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Managerial economics 7th edition William f. samuelson stephen g. marks - Solutions

Because of changing demographics, a small, private liberal arts college predicts a fall in enrollments over the next five years. How would it apply marginal analysis to plan for the decreased enrollment? (The college is a nonprofit institution, so think broadly about its objectives.)
Suppose a firm’s inverse demand curve is given by P = 120 - .5Q and its cost equation is C = 420 + 60Q + Q2.a. Find the firm’s optimal quantity, price, and profit (1) By using the profit and marginal profit equations and (2) By setting MR equal to MC. Also provide a graph of MR and MC.b.
a. As in Problem 4, demand continues to be given by P = 120, but the firm’s cost equation is linear: C = 420 + 60Q. Graph the firm’s revenue and cost curves. At what quantity does the firm break even, that is, earn exactly a zero profit?b. In general, suppose the firm faces the fixed price P
A television station is considering the sale of promotional videos. It can have the videos produced by one of two suppliers. Supplier A will charge the station a set-up fee of $1,200 plus $2 for each DVD; supplier B has no set-up fee and will charge $4 per DVD. The station estimates its demand for
The college and graduate-school textbook market is one of the most profitable segments for book publishers. A best-selling accounting text— published by Old School Inc (OS)—has a demand curve: P = 150 - Q, where Q denotes yearly sales (in thousands) of books. (In other words, Q = 20 means 20
Firm Z is developing a new product. An early introduction (beating rivals to market) would greatly enhance the company’s revenues. However, the intensive development effort needed to expedite the introduction can be very expensive. Suppose total revenues and costs associated with the new
As the exclusive carrier on a local air route, a regional airline must determine the number of flights it will provide per week and the fare it will charge. Taking into account operating and fuel costs, airport charges, and so on, the estimated cost per flight is $2,000. It expects to fly full
A producer of photocopiers derives profits from two sources: the immediate profit it makes on each copier sold and the additional profit it gains from servicing its copiers and selling toner and other supplies. The firm estimates that its additional profit from service and supplies is about $300
Suppose the microchip producer discussed in this chapter faces demand and cost equations given by Q = 8.5 - .05P and C = 100 + 38Q. Choosing to treat price as its main decision variable, it writes profit as π = R - C= [P(8.5 - .05P)] - [100 + (38)(8.5 -.05P)]= - 423 + 10.4P - .05P2.Derive an
Modifying a product to increase its “value added” benefits customers and can also enhance supplier profits. For example, suppose an improved version of a product increases customer value added by $25 per unit. (In effect, the demand curve undergoes a parallel upward shift of $25.)a. If the
Suppose a firm’s inverse demand and cost equations are of the general forms P = a - bQ and C = F + cQ, where the parameters a and b denote the intercept and slope of the inverse demand function and the parameters F and c are the firm’s fixed and marginal costs, respectively. Apply the MR = MC
Under the terms of the current contractual agreement, Burger Queen (BQ) is entitled to 20 percent of the revenue earned by each of its franchises. BQ’s best-selling item is the Slopper (it slops out of the bun). BQ supplies the ingredients for the Slopper (bun, mystery meat, etc.) at cost to the
Suppose a firm assesses its profit function asπ = -10 - 48Q + 15Q2 - Q3.a. Compute the firm’s profit for the following levels of output: Q = 2, 8, and 14.b. Derive an expression for marginal profit. Compute marginal profit at Q = 2, 8, and 14. Confirm that profit is maximized at Q = 8. (Why is
During a five-year period, the ticket sales of a city’s professional basketball team have increased 30 percent at the same time that average ticket prices have risen by 50 percent. Do these changes imply an upward-sloping demand curve? Explain.
