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Questions and Answers of Economics

The following data represent the production possibilities of two people in solving math and economics problems. If they devote their total effort and time to math, A can solve 10 math problems and B
Give some examples of rent seeking. If rent seeking is inefficient, will it be competed away? Why or why not?
What is an “externality”? Why might it create a problem for market allocation?
Why is it widely accepted that the government is responsible for dealing with externalities?
Give an example of an externality between firms, between customers and firm, and between suppliers and firm?
Explain how smoking can simultaneously generate positive and negative externalities. Is there too much or too little smoking? Explain why smoking bans on bars and restaurants do not efficiently solve
“Anyone who tells you that markets left to their own devices always lead to socially beneficial outcomes is talking utter nonsense.” Do you agree with this statement? Defend your position.
Is the government provision of interstate highways a productive use of resources? What would have occurred had the government not taken responsibility for building and maintaining highways?
What is a public good? Is it necessary for government to provide a public good? Apply your answer to national defense. Apply your answer to a lighthouse. Could either be privatized?
What is adverse selection? What is moral hazard? Give an example of these two problems arising between a firm and its suppliers.
“Markets tend to favor the party that knows more.” True or false? So if you think you might know less, how does that change your behavior?
Is it necessary to have democracy to have a “free enterprise economy”? Can a free enterprise economy and totalitarianism coexist?
Why does corruption negatively affect economic growth and standards of living? Why is corruption like a tax on doing business?
A beekeeper, Yung, lives next to an apple orchard. She not only benefits from the bees' honey, which she sells, but she also creates a positive externality for her apple grower neighbor: Yung's bees
Suppose that an automobile race track is built several miles from a small town. After the construction is completed it is discovered that the heavy roar from the cars regularly disturbs the 2,500
Are there private property rights within a firm? Who owns what? What is not owned? Can `trade and exchange occur within the firm without the existence of private property rights?
What are the “boundaries” of a firm? What determines the extent of vertical boundaries – vertical integration? What determine the extent of horizontal integration – scope? Use a cost benefit
What is the purpose of corporate governance?
What is the role of the Board of Directors? Should the Board’s interests be aligned with managers or owners? Explain.
In Chapter 1 it was noted that economics examines issues “at the margin.” Explain how this would apply to the decision to make or buy.
Explain how a focus on core competency could be compatible with an expanding vertical boundary. With an expanding horizontal boundary.
What is meant by “supply chain”? Explain when a firm should bring its supply chain in-house. Explain when a firm should leave its supply chain external.
Is it possible for a firm to have several different cultures? If so, what does this imply about the relationship between culture and performance?
If it is necessary for each employee to interact with all other employees, what organizational form makes most sense? If the employees work independently, not having to interact with each other,
Suppose that an employee has two tasks to perform—assembling machinery and evaluating quality. Suppose that the supervisor can only observe how many machines have been assembled by the worker. Is a
A shareholder in a limited liability company is not personally liable for any of the debts of the company, other than for the value of his investment in that company. Explain why limited liability
Describe the efficiencies and the inefficiencies that occur with a top-down (hierarchical) management structure.
What might be a problem with democracy as a structure to run a publicly held company?
Would it be more efficient to enable employees to vote on decisions with majority rule or to assign the CEO full responsibility for decisions? Explain.
A commonly referred to management theory is Maslow’s Hierarchy of Needs. It is a theory of motivation and is structured as an hierarchy.The way the hierarchy works is that a person starts at the
When leading business thinker Gary Hamel analyzes the central problems with the modern hierarchical organization, he sees 5 debilitating deficits. One is that too few voices are heard. His suggested
Do you think this explains the organizational changes to have taken place since the 1970s? Explain
It has been suggested that large, tall hierarchies will predominate in physical capital intensive industries, and these will typically have seniority-based promotion policies. By contrast, flat
Here is a view on organizational changes.
Personal injury lawyers may be paid a contingency fee equal to a percentage of the amount awarded. The lawyer receives payment only if his or her client wins the case and is awarded a sum of money.
