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Managerial Economics and Strategy 1st edition Jeffrey M. Perloff, James A. Brander - Solutions

The United States is increasingly outsourcing jobs to India: having the work done in India rather than in the United States. For example, the Indian firm Tata Consultancy Services, which provides information technology services, increased its work force by 70,000 workers in 2010 and expected to add
In Q& A 2.1, if the price of tomatoes rises to $ 1.80 per lb, what are the new equilibrium price and quantity for avocados?
According to Borjas (2003), immigration into the United States increased the labor supply of working men by 11.0% from 1980 to 2000 and reduced the wage of the average native U. S. worker by 3.2%. Draw a supply- and- demand diagram and label the axes to illustrate what happened.
Given that the U. S. supply of frozen orange juice comes mainly from Florida and Brazil, what effect would a freeze that damages oranges in Florida have on the price and quantity of frozen orange juice sold in the United States? What effect would the freeze have on the price of grapefruit juice?
The major BP oil spill in the Gulf of Mexico substantially reduced the harvest of shrimp and other seafood in the Gulf, but had limited impact on the prices that U. S. consumers paid in 2010 (Emmeline Zhao, “Impact on Seafood Prices Is Limited,” Wall Street Journal, June 20, 2010). The reason
Increasingly, instead of advertising in newspapers, individuals and firms use Web sites that offer free or inexpensive classified ads, such as ClassifiedAds.com, Craigslist.org, Realtor.com, Jobs.com, Mon-ster. com, and portals like Google and Yahoo. Using a supply-and-demand model, explain what
Humans who consume beef products made from diseased animal parts can develop mad cow disease (bovine spongiform encephalopathy, or BSE, a new variant of Creutzfeldt- Jakob disease), a deadly affliction that slowly eats holes in sufferers’ brains. The first U. S. case, in a cow imported from
In the previous question, you were asked to illustrate why the mad cow disease announcement initially caused the U. S. equilibrium price of beef to fall and the quantity to rise. Show that if the supply and demand curves had shifted in the same directions as above but to greater or lesser degrees,
Increases in the price of petroleum affect the demand curve for aluminum. Petroleum- based chemicals (petrochemicals) are the main raw material used for plastic. Plastics are used to make many products, including beverage containers, auto parts, and construction materials. An alternative to plastic
Use a supply-and-demand diagram to show the effects of occupational licensing on the equilibrium wage and number of workers in an occupation as described in the Mini-Case “Occupational Licensing.”
Usury laws place a ceiling on interest rates that lenders such as banks can charge borrowers. Why would we expect low-income households in states with usury laws to have significantly lower levels of consumer credit (loans) than comparable house-holds in states without usury laws?
After Katrina, a major hurricane, damaged many U. S. gasoline refineries in 2005, the price of gasoline shot up around the country. The Federal Trade Commission announced that it would investigate price gouging— charging “too much”— and several members of Congress called for price controls
Some cities impose rent control laws, which are price controls or limits on the price of rental accommodations (apartments, houses, and mobile homes). As of 2011, New York City alone had approximately one million apartments under rent control. Show the effect of a rent control law on the
If the minimum wage raises the market wage, w, but hours worked, L, fall as a result, total wage payments, wL, may rise or fall. Use supply and demand curves to show that either outcome is possible depending on the shapes (slopes) of the supply and demand curves.
Use the demand function and the supply function for the avocado market to determine how the equilibrium price and quantity change when a 55¢ per lb specific tax is imposed on this market, as illustrated infigure.
Worried about excessive drinking among young people, the British government increased the tax on beer by 42% from 2008 to 2012. Does a specific tax substantially reduce the equilibrium quantity of alcohol? Answer in terms of the slopes of the demand and supply curves.
If the government collects a $ 1 specific tax, what share of the tax is paid by consumers and firms in each of the following cases? Explain why. a. The demand curve is vertical at quantity Q and the supply curve is upward sloping. b. The demand curve is horizontal at price p and the supply curve is
Quebec, Canada, offers a per-child subsidy on day care for young children that lowers the price to $ 7 per child as of 2011 (at a cost of about $ 10,000 per child per year).a. What is the effect of this subsidy on the equilibrium price and quantity? b. Show the incidence of the subsidy on day care
List as many industries as you can for which the supply-and-demand model is likely to be appropriate.