A retail store faces a demand equation for Roller Blades given by: Q = 180 - 1.5P,where Q is the number of pairs sold per month and P is the price per pair in dollars.a. The store currently charges P = $80 per pair. At this price, determine the number of pairs sold.b. If management were to raise
Management of McPablo’s Food Shops has completed a study of weekly demand for its “old-fashioned” tacos in 53 regional markets. The study revealed thatQ = 400 - 1,200P + .8A + 55Pop + 800P°,where Q is the number of tacos sold per store per week, A is the level of local advertising
Four firms have roughly equal shares of the market for farm-raised catfish. The price elasticity of demand for the market as a whole is estimated at -1.5.a. If all firms raised their prices by 5 percent, by how much would total demand fall?b. What is the price elasticity if a single firm raises its
As economic consultant to the dominant firm in a particular market, you have discovered that, at the current price and output, demand for your client’s product is price inelastic. What advice regarding pricing would you give?
A minor league baseball team is trying to predict ticket sales for the upcoming season and is considering changing ticket prices. a. The elasticity of ticket sales with respect to the size of the local population is estimated to be about .7. Briefly explain what this number means. If the local
a. General Motors (GM) produces light trucks in several Michigan factories, where its annual fixed costs are $180 million, and its marginal cost per truck is approximately $20,000. Regional demand for the trucks is given by: P = 30,000 - 0.1Q, where P denotes price in dollars and Q denotes annual
During the 1990s, Apple Computer saw its global share of the personal computer market fall from above 10 percent to less than 5 percent. Despite a keenly loyal customer base, Apple found it more and more difficult to compete in a market dominated by the majority standard: PCs with Microsoft’s
a. Triplecast was NBC’s and Cablevision’s joint venture to provide pay-per-view cable coverage of the 1992 Summer Olympics in Barcelona. Based on extensive surveys of potential demand, the partners hoped to raise $250 million in revenue by attracting some 2 million subscribers for three
A New Hampshire resort offers year-round activities: in winter, skiing and other cold-weather activities and, in summer, golf, tennis, and hiking. The resort’s operating costs are essentially the same in winter and summer. Management charges higher nightly rates in the winter, when its average
In 1996, the drug Prilosec became the best-selling anti-ulcer drug in the world. (The drug was the most effective available, and its sales outdistanced those of its nearest competitor.) Although Prilosec’s marginal cost (production and packaging) was only about $.60 per daily dose, the drug’s
Explain how a firm can increase its profit by price discriminating. How does it determine optimal prices? How does the existence of substitute products affect the firm’s pricing policy?
Often, firms charge a range of prices for essentially the same good or service because of cost differences. For instance, filling a customer’s onetime small order for a product may be much more expensive than supplying “regular” orders. Services often are more expensive to deliver during
In what respects are the following common practices subtle (or not-so-subtle) forms of price discrimination?a. Frequent-flier and frequent-stay programsb. Manufacturers’ discount coupon programsc. A retailer’s guarantee to match a lower competing price
A private-garage owner has identified two distinct market segments:Short-term parkers and all-day parkers with respective demand curves of PS = 3 - (QS/200) and PC = 2 - (QC/200). Here P is the average hourly rate and Q is the number of cars parked at this price. The garage owner is considering
A golf-course operator must decide what greens fees (prices) to set on rounds of golf. Daily demand during the week is: PD = 36 - QD/10 where QD is the number of 18-hole rounds and PD is the price per round. Daily demand on the weekend is: PW = 50 - QW/12. As a practical matter, the capacity of the
Discuss and compare the advantages and disadvantages of survey methods and test marketing.
