Managerial Economics A Problem Solving Approach 3rd edition Luke M. Froeb, Brian T. McCann, Mikhael Shor, Michael R. War - Solutions

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Would yogurt or Prada handbags have wider price variation in a free trade area like the European Union? Why?
The costs of producing steel have declined substantially from building a conventional hot-rolled steel mill down to the new minimill technology that requires only scrap metal, an electric furnace, and 300 workers rather than iron ore raw materials, enormous blast furnaces, rolling mills, reheating
Why should the early adopters of an information technology system provided by IBM Systems Solutions be willing to pay more for a closed-end lease of the servers and other hardware required than for an outright purchase?
What problems arise in PepsiCo’s couponing customers every other week to try to attract additional business? Would mail-order segmentation of PepsiCo versus Coca-Cola customers help this process? How?
Analyze the following sequential game and advise Kodak about whether they should introduce the new product, PictureCD.
Why don’t airlines and hotel chains worry about self-destructive cannibalization of their own higher-priced live sales when they list seats and rooms for sale in the virtual marketplace on Priceline.com?
Which two of the following are most clearly common-value auction items: Viper sports cars, electricity, patent licenses, T-bills, antiques, or fine art?
If Apple iPod only played iTunes, and iTunes only could be heard on the Apple iPod, could Apple price the technologically integrated bundle any way they wanted? If other electronic music can play on an iPod, what determines whether there are any limitations on the bundled pricing of iPods and
The Williams Company has a present capital structure (that it considers optimal) consisting of 30 percent long-term debt and 70 percent common equity. The company plans to finance next year’s capital budget with additional long-term debt and retained earnings. New debt can be issued at a coupon
Multiple-Choice Questions1. An individual's value for a good or service is thea. The amount of money he or she used to pay for a good.b. The amount of money he or she is willing to pay for it.c. The amount of money he or she has to spend on goods.d. None of the above.2. The biggest advantage of
How will commercial airlines respond to the threat of new $27,500 fines for keeping passengers on the tramac for more than 3 hours? What inefficiency will this create?
I recently sold my used car. If no new production occurred for this transaction, how could it have created value?
The U.S. government subsidizes flood insurance because those who want to buy it live in the flood plain and cannot get it at reasonable rates. What inefficiency does this create?
An elderly physician has built up his own practice into a quite valuable business. Now that he is thinking of retiring, he wants to take on a partner to learn the business and eventually buy the practice in three years. Her compensation will be a salary plus 25% of the profits if they are below the
When Kraft recently bid $16.7 billion for Cadbury, Cadbury's market value rose, but Kraft's market value fell by more. What does this tell you about the value-creating potential of the deal?
Two similar surgeries, breast reconstruction and breast augmentation, have different prices. Breast augmentation is cosmetic surgery not covered by health insurance. Patients who want the surgery must pay for it themselves. Breast reconstruction following breast removal due to cancer is covered by
Multiple-Choice Questions1. A business owner makes 1,000 items a day.Each day he or she contributes eight hours to produce those items. If hired, elsewhere he or she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total
You won a free ticket to see a Bruce Springsteen concert (assume the ticket has no resale value). U2 has a concert the same night, and this represents your next-best alternative activity. Tickets to the U2 concert cost $80, and on any particular day, you would be willing to pay up to $100 to see
You were able to purchase two tickets to an upcoming concert for $100 apiece when the concert was first announced three months ago. Recently, you saw that StubHub was listing similar seats for $225 apiece. What does it cost you to attend the concert?
Due to the housing bubble, many houses are now selling for much less than their selling price just two to three years ago. There is evidence that homeowners with virtually identical houses tend to ask for more if they paid more for the house. What fallacy are they making?
The expression "3/10, net 45" means that the customers receive a 3% discount if they pay within 10 days; otherwise, they must pay in full within 45 days. What would the seller's cost of capital have to be in order for the discount to be cost justified? (Hint: Opportunity Cost)
Starbucks is hoping to make use of its excess restaurant capacity in the evenings by experimenting with selling beer and wine. It speculates that the only additional costs are hiring more of the same sort of workers to cover the additional hours and costs of the new line of beverages. What hidden
Students doing poorly in courses often consider dropping the courses. Many universities will only offer a refund up to a certain date. Should this affect their drop decisions?