During the spring and summer of 2008 when gasoline prices were rising quickly, politicians in several countries proposed a moratorium on some or all gasoline taxes to help consumers. In the United States, John McCain, the Republican candidate for president, proposed suspending the federal gasoline
The U. S. Tobacco Settlement between the major tobacco companies and 46 states caused the price of cigarettes to jump 45¢ (21%) in November 1998. Levy and Meara (2005) found only a 2.65% drop in prenatal smoking 15 months later. What is the elasticity of demand for this group?
When Apple raised the price of iTunes from 99¢ to $ 1.29, GS Boyz’s “ Stanky Legg” sales dropped from 22,686 units to 19,692 units (Glenn Peoples, “ iTunes Price Change: Sales Down, Revenue Up in Week 1,” Billboard, April 15, 2009). What was the song’s arc elasticity of demand?
The demand curve for a good is Q = 100 – 2p. What is the elasticity at the point p = 10 and Q = 80?
Luchansky and Monks (2009) estimated that the U. S. demand curve for ethanol is Q = p– 0.504 p1g.269 v2.226, where Q is the quantity of ethanol, p is the price of ethanol, pg is the price of gasoline, and v is the number of registered vehicles. What is the elasticity of demand for ethanol?
The demand curve for a good is Q = 1,000 – 2p2. What is the elasticity at the point p = 10 and Q = 800? C
What section of a straight-line demand curve is elastic?
Suppose that the demand curve for wheat in each country is inelastic up to some “ choke” price p*— a price so high that nothing is bought— so that the demand curve is vertical at Q* at prices below p* and horizontal at p*. If p* and Q* vary across countries, what does the world’s demand
Calculate the price and cross- price elasticities of demand for coconut oil. The coconut oil demand function (Buschena and Perloff, 1991) isQ = 1,200 – 9.5p + 16.2pp + 0.2Y,where Q is the quantity of coconut oil demanded in thousands of metric tons per year, p is the price of coconut oil in cents
Using the coconut oil demand function from Question 1.9, calculate the income elasticity of demand for coconut oil. (If you do not have all the numbers necessary to calculate numerical answers, write your answers in terms of variables.)
The Mini-Case “Substitution May Save Endangered Species” describes how the equilibrium changed in the market for seal genitalia (used as an aphrodisiac in Asia) when Viagra was introduced. Use a supply-and-demand diagram to illustrate what happened. Is it possible for a positive quantity to be
Nataraj (2007) found that a 100% increase in the price of water for heavy users in Santa Cruz, California, caused the quantity of water they demanded to fall by an average of 20% (Mini- Case “Turning Off the Faucet”). Before the increase, heavy users initially paid $ 1.55 per unit, but
At the Portland Fish Exchange, each day some amount of cod is brought to market. Supply is perfectly inelastic at that amount. How much cod is caught and brought to market varies day to day. Assuming the demand curve does not vary over time use the supply- demand framework to illustrate how the
Suppose that a restaurant uses a focus group of regular customers to determine how many customers would buy a proposed new menu item at various prices. Can this information be used to estimate an inverse demand curve? A demand curve? Explain briefly. Would it be possible to use a focus group to
The estimated demand curve for popsicles on a particular beach on a sunny summer day is given by Q = 130 – 3.5p, where p is measured in dollars. What is the predicted quantity if p = $ 2.00. If the actual quantity demanded is 129, what is the residual? Suggest at least two unobserved variables
A producer of outdoor clothing used a focus group to obtain information about the demand for fleece jackets with built-in, battery-operated warming panels. At prices of $ 100, $ 90, $ 80, $ 70, $ 60, and $ 50, the focus group demanded 23, 31, 40, 44, 48, and 60 jackets, respectively. Use the Excel
How sensitive are your regression results in Exercise 3.1 to small changes in the data? In particular, how do your regression results change if a. The quantity in the first row of Table 3.1 were 2.0 instead of 1.5? b. The quantity in the second row of Table 3.1 were 2.7 instead of 2.2?