Coca-Cola Company introduced New Coke largely because of Pepsiâ€™s success in taste tests head to head with Coke Classic.a. Consider the following hypothetical information:(1) In blind taste tests, 58 percent of subjects preferred Pepsi to Coke Classic;(2) In similar tests, 58 percent of
A financial analyst seeks to determine the relationship between the return on PepsiCo’s common stock and the return on the stock market as a whole. She has collected data on the monthly returns of PepsiCo’s stock and the monthly returns of the Standard & Poor’s stock index for the last five
To what extent do you agree with the following statements?a. The best test of the performance of two different regression equations is their respective values of R2.b. Time-series regressions should be run using as many years of data as possible; more data means more reliable coefficient
A study of cigarette demand resulted in the following logarithmic regression equation:Here, Q denotes annual cigarette consumption, P is the average price of cigarettes, Y is per capita income, A is total spending on cigarette advertising, and W is a dummy variable whose value is 1 for years after
The following regression was estimated for 23 quarters between 2004 and 2011 to test the hypothesis that tire sales (T) depend on new automobile sales (A) and total miles driven (M). Standard errors are listed in parentheses.Here, N = 23, corrected R2 = .83, F = 408, standard error of the
A water expert was asked whether increased water consumption in a California community was lowering its water table. To answer this question, the expert estimated a linear regression equation of the formW = a + bt,Where W = height of the water table and t = time measured from the start of the study
A food-products company has recently introduced a new line of fruit pies in six U.S. cities: Atlanta, Baltimore, Chicago, Denver, St. Louis, and Fort Lauderdale. Based on the pie€™s apparent success, the company is considering a nationwide launch. Before doing so, it has decided to use
In preparation for their 2008 merger, Delta Airlines and Northwest Airlines undertook a comparative study of their on-time performance.The following table shows each airline€™s on-time record for a common two-month period for three cities where they both operated.a. Northwest€™s
The following table lists your company€™s sales during the last four years.a. A fellow manager points to the 15-unit increase between year 3 and year 4. Extrapolating this trend, he predicts 135 units will be sold in the coming year (year 5). Do you agree? Explain.b. A second manager
Consider again the data in Problem 10.a. Using a computer program, estimate the linear increasing trend equation, S = a + bt, using OLS regression.b. According to your regression statistics, how well does your estimated equation explain past variations in sales?c. Use your equation to forecast
As the name suggests, a lagging indicator is an economic variable whose movements occur after movements in the overall economy.a. A number of employment measures are lagging indicators. Consider the following variables: (1) Increased use of temporary workers, (2) Increases in new hires, (3) A
A chemical company uses large amounts of shredded steel scrap metal in its production processes. Most of this scrap comes from 12-ounce beverage cans (soft-drink and beer cans). On behalf of the company, you are responsible for forecasting the availability (and price) of this type of scrap over the
Studies of automobile demand suggest that unit sales of compact cars depend principally on their average price and consumers€™ real personal income. Consider the historical record of sales shown in the table.a. Estimate the point elasticity of demand with respect to price. (Be sure to
Does optimal use of an input (such as labor) mean maximizing average output (per unit of input)? Explain.
One-tenth of the participants produce over one-third of the output. Increasing the number of participants merely reduces the average output. If this statement were true, would it be consistent with the law of diminishing returns?
Consider the production function Q = 10L -.5L2 + 24K - K2 for L and K in the range 0 to 10 units. Does this production function exhibit diminishing returns to each input? Does it exhibit decreasing returns to scale? Explain.
a. Suppose the inputs in Problem 3 can be purchased at the same price per unit. Will production be relatively labor intensive or capital intensive? Explain.b. Suppose input prices are PL = 40 and PK = 80 and the price of output is 10. Determine the optimal quantity of each input.
Explain the difference between diminishing returns and decreasing returns to scale.
Making dresses is a labor-intensive process. Indeed, the production function of a dressmaking firm is well described by the equation Q = L - L2/800, where Q denotes the number of dresses per week and L is the number of labor hours per week. The firm’s additional cost of hiring an extra hour of
A 200-pound steer can be sustained on a diet calling for various proportions of grass and grain. These combinations are shown in the table. Pounds of Grass Pounds of Grain50 ..........8056 ..........7060 ..........6568 ..........6080 ..........5488 ..........52a. Plot the isoquant corresponding to
A trendy French restaurant is one of the first businesses to open in a small corner of a commercial building still under construction. The restaurant has received rave reviews and has lines of diners waiting for tables most nights.a. In the short run (next few months), what measures should the
Steel can be produced using three different methods:(1) A basic process using coke that produces steel ingots,(2) Continuous casting, or(3) An electric furnace using steel scrap.The following table lists the average cost per ton of steel for each method.a. Production of steel by electric furnace is
In recent years, Chrysler Corporation initiated three-shift or nearly continuous (21-hours-per-day) production at a number of its plants.Explain why Chrysler’s decision might have been prompted by movements in its wage costs or capital costs, or both. Why would Chrysler have instituted this
A firm is producing a given amount of output at least cost using a mix of labor and capital (which exhibit some degree of substitutability). Using an isoquant graph, show that if one input price increases, least-cost production calls for the firm to reduce that input (and increase the use of the
Consider the production function Q = 100L.5K.4. Suppose L = 1 and K = 1 so that Q = 100.a. If L is increased by 1 percent, that is, to L = 1.01, with capital unchanged, what is the resulting percentage increase in output?b. Describe the nature of returns to scale for this production function.