Suppose that an employee has two tasks to perform, assembling machinery and evaluating quality. Suppose that the supervisor can only observe how many machines the worker has assembled. Under what
Many firms that use operators to assist customers evaluate the operators on the basis of how many customers they service. Explain the results of such an evaluation system. What would you do
The same study of workers and their lower paying jobs mentioned in question 5 found that workers who had been with a firm a longer period of time suffered larger declines than those who had been with
When Ben and Jerry decided to step down as managers of their own company, they announced that the new CEO would not earn more than 10 times the lowest paid employee. What do you think was the result
An investment has returns of zero with probability one half, $3,000 with probability one third and $6,000 with probability one sixth. What is the expected value of the return?
Explain why you tend to find more shirking, more corruption, and more inefficiency in large firms than you do in small firms. Explain why you tend to find more shirking, more corruption, and more
The oil well Maconda exploded in the Gulf of Mexico in 2010, killing 11 people and creating a huge oil spill. BP did not own the Deepwater Horizon platform, but leased it from a company
It is said that the current generation of workers will have a very small probability of being employed by the same firm throughout their work life. In previous generations it was common for people to
If the investment described in exercise 12 is an individual’s possible weekly compensation and the individual has no control over the outcome, what effort will the risk-averse individual put in?
What is market failure? Explain how externalities, public goods, and asymmetric information are all problems with private property.
Could rent seeking on the part of the CEO influence the CEO’s compensation? Evaluate the following argument.
In an advertisement for a Professional Employment Organization it was stated “Outsourcing can be a cost effective alternative to the expense and administrative burden of a traditional
Under what conditions are the two strategies of low cost and high quality a tradeoff? Under what conditions would the efficient frontier not be an appropriate picture of the two strategies?
What is the best practices frontier? How does this relate to competitive advantage?
Why is growth a primary strategy of almost every firm? Would it ever make sense to “stand pat.” Use the economic profit equation to provide an answer.
Jack Welch is heralded as a great leader of General Electric (GE). His strategy to acquire companies in different lines of business based on the requirement that each business in GE was to become the
Suppose that two firms, A and B compete. They can choose different strategies – a combination of low price or high quality. The tables below show the best practice frontiers for each firm.A’s
Explain how a strategy of increasing expenditures on advertising could deter market entry.
Explain why predatory pricing hardly works in the real world.
Here are some examples of strategies selected by different firms:1) grow larger – AHERF2) downsize – Avon, Sara Lee3) Diversify – Walmart, PepsiCo4) Dominate a niche – Starbucks, Jiffy Lube5)
Use what you know about Starbucks and apply the VRIO/VRIN approach to evaluate Starbucks, as you know it. Use the five forces model to evaluate Starbucks. Is the five forces model different from the
Explain the differences between perfect competition, monopoly, monopolistic competition, and oligopoly.
Which of the following might create first-mover advantages?a. Maxwell House introduces the first freeze-dried coffee.b. A consortium of U.S. firms introduces the first high-definition television.c.
You and your rival must simultaneously decide what price to advertise in the weekly newspaper. If you each charge a low price, you each earn zero profits. If you each charge a high price, you each
You are considering entering a market serviced by a monopolist. You currently earn $0 economic profits, while the monopolist earns $5. If you enter the market and the monopolist engages in a price
Ludwig von Mises had this to say about game theory in 1949. Game theory had been invented only a few years before.Mises, Ludwig von (1949) Human Action. London: William Hodge. (p.116)Explain what von
Firm 1 and Firm 2 are the only ones that produce and sell good X. Each of them is trying to decide (independently and simultaneously) how much to spend on advertising. Sales and profits of each firm
Two firms are involved in developing a new technology that will allow consumers to provide the most incredibly clear picture yet devised on all video sources. Given the risks, compatibility of the
What is “the market process”? Describe the role of the entrepreneur in the market process.
In the book, Naked Economics, the author says, “Prices are like giant neon billboards that flash important information.” (p.12) Describe the types of information that market prices provide. What
Creative Destruction – means what? Is it true that capitalism works not because it rewards winners but crushes losers? How is this reconciled with golf tournaments and professional team sports?