Using the data in Question 2.4, determine the standard error and t- statistic for the price coefficient. Is price statistically significantly different from zero at the 0.05 level of significance?
In the Camry focus group analysis in this chapter, we used a regression to estimate the demand for Camrys. Using that equation, how many fewer Camrys would the focus group buy if the price were increased by $ 1,000? How many Camrys would we expect the focus group to purchase if the price is $
According to the regression results for CEO compensation, is the effect of experience on CEO compensation statistically significant? Is it economically significant? Explain.
Suppose that you believe that the demand curve is a constant- elasticity demand curve: Q = Apε, where A is a positive constant and e is the constant elasticity of demand. You have some data and want to estimate the constant- elasticity demand curve Q = Apεu, where A is a positive constant, e is
You work for a firm producing fitness equipment. You have been told that the demand curve for the firm’s main product—a multistation home gym—is linear. You have been provided with price and quantity data obtained from focus groups and have been asked to run a regression of revenue on price.
Heinz makes most of its money from ketchup and prepared packaged foods that are substitutes for fresh foods. From figure, we see that its revenue tends to be low in the second quarter (May, June, and July). Can you provide a possible reason for this pattern?
As reported in the chapter, quarterly revenue for Heinz is estimated as R = 2,094 + 27.97t + 93.8D1 – 125.3D2 – 8.60D3. What does this estimation tell us about second quarter revenues for Heinz? If, as a consultant, you were asked to suggest ways of smoothing quarter-to-quarter revenues for
Some companies, such as Heinz, can reliably fore-cast revenues using pure time- series analysis (that is, by extrapolation of prior data, accounting for seasonal effects). Other companies, such as FedEx (which makes money by shipping packages), or Sony (which sells consumer electronics), find that
In the Managerial Solution, we estimated a focus group’s demand curve for iTunes downloads. The estimated coefficient on price was – 413, and the t- statistic was – 12.8. a. Using these values, what is the standard error of this estimated coefficient? b. Suppose we had another focus group
Using Excel or another program, estimate the linear OLS demand regression for the iTunes focus group data in the Managerial Solution. What is the R2? What are the coefficient estimates, the standard errors, and the t-statistics for each coefficient? Using a 95% confidence criterion, would you
Give as many reasons as you can why we believe that economists assume that the more-is-better property holds and explain how these explanations relate to the results in the Mini- Case “You Can’t Have Too Much Money.”
Give as many reasons as you can why we believe that indifference curves are convex to the origin.
William eats hot dogs only with mustard and consumes mustard only with hot dogs. He puts one unit of mustard on each hot dog he eats. Show his preference map. What is his utility function?
If Mia views two cups of tea as a perfect substitute for one cup of coffee and vice versa, what is her marginal rate of substitution between tea and coffee?
Andy purchases only two goods, apples (a) and kumquats (k). He has an income of $ 40 and can buy apples at $ 2 per pound and kumquats at $ 4 per pound. His utility function is U(a, k) = 3a + 5k. That is, his constant marginal utility for apples is 3 and his constant marginal utility for kumquats is
Lorna consumes cans of anchovies, A, and boxes of biscuits, B. Each of her indifference curves reflects strictly diminishing marginal rates of substitution. If A = 2 and B = 2, her marginal rate of substitution between cans of anchovies and boxes of biscuits equals – 1(= MUA / MUB). Will she
Yuka consumes mangos and oranges. She is given four mangos and three oranges. She can buy or sell mangos for $ 2 each. Similarly, she can buy or sell an orange for $ 1. If Yuka has no other source of income, draw her budget line and write the equation.
Change Q& A 4.1 so that Lisa’s budget and the price of pizza double, but the price of burritos remains constant. Show how her budget constraint and opportunity set changes. Is Lisa necessarily better off than before these changes?
Dale goes to the opera and ice hockey games. Draw a budget line for Dale. If the government imposes a 25% income tax on her, what happens to her budget line and opportunity set?