In her last-minute preparations for final exams, a student has set aside five hours to split between studying for two subjects, finance and economics. Her goal is to maximize the average grade received in the two courses. (Maximizing the average grade and maximizing the sum of the grades are
Let Q = Lα Kβ. Suppose the firm seeks to produce a given output while minimizing its total input cost: TC = PLL + PKK. Show that the optimal quantities of labor and capital satisfy L/K = (α/β)(PK/PL). Provide an intuitive explanation for this result.
In a particular region, there are two lakes rich in fish. The quantity of fish caught in each lake depends on the number of persons who fish in each, according to Q1 = 10N1 -.1N12 and Q2 = 16N2 -.4N22, where N1 and N2 denote the number of fishers at each lake. In all, there are 40 fishers.a.
The development of a new product was much lengthier and more expensive than the company’s management anticipated. Consequently, the firm’s top accountants and financial managers argue that the firm should raise the price of the product 10 percent above its original target to help recoup some of
Comment on the following statement: “Average cost includes both fixed and variable costs, whereas marginal cost only includes variable costs. Therefore, marginal cost is never greater than average cost.”
A company produces two main products: electronic control devices and specialty microchips. The average total cost of producing a microchip is $300; the firm then sells the chips to other high-tech manufacturers for $550. Currently, there are enough orders for microchips to keep its factory capacity
The last decade has witnessed an unprecedented number of megamergers in the banking industry: Bank of America’s acquisitions of Fleet Bank, MBNA, and U.S. Trust; Bank of New York’s acquisition of Mellon Financial; and Wells Fargo’s acquisition of Wachovia, to name several of the largest
An entrepreneur plans to convert a building she owns into a video-game arcade. Her main decision is how many games to purchase for the arcade. From survey information, she projects total revenue per year as R = 10,000Q - 200Q2, where Q is the number of games. The cost for each game (leasing,
Suppose the manufacturer of running shoes has collected the following quantitative information. Demand for the boys’ shoe is estimated to be Q = 9,600 - 200P, or, equivalently, P = 48 - Q/200. The shoe’s direct cost is C = $60,000 +.0025Q2.a. Check that these demand and cost equations are
You are a theater owner fortunate enough to book a summer box office hit into your single theater. You are now planning the length of its run. Your share of the film’s projected box office is R = 10w - .25w2, where R is in thousands of dollars and w is the number of weeks that the movie runs. The
Firm A makes and sells motorcycles. The total cost of each cycle is the sum of the costs of frames, assembly, and engine. The firm produces its own engines according to the cost equation:CE = 250,000 + 1,000Q + 5Q2.The cost of frames and assembly is $2,000 per cycle. Monthly demand for cycles is
A firm’s long-run total cost function isC = 360 + 40Q + 10Q2.a. What is the shape of the long-run average cost curve?b. Find the output that minimizes average cost.c. The firm faces the fixed market price of $140 per unit. At this price, can the firm survive in the long run? Explain.
