taxi industry (NetJets, FlexJets, etc.) to be a contestable market? Why or why not?
The industry demand function for bulk plastics is represented by the following equation:P = 800 − 20QWhere Q represents millions of pounds of plastic.The total cost function for the industry,
Discuss the problems of aircraft noise around an airport from an externality perspective and propose a possible solution if (a) Housing existed in the airport area before the airport was built and
A sheep rancher leased the mineral rights beneath her grazing land to an oil company. She fears that discharges from the oil wells will pollute her underground water resources. Consequently, the
Branding Iron Products, a specialty steel fabricator, operates a plant in the town of West Star, Texas. The town has grown rapidly because of recent discoveries of oil and gas in the area. Many of
An industry produces its product, Scruffs, at a constant marginal cost of $50. The market demand for Scruffs is equal toQ = 75,000 − 600Pa. What is the value to a monopolist who is able to develop
If the decision to develop and license or wait and imitate in Table is a simultaneous-play repeated game between Lucent and Motorola for each new generation of technology, what happens if the
1. Which of the following is a violation of the antitrust laws in the United States and why? (a) Microsoft monopolizes the market in PC operating systems with a 92 percent market share; (b) Microsoft
Given the following market share distributions, the U.S. Antitrust Division blocked a merger of BMG and EMI in 2001, and the European Commission blocked a merger of Time Warner€™s music
A firm has the opportunity to invest in a project having an initial outlay of $20,000. Net cash inflows (before depreciation and taxes) are expected to be $5,000 per year for five years. The firm
A machine that costs $12,000 is expected to operate for 10 years. The estimated salvage value at the end of 10 years is $0. The machine is expected to save the company $2,331 per year before taxes
A company is planning to invest $75,000 (before taxes) in a personnel training program. The $75,000 outlay will be charged off as an expense by the firm this year (year 0). The returns estimated from
Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero.
The Charlotte Bobcats, a professional basketball team, has been offered the opportunity to purchase the contract of an aging superstar basketball player from another team. The general manager of the
The Gordon Company currently pays an annual common stock dividend of $4.00 per share. Its dividend payments have been growing at a steady rate of 6 percent per year, and this rate of growth is
The state of Glottamora has $100 million remaining in its budget for the current year. One alternative is to give Glottamorans a one-time tax rebate. Alternatively, two proposals have been made for
The Department of Transportation wishes to choose between two alternative accident prevention programs. It has identified three benefits to be gained from such programs:€¢ Reduced property
1. Determine the benefit-cost ratio (defined as the ratio of discounted benefits to costs) for the proposed fairgrounds development.2. Based on this analysis, should the redevelopment program be
1. Assess the likely benefits of such a plant or hub and how one should go about analyzing them.2. What form might a report to the Industrial Development Commission take? Outline the requisite
Define Q as the level of output produced and sold, and suppose that a firmâ€™s total revenue (TR) and total cost (TC) functions can be represented in tabular form as shown here.a. Compute the
Consider again the total revenue and total cost functions shown in tabular form in the previous problem.a. Compute the total, marginal, and average profit functions.b. On a single graph, plot the
Differentiate the following functions:a. TC = 50 + 100Q − 6Q2 + .5Q3b. ATC = 50/Q + 100 − 6Q + .5Q2c. MC = 100 − 12Q + 1.5Q2d. Q = 50 − .75Pe. Q = .40X1.50
Differentiate the following functions:a. Y = 2X3/(4X2 − 1)b. Y = 2X/(4X2 − 1)c. Y = 8Z2 − 4Z + 1, where Z = 2X2 − 1 (differentiate Y with respect to X)
Define Q to be the level of output produced and sold, and assume that the firm’s cost function is given by the relationshipTC = 20 + 5Q + Q2Furthermore, assume that the demand for the output of the
Use the cost and demand functions in Exercise 5 to calculate the following:a. Determine the marginal revenue and marginal cost functions.b. Show that, at the profit-maximizing output level determined
Determine the partial derivatives with respect to all of the variables in the following functions:a. TC = 50 + 5Q1 + 10Q2 + .5Q1Q2b. Q = 1.5L.60 K.50c. QA = 2.5PA–1.30 Y.20 PB.40
Bounds Inc. determined through regression analysis that its sales (S) are a function of the amount of advertising (measured in units) in two different media. This relationship is given by the
The Santa Fe Cookie Factory is considering an expansion of its retail piñon cookie business to other cities. The firm’s owners lack the funds needed to undertake the expansion on their own. They
Show that the optimal solution to the set of simultaneous equations in the IndianaPetroleum example are Q*1 = 5:77 and Q*2 = 4:08.
1. Suppose you belong to a tennis club that has a monthly fee of $100 and a charge of $5 per hour to play tennis.a. Using Figure as a model, prepare a table and draw a curve to show the relationship
To illustrate the notion that people are rational and respond to incentives, consider an experiment conducted by the managers of a Chinese factory that produces electronic products such as GPS
Spam unwanted commercial e-mail torments people around the world, interrupting their work and congesting their computer networks. What s more, spam is spreading to cell phones, with annoying beeps to
In the 1970s the government of Mexico City repainted the highway lane lines on the Viaducto to transform a four-lane highway into a six-lane highway. The government announced that the highway
1. The three basic economic questions a society must answer are _________ products do we produce? _________ do we produce the products? _________ consumes the products?2. List the five factors of
1. What is the economist s solution to the congestion problem?a. Require people to carpool.b. Charge a toll during rush hour.c. Require people to move closer to their jobs.d. No economist would
1. A road map incorporates two unrealistic assumptions: (1) _____ and (2) ____________.2. The four elements of the economic way of thinking are (1) use ______ to simplify the analysis, (2) explore
Betty has a degree in fine arts, and makes a unique product decorative bottle-cap pins. She paints recycled bottle caps with attractive images, and attaches a pin so the bottle caps can be displayed
Why do people walk up stairs, but do not walk up escalators? The rationale for walking up stairs is obvious if you just stand still, you won t get anywhere. If the benefit of getting to the top of
Jasper Johns is a contemporary American artist whose painting False Start sold for $80 million, the largest sum paid for a painting of a living artist. According to Skate s Art Market Research, Mr.
The notion of diminishing returns applies to all inputs to the production process. For example, one of the inputs in the production of corn is nitrogen fertilizer. Suppose a farmer has a fixed amount
1. Consider Figure Between points c and d, the opportunity cost of ___ tons of wheat is _______ tons of steel.2. Arrow up or down: An increase in the wage for high-school graduates ______ the
1. A taxi company currently has nine cabs in its fleet, and its total daily cost is $4,000. If the company added a tenth cab, its daily total cost would be $4,200, or $420 per cab. Adding the tenth
1. When two people involved in an exchange say thank you afterwards, they are merely being polite. _______ (True/False)2. Consider a transaction in which a consumer buys a book for $15. The value of

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