Alexander spends all his money on chocolate bars and songs that he downloads. The price of a chocolate bar and of a song is $ 1 each. His parents give him an allowance of $ 50 and four chocolate bars each month. Draw his opportunity set, assuming that he cannot sell the chocolate bars to his
Linda loves buying shoes and going out to dance. Her utility function for pairs of shoes, S, and the number of times she goes dancing per month, T, is U(S, T) = 2ST, so MUS = 2T and MUT = 2S. It costs Linda $ 50 to buy a new pair of shoes or to spend an evening out dancing. Assume that she has $
Nadia likes spare ribs, R, and fried chicken, C. Her utility function is U = 10R2C. Her marginal utilities are MUR = 20RC and MUC = 10R2. Her weekly income is $ 90, which she spends on only ribs and chicken. a. If she pays $ 10 for a slab of ribs and $ 5 for a chicken, what is her optimal
Lucas chooses between water and all other goods. If he spends all his money on water, he can buy 15 thousand gallons per week. At current prices, his optimal bundle is e1, where he buys both types of goods. Show e1 in a diagram. During a drought, the government limits the number of gallons per week
Gasoline is typically less expensive in the United States than across the border in Canada but now suppose that U. S. gasoline price rises above that in Canada due to a change in taxes. How would the gasoline-purchasing behavior of a person who lives equally close to gas stations in both countries
Suppose we change Q& A 4.4 so that Max and Bob have indifference curves that are convex to the origin. Use a figure to discuss how the different slopes of their budget lines affect the choices they make. Can you make any unambiguous statements about how many total books each can buy? Can you make
Ralph usually buys one pizza and two colas from the local pizzeria. The pizzeria announces a special: All pizzas after the first one are half- price. Show the original and new budget line. What can you say about the bundle Ralph will choose when faced with the new constraint?
Until 2012, California, Texas, and Pennsylvania required firms to collect sales taxes for online sales if the chain had a physical presence ( a “ brick” store as opposed to a “ click” store) in those states. Thus, those states collected taxes on Best Buy’s online sales, because it had
The local swimming pool charges nonmembers $ 10 per visit. If you join the pool, you can swim for $ 5 per visit but you have to pay an annual fee of F. Use an indifference curve diagram to find the value of F such that you are indifferent between joining and not joining. Suppose that the pool
Based on panel a in figure, show that Angela would accept the BOGOF promotion or the half-price promotion. Show that she may choose to stay either three or four nights with the half-price promotion depending on the exact shape of her indifference curves.
Some of the largest import tariffs (taxes on only imported goods) are on shoes. Strangely, the tariff is higher on cheaper shoes. The highest U. S. tariff, 67%, is on a pair of $ 3 canvas sneakers, while the tariff on $ 12 sneakers is 37%, and that on $ 300 Italian leather imports is 0%. (Adam
Draw diagrams similar to figure but with different shape indifference curves to show that as the price of tracks rises, the amount of live music Jack will buy may rise or fall.
Derive and plot Olivia’s demand curve for pie if she eats pie only à la mode and does not eat either pie or ice cream alone (pie and ice cream are complements).
According to towerswatson.com, at large employers, 48% of employees earning between $ 10,000 and $ 24,999 a year participated in a voluntary retirement savings program, compared to 91% who earned more than $ 100,000. We can view savings as a good. In a figure, plot savings versus all other goods.
Illustrate the logic of the endowment effect using a kinked indifference curve. Let the angle be greater than 90°. Suppose that the prices change, so the slope of the budget line through the endowment changes. Use the diagram to explain why an individual whose endowment point is at the kink will
Why would a consumer’s demand for a product change when the product price is quoted inclusive of taxes rather than before tax? Do you think fewer people would apply for a job if the salary were quoted after deducting income tax rather than in pretax form?
In the Managerial Problem, suppose that entertainment is relatively more expensive in London than in Seattle so that the LL budget line cuts the LS budget line from below rather than from above as in the figure in the Managerial Solution. Show that the conclusion that Alexx is better off after his
What are the main types of capital, labor, and materials used to produce licorice?