Multiple-Choice Questions1. When economists speak of "marginal," they meana. Opportunity.b. Scarcity.c. Incremental.d. Unimportant.2. Managers undertake an investment only ifa. Marginal benefits of the investment are greater than zero.b. Marginal costs of the investment are greater than marginal
Identify which of the following are extent decisions.a. Decide whether to expand an existing product into a new region.b. What discount should be given on products during the upcoming holiday sale?c. Should the advertising budget be changed for the upcoming year?d. Should you develop a new product
You run a game day shuttle service for parking services for the local ball club. Your costs for different customer loads are 1: $30, 2: $32, 3: $35, 4: $38, 5: $42, 6: $48, 7: $57, and 8: $68. What are your marginal costs for each customer load level? If you are compensated $10 per ride, what
Children in poor neighborhoods have bleak outlooks on life and do not see much gain to studying. A recent experiment is paying children in poor neighborhoods $100 for each "A" they earn in a six-week grade reporting cycle. How does this affect behavior?
Your company is contemplating bidding on an RFP (Request For Proposal) for 100,000 units of a specialized part. Why might the amount be more than the requesting company actually wants?
Your insurance firm processes claims through its newer, larger high-tech facility and its older, smaller low-tech facility. Each month, the high-tech facility handles 10,000 claims, incurs $100,000 in fixed costs and $100,000 in variable costs.Each month, the low-tech facility handles 2,000 claims,
Multiple-Choice Questions1. Which of the following will increase the breakeven quantity?a. A decrease in overall fixed costsb. A decrease in the marginal costsc. A decrease in the price leveld. A increase in price level2. The higher the interest ratesa. The more value individuals place on future
George's T-Shirt Shop produces 5,000 custom printed T-shirts per month. George's fixed costs are $15,000 per month. The marginal cost per T-shirt is a constant $4. What is his breakeven price? What would be George's breakeven price if George were to sell 50% more shirts?
Suppose an initial investment of $100 will return $50/year for three years (assume the $50 is received each year at the end of the year). Is this a profitable investment if the discount rate is 20%?
Probably the most important source of capital is human capital. For example, most medical doctors spend years learning to practice medicine. Doctors are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work. In Canada, the
A university spent $1.8 million to install solar panels atop a parking garage. These panels will have a capacity of 500 kw, have a life expectancy of 20 years and suppose the discount rate is 10%.a. If electricity can be purchased for costs of $0.10 per kwh, how many hours per year will the solar
Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $2.5 million for a plastic injection molding machine (which can be sold for $2.0 million) and $100,000 in plastic injection molds specifically for the toy (not valuable to anyone else). Labor and
In early 2008, you purchased and remodeled a 120 room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will only be able to sell 20,000 room-nights that cost on
Multiple-Choice Questions1. Jim has estimated elasticity of demand for gasoline to be -0.7 in the short run and -1.8 in the long run. A decrease in taxes on gasoline woulda. Lower tax revenue in both the short and long run.b. Raise tax revenue in both the short and long run.c. Raise tax revenue in
George has been selling 5,000 T-shirts per month for $8.50. When he increased the price to $9.50 he sold only 4,000 T-shirts. What is the demand elasticity? If his marginal cost is $4 per shirt, what is his desired markup and what is his initial actual markup? Was raising the price profitable?
Suppose there are 10 individuals with values as follows: {10, 8, 8, 8, 8, 8, 8, 4, 0, 0}.Construct a demand schedule (table), and calculate the marginal revenue of the second unit sold.
To conduct an experiment, AMC increased movie ticket prices from $9.00 to $10.00 and measured the change in ticket sales. Using the data over the following month, they concluded that the increase was profitable. However, over the subsequent months, they changed their minds and discontinued the
If demand for Nike running shoes is inelastic, should Nike raise or lower price?
An end-of-aisle price promotions changes the price elasticity of a good from -2 to -3. If the normal price is $10, what should the promotional price be?
Why do bars offer free peanuts?
Multiple-Choice Questions1. Microsoft found that instead of producing a DVD player and a gaming system separately, it is cheaper to incorporate DVD playing capabilities in their new version of the gaming system. Microsoft is taking advantage ofa. Economies of scale.b. Learning curve.c. Economies of
The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour (and $18,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of $8,000). Does this production exhibit scale economies or scope economies?
Multiple-Choice Questions1. Changes in prices of a good causesa. Movement along the demand curve.b. Movement along the supply curve.c. No effect to either curve.d. Both a and b2. If the market for a certain product experiences an increase in supply and a decrease in demand, which of the following
Due to the H1N1 flu outbreak, the demand for hand sanitizer has tripled. Should Johnson &Johnson increase production of their Purell hand sanitizer? Should it invest in doubling production capacity?
Multiple Choice Questions1. In the long run, which of the following outcomes is most likely for a firm?a. Zero accounting profits but positive economic profitsb. Zero accounting profitsc. Positive accounting profits and positive economic profitsd. Zero economic profits but positive accounting
Snack food venders and beer distributers earn some monopoly profits in their local markets but see them slowly erode from various new substitutes. When California voted on legalizing marijuana, which side would you think that California beer distributors were on? What about snack food venders? Why?