A firm uses a single plant with costs C = 160 + 16Q + .1Q2 and faces the price equation P = 96 - .4Q.a. Find the firm’s profit-maximizing price and quantity. What is its profit?b. The firm’s production manager claims that the firm’s average cost of production is minimized at an output of 40
As noted in Problem 5 of Chapter 3, General Motors (GM) produces light trucks in its Michigan factories. Currently, its Michigan production is 50,000 trucks per month, and its marginal cost is $20,000 per truck. With regional demand given by: P = 30,000 - 0.1Q, GM sets a price of $25,000 per
a. Firm K is a leading maker of water-proof outerwear. During the winter months, demand for its main line of water-proof coats is given by:P = 800 - .15Q,Where P denotes price in dollars and Q is quantity of units sold per month. The firm produces coats in a single plant (which it leases by the
A manufacturing firm produces output using a single plant. The relevant cost function is C = 500 + 5Q2. The firm’s demand curve is P = 600 - 5Q.a. Find the level of output at which average cost is minimized. Set AC equal to MC. What is the minimum level of average cost?b. Find the firm’s
A firm produces digital watches on a single production line serviced during one daily shift. The total output of watches depends directly on the number of labor-hours employed on the line. Maximum capacity of the line is 120,000 watches per month; this output requires 60,000 hours of labor per
The renowned Spaniard, Pablo Picasso, was a prolific artist. He created hundreds of paintings and sculptures as well as drawings and sketches numbering in the thousands. (He is said to have settled restaurant bills by producing sketches on the spot.)a. What effect does the existence of this large
Consider the regional supply curve of farmers who produce a particular crop.a. What does the supply curve look like at the time the crop is harvested? (Show a plausible graph.)b. Depict the crop’s supply curve at the beginning of the growing season (when farmers must decide how many acres to
Potato farming (like farming of most agricultural products) is highly competitive. Price is determined by demand and supply. Based on U.S. Department of Agriculture statistics, U.S. demand for potatoes is estimated to be QD = 184 - 20P, where P is the farmer’s wholesale price (per 100 pounds) and
a. In 2009, the Japanese beer industry was affected by two economic events: (1) Japan’s government imposed on producers a tax on all beer sold, and (2) Consumer income fell due to the continuing economic recession. How would each factor affect (i.e., shift) demand or supply? What impact do you
The Green Company produces chemicals in a perfectly competitive market. The current market price is $40; the firm’s total cost is C = 100 + 4Q + Q2.a. Determine the firm’s profit-maximizing output. More generally, write down the equation for the firm’s supply curve in terms of price P.b.
In a competitive market, the industry demand and supply curves are P = 200 - .2Qd and P = 100 + .3Qs, respectively.a. Find the market’s equilibrium price and output.b. Suppose the government imposes a tax of $20 per unit of output on all firms in the industry. What effect does this have on the
In a perfectly competitive market, industry demand is given by Q =1,000 - 20P. The typical firm’s average cost is AC = 300/Q + Q/3.a. Confirm that Qmin = 30. (Set AC equal to MC.) What is ACmin?b. Suppose 10 firms serve the market. Find the individual firm’s supply curve. Find the market supply
Firm Z, operating in a perfectly competitive market, can sell as much or as little as it wants of a good at a price of $16 per unit. Its cost function is C = 50 + 4Q + 2Q2. The associated marginal cost is MC = 4 + 4Q and the point of minimum average cost is Qmin = 5.a. Determine the firm’s
Demand for microprocessors is given by P = 35 - 5Q, where Q is the quantity of microchips (in millions). The typical firm’s total cost of producing a chip is Ci = 5qi, where qi is the output of firm i. a. Under perfect competition, what are the equilibrium price and quantity?b. Does the typical
In 2007, dairy farmers faced an (equilibrium) wholesale price for their milk of about 1 cent per ounce. Because of changes in consumer preferences, the demand for milk has been declining steadily since then.a. In the short run, what effect would this have on the price of milk? On the number of
In a competitive market, the industry demand and supply curves are P = 70 - QD and P = 40 + 2QS, respectively.a. Find the market’s equilibrium price and output.b. Suppose that the government provides a subsidy to producers of $15 per unit of the good. Since the subsidy reduces each supplier’s
The market for rice in an East Asian country has demand and supply given by QD = 28 - 4P and QS = -12 + 6P, where quantities denote millions of bushels per day.a. If the domestic market is perfectly competitive, find the equilibrium price and quantity of rice. Compute the triangular areas of
In 1989, the Detroit Free Press and Detroit Daily News (the only daily newspapers in the city) obtained permission to merge under a special exemption from the antitrust laws. The merged firm continued to publish the two newspapers but was operated as a single entity.a. Before the merger, each of
A pharmaceutical company has a monopoly on a new medicine. Under pressure by regulators and consumers, the company is considering lowering the price of the medicine by 10 percent. The company has hired you to analyze the effect of such a cut on its profits. How would you carry out the analysis?