What is an asymmetrical information problem? How does an entrepreneur deal with asymmetric information?
Is rent seeking the same as corruption? Why does corruption negatively affect economic growth and standards of living? In what way might corruption be like a tax on doing business? What institutions
What does the following statement mean? “Indeed, every decision we make involves some kind of trade-off.” Under what condition would the statement not be true? Does the entrepreneur face a
It has been said that the concept of opportunity cost is central to economics and economic thinking. Understanding opportunity cost will help an entrepreneur determine the true value of decisions.
Define entrepreneurship. How does it differ from management? Would you consider each of the following entrepreneurial or managerial? a. Bill Gates’ creation of the Microsoft operating system b.
List 3 reasons that firms exist. Do any of the reasons imply that the command and control of centrally planned economies is the appropriate form? What are the similarities and differences between
Which of the three types of government policies—antitrust, social regulation, economic regulation—is the basis for each of the following? Who benefits from the policy?a. beautician education
Some airline executives have called for “re-reregulation”. Why might an executive of an airline prefer to operate in a regulated environment?
Using the following HHIs, do the following:a. Indicate in which market a merger would be allowed under Department of Justice guidelines.b. Provide an economic explanation for why this result would
“Government operations are often described as inefficient. In fact, they operate exactly as we would expect given their incentives.” What does this mean? The example used is the DMV – a
The “grabbing hand” may be described as merely an essential business strategy. Explain what the strategy is and demonstrate how many resources a business should allocate to it.
What are network externalities? What is the externality part of the “network externalities”? Why don’t firms with network externalities become monopolists?
The 2010 FCC report on the wireless market also noted that: There are over 900,000 rural residents who have no mobile service at all. Another 2.5 million get coverage from only one provider. Why
Suppose internal rent seeking increases as firm size increases. What would this say for the ‘optimal’ size of firms?
Services marketing is a current business buzzword. It is a branch of marketing that focuses on services. Why would it be different from the marketing of goods?
Explain the relationship between fixed costs, variable costs and revenue for determining when a firm should temporarily shut down.
Explain why the rule MR=MC defines profit maximization.
What is the abnormal net income model? Where does the entrepreneur show up in this model?
What should the firm do, maximize profit or maximize stakeholder value? Explain
The owner of Whole Foods Markets, John Mackay, argues that firms should maximize stakeholder value. He uses his firm as an example. Mackay takes money from the profits and allocates it to community
Does a firm maximize profits today or the present value of the profit stream? How far out does a firm look to determine its profit stream? If a CEO could be fired at any time for poor performance,
Although water is essential to life no matter where one lives, the demand for water differs across regions. In one study it was found that the price elasticity of demand for water in all regions of
Many proponents of public transit argue that the service should be provided free to the public in metropolitan areas in order to reduce pollution and traffic congestion. Estimates by economists
The income elasticity of demand for automobiles in the United States was estimated by a government agency to be between 2.5 and 3.9. a. What does this mean?b. If incomes rise by 10 percent, what
What would happen to the demand curve in each of the following cases:a. income rises –b. the number of customers rises –c. the number of substitutes increases –d. people expect that the price
A firm has estimated the following demand function for its product:Q = 10-2P+.20I+2A where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A
Explain why the price elasticity of demand is negative. What would the price of demand be for a “prestige good,” one for which quantity purchased increases a price increases? How do you reconcile
For each of the following pairs of goods or services, identify the one for which the price elasticity of demand is greater and explain why:Coffee; Starbucks CoffeeTuition at a public university;
Explain why the demand curve is a horizontal line in the situation called perfect competition
Many retailers will use short-term price cuts to attract customers. These often include "loss-leaders," products sold at a loss for a short time. Why would a firm ever sell at a loss?
If a firm has two sets of customers, those who want the newest version of the product immediately and those who are more patient, how should it price its product?
Using elasticity, explain what “market power” means.
Why would different industries have different degrees of economies or diseconomies of scale?
The thing a lot of people don’t understand about e-commerce is the degree to which it is a scale business,” says Jeff Bezos, CEO of Amazon.com. Where a conventional retailer might have to double

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