Relative to managers in more monopolistic industries, are managers in more competitive industries more likely to spend their time on reducing costs or on pricing strategies?
Describe an important difference in the way an economist and a businessperson might view a monopoly. Discuss.
For each category, indicate which condition is associated with higher rivalry amongcompetitors.
The smart phone market has been dominated by Apple, but recently the Droid has been able to leverage Google's information services into market gains while Blackberry, known for its secure business oriented network, has attempted to become more attractive with a "friendlier" interface. At the same
Multiple Choice Questions1. The intersection between demand for U.S. dollars and the supply of U.S. dollars is known as thea. Inflation rate.b. Exchange rate.c. Price.d. quantity.2. An individual in the United States wants to buy office equipment from England that costs 2,800 pounds. If the
Explain how both Japanese consumers and producers would view an appreciation of the Japanese yen versus the U.S. dollar.
Multiple Choice Questions,1. After massive promotion of Justin Bieber's latest music album, the producers reacted by raising prices for his albums. This implies that promotion expenditures made the album demanda. More elastic.b. Unitary elastic.c. The change is due to psychological pricing.d. Less
What would efficient revenue management imply for the pricing of the Cowboys Stadium parking lot on typical game days? How about for the Super Bowl? How about for the many smaller events that fill less than half the lot?
Every week, more and more apps (applications) are available for Droid-based smart phones. How does this affect the optimal price for Droid-based smart phones?
When the Macintosh computer was introduced in 1982, Apple made it difficult for third party software developers to develop software for the platform. In contrast, Apple made it relatively easy for third party developers to make applications that ran on the iPhone when it was introduced in 2007.
Concert prices have increased coincidentally with illegal downloading of music off the Internet. Why?
Clear channel, an owner of multiple radio stations with the Top 40 format, recently bought rock concert promoter Live Nation. How would this affect prices for concert tickets or rates for radio programming?
Multiple Choice Questions 1. A software firm can offer a high-feature version of its software or a stripped-down low value version, each with similar production costs. Which of the following cannot be an optimal strategy?a. Offer only the high-feature version aimed only at a high-value market
Why might Mattel set a much lower contribution margin on its Barbie dolls than on the accessories for the dolls?
German brothels recently began offering a monthly subscription service for multiple purchasers. If you thought that the brothels' encouragement of prostitution was immoral to begin with, would you consider this pricing plan to be even more immoral?
Your family business produces a secret recipe salsa and distributes it through both smaller specialty stores and chain supermarkets. The chains have been demanding sizable discounts but you do not want to drop your prices to the specialty stores. How can you legally accommodate the chains without
A manufacturer of microwaves has discovered that male shoppers have little value for microwaves and attribute almost no extra value to an auto-defrost feature. Female shoppers generally value microwaves more than men and attribute greater value to the auto-defrost feature. There is little
The pricing model for iTunes has been to price songs individually. Instead, Pandora opted to offer unlimited song playing for a monthly fee. Would Pandora's pricing model likely yield more profit than pricing songs individually?
Multiple Choice Questions1. The prisoners' dilemma is an example ofa. A sequential game.b. A simultaneous game.c. A shirking game.d. A dating game2. Nash equilibriuma. Is where one player maximizes his payoff and the other doesn't.b. is where each player maximizes his own payoff given the action of
Mr. and Mrs. Ward typically vote oppositely in elections and so their votes "cancel each other out." They each gain two units of utility from a vote for their positions (and lose two units of utility from a vote against their positions). However, the bother of actually voting costs each one unit of
Suppose Mr. and Mrs. Ward agreed not to vote in tomorrow's election. Would such an agreement improve utility? Would such an agreement be an equilibrium?
Microsoft and a smaller rival often have to select from one of two competing technologies. The rival always prefers to select the same technology as Microsoft (because compatibility is important), while Microsoft always wants to select a different technology from its rival. Describe the equilibrium
The following represents the potential outcomes of your first salary negotiation after graduation: Assuming this is a sequential move game with the employer moving first, indicate the most likely outcome. Does the ability to move first give the employer an advantage? If so, how? As the employee, is
Every year, management and labor renegotiate a new employment contract by sending their proposals to an arbitrator who chooses the best proposal (effectively giving one side or the other $1 million). Each side can choose to hire, or not hire, an expensive labor lawyer (at a cost of $200,000) who is
In the text, we considered a sequential move game in which an entrant was considering entering an industry in competition with an incumbent firm (Figure 15-1). Consider now that the entrant, if fought, has the possibility of withdrawing from the industry (at a loss of 1 for the entrant and a gain
American Airlines and British Airways are proposing to merge. If different unions represent British pilots and American pilots how would this merger affect airline costs?