The ready-to-eat breakfast cereal industry is dominated by General Mills, Kellogg, Kraft Foods, and Quaker Oats that together account for 90 percent of sales. Each firm produces a bewildering proliferation of different brands (General Mills alone has over 75 cereal offerings), appealing to every
Formerly, the market for air travel within Europe was highly regulated. Entry of new airlines was severely restricted, and air fares were set by regulation. Partly as a result, European air fares were higher than U.S. fares for routes of comparable distance. Suppose that, for a given European air
Consider a natural monopoly with declining average costs summarized by the equation AC = 16/Q + 1, where AC is in dollars and Q is in millions of units. (The total cost function is C = 16 + Q.) Demand for the natural monopolist’s service is given by the inverse demand equation P = 11 + Q.a.
Firm S is the only producer of a particular type of foam fire retardant and insulation used in the construction of commercial buildings. The inverse demand equation for the product is P = 1,500 - .1Q,Where Q is the annual sales quantity in tons and P is the price per ton.The firm’s total cost
Suppose that, over the short run (say, the next five years), demand for OPEC oil is given by Q = 57.5 - .5P or, equivalently, P = 115 - 2Q.(Here Q is measured in millions of barrels per day.) OPEC’s marginal cost per barrel is $15.a. What is OPEC’s optimal level of production? What is the
Consider once again the microchip market described in Problem 9 of Chapter 7. Demand for microprocessors is given by P = 35 - 5Q, where Q is the quantity of microchips (in millions). The typical firm’s total cost of producing a chip is Ci = 5qi, where qi is the output of firm i. a. Suppose that
Consider again the New York taxi market, where demand is given by Q = 7 - .5P, each taxi’s cost is C = 910 + 1.5q, and ACmin = $8 at 140 trips per week.a. Suppose that, instead of limiting medallions, the commission charges a license fee to anyone wishing to drive a cab. With an average price of
Firms A and B make up a cartel that monopolizes the market for a scarce natural resource. The firms’ marginal costs are MCA = 6 + 2QA and MCB = 18 + QB, respectively. The firms seek to maximize the cartel’s total profit.a. The firms have decided to limit their total output to Q = 18. What
A single buyer who wields monopoly power in its purchase of an item is called a monopsonist. Suppose that a large firm is the sole buyer of parts from 10 small suppliers. The cost of a typical supplier is given by C = 20 + 4Q + Q2.a. Suppose that the large firm sets the market price at some level
a. When a best-selling book was first released in paperback, the Hercules Bookstore chain seized a profit opportunity by setting a selling price of $9 per book (well above Hercules’ $5 average cost per book). With paperback demand given by P = 15 - .5Q, the chain enjoyed sales of Q = 12 thousand
Firm 1 is a member of a monopolistically competitive market. Its total cost function is C = 900 + 60Q1 + 9Q12. The demand curve for the firm’s differentiated product is given by P = 660 - 16Q1.a. Determine the firm’s profit-maximizing output, price, and profit.b. Attracted by potential profits,
Consider a regulated natural monopoly. Over a 10-year period, the net present value of all the investment projects it has undertaken has been nearly zero. Does this mean the natural monopoly is inefficient? Does it mean the regulatory process has been effective? Explain.
Venture capitalists provide funds to finance new companies (start-ups), usually in return for a share of the firm’s initial profits (if any). Of course, venture capitalists look to back experienced entrepreneurs with strong products (or at least product blueprints). But potential competitors and
In granting (or prohibiting) proposed acquisitions or mergers in an industry, government regulators consider a number of factors, including the acquisition’s effect on concentration, ease of entry into the market, extent of ongoing price competition, and potential efficiency gains. In 2011,

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