Robert G. Flanders Jr., the state-appointed receiver for Central Falls, RI, said his city's declaration of bankruptcy had proved invaluable in helping it cut costs. Before the city declared bankruptcy, he said, he had found it impossible to wring meaningful concessions out of the city's unions and
Your pharmaceutical firm is seeking to open up new international markets by partnering with various local distributors. The different distributors within a country are stronger with different market segments (hospitals, retail pharmacies, etc.) but also have substantial overlap.a. In Egypt, you
Pharmaceutical Benefits Managers or PBM's are intermediaries between upstream drug manufacturers and downstream insurance companies. They design formularies (list of drugs that insurance will cover) and negotiate prices with drug companies. PBM's want a wider variety of drugs available to their
Multiple Choice Questions1. You are taking a multiple-choice test that awards you one point for a correct answer and penalizes you 0.25 points for an incorrect answer. If you have to make a random guess and there are five possible answers, what is the expected value of guessing?a. 0.5 pointsb. 0.25
You want to price posters at the Poster Showcase profitably and run an experiment to estimate the demand elasticity. You raise the price of kitten posters 10% but keep your dog poster prices unchanged. After a month, kitten poster unit sales fall by 12%, but dog posters rise by 8%.Why might the
Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for possible future product and estimates that the reservation value is $250,000. Your dealings on the secondhand market lead
The HR department is trying to fill a vacant position for a job with a small talent pool. Valid applications arrive every week or so, and the applicants all seem to bring different levels of expertise. For each applicant, the HR manager gathers information by trying to verify various claims on
Multiple Choice Questions1. You are bidding in a second-price auction for a painting that you value at $800. You estimate that other bidders are most likely to value the painting at between $200 and $600. Which of these is likely to be your best bid?a. $1,000b. $800c. $600d. $4002. Which of the
You hold an auction among three bidders. You estimate that each bidder has a value of either $16 or $20 for the item, and you attach probabilities to each value of 50%. What is the expected price? If two of the three bidders collude, what is the price?
A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of $0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the reserve price. An auctioneer faces two bidders,
Consider the problem above, but now each bidder has a value of either $60 or $80. What reserve price should the auctioneer set, and what is the expected revenue from auctioning the item with and without a reserve price?
When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, representatives of other museums that have no chance of winning are actively wooed by the auctioneer to attend anyway. Why?
Moe Green estimates the cost of future projects for a large contracting firm. Mr. Green uses precisely the same techniques to estimate the costs of every potential job, and formulates bids by adding a standard profit markup. For some companies to whom the firm offers its services, no competitors
Multiple Choice Questions1. An insurance company offers doctors malpractice insurance. Assume that malpractice claims against careful doctors cost $5,000 on average over the term of the policy and settling malpractice claims against reckless doctors costs $30,000. Doctors know whether they are
In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer would pay a price to the manufacturer, the
Many Police Officer positions being advertised today require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don't police departments increase their applicant pool by dropping this requirement?
You sell bicycle theft insurance. If bicycle owners do not know whether they are high- or low risk consumers, is there an adverse selection problem?
When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to the state. In cases where the incumbent manager
Multiple Choice Questions1. Which of the following is an example of moral hazard?a. Reckless drivers are the ones most likely to buy automobile insurance.b. Retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas.c. Drivers who have
Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Would you want to price the extended warranty at 2% of the product price? Discuss both moral hazard and adverse selection issues.
Lightweight personal locator beacons are now available to hikers that make it easier for the Forest Service's rescue teams to locate those lost or in trouble in the wilderness. How will this affect the costs that the Forest Service incurs?
BPO Services is in the business of digitizing information from forms that are filled out by hand. In 2006, a big client gave BPO a distribution of the forms that it digitized in house last year, and BPO estimated how much it would cost to digitize each form.A. Compute the average cost of filling
Frequent flyer programs are targeted more toward business travelers (who do not pay for their own tickets) than leisure travelers (who do). Explain their effect on each type of traveler. Why is there a difference?
Often building supply retail store employees become friendly with their customers (building contractors) and will do them favors. For example, they might charge customers for 90% of the flooring material being purchased, or they might hide the last of a unique flooring material for the contractor

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Managerial Economics A Problem Solving Approach 3rd edition Luke M. Froeb, Brian T. McCann, Mikhael Shor, Michael R. War - Solutions

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