Suppose that for the production function q = f( L, K), if L = 3 and K = 5 then q = 10. Is it possible that L = 3 and K = 6 also yields q = 10 for this production function? Why or why not?
Consider Boeing (a producer of jet aircraft), General Mills (a producer of breakfast cereals), and Wacky Jack’s (which claims to be the largest U. S. provider of singing telegrams). For which of these firms is the short run the longest period of time? For which is the long run the shortest?
If each extra worker produces an extra unit of output, how do the total product of labor, average product of labor, and marginal product of labor vary with labor? Plot these curves in a graph similar to figure.
Each extra worker produces an extra unit of out-put up to six workers. As more workers are added, no additional output is produced. Draw the total product of labor, average product of labor, and marginal product of labor curves in a graph similar to Figure.
Suppose that the production function is q = L0.75 K0.25.a. What is the average product of labor, holding capital fixed at K?b. What is the marginal product of labor?c. How is the marginal product of labor related to the average product of labor?
In the short run, a firm cannot vary its capital, K = 2, but can vary its labor, L. It produces output q. Explain why the firm will or will not experience diminishing marginal returns to labor in the short run if its production function is a. q = 10L + K. b. q = L0.5 K0.5.
According to Card (2009), (a) workers with less than a high school education are perfect substitutes for those with a high school education, (b) “high school equivalent” and “ college equivalent” workers are imperfect substitutes, and (c) within education groups, immigrants and natives are
To produce a recorded DVD, q = 1, a firm uses one blank disk, D = 1, and the services of a recording machine, M = 1, for one hour. a. Draw the isoquants for this production function and explain its shape. b. What is the MRTS at each point along the isoquant corresponding to q = 100? c. Draw the
The production function at Ginko’s Copy Shop is q = 1,000 × min( L, 3K), where q is the number of copies per hour, L is the number of workers, and K is the number of copy machines. As an example, if L = 4 and K = 1, then the minimum of L and 3K, min( L, 3K) = 3, and q = 3,000.a. Draw the
Using the figure in the Mini- Case “A Semiconductor Isoquant,” show that as the firm employs additional fixed- proportion technologies, the firm’s overall isoquant approaches a smooth curve similar to that in panel c of figure.
To speed relief to isolated South Asian communities that were devastated by the December 2004 tsunami, the U. S. government doubled the number of helicopters from 45 to 90 in early 2005. Navy admiral Thomas Fargo, head of the U. S. Pacific Command, was asked if doubling the number of helicopters
The production function for the automotive and parts industry is q = L0.27 K0.16 M0.61, where M is energy and materials (based on Klein, 2003). What kind of returns to scale does this production function exhibit? What is the marginal product of materials?
Does it follow that because we observe that the aver-age product of labor is higher for Firm 1 than for Firm 2, Firm 1 is more productive in the sense that it can produce more output from a given amount of inputs? Why?
A production function has the property that f( xL, xK) = x2f( L, K) for any positive value of x. What kind of returns to scale does this production function exhibit? If the firm doubles L and K, show that the marginal product of labor and the marginal product of capital also double.
Show in a diagram that a production function can have diminishing marginal returns to a factor and constant returns to scale.
Is it possible that a firm’s production function exhibits increasing returns to scale while exhibiting diminishing marginal productivity of each of its inputs? To answer this question, calculate the marginal productivities of capital and labor for the production of electronics and equipment,
The BlackBerry production function indicated in the text is Q = 2.83L1.52 K0.82. Epple et al. (2010) estimate that the production function for U. S. housing is q = 1.38L0.144 M0.856, where L is land and M is an aggregate of all other mobile, nonland factors, which we call materials. Haskel and
Michelle’s business produces ceramic cups using labor, clay, and a kiln. She produces cups using a fixed proportion of labor and clay, but regardless of how many cups she produces, she uses only one kiln. She can manufacture 25 cups a day with one worker and 35 with two workers. Does her
Firm 1 and Firm 2 use the same type of production function, but Firm 1 is only 90% as productive as Firm 2. That is, the production function of Firm 2 is q2 = f(L, K), and the production function of Firm 1 is q1 = 0.9f (L, K). At a particular level of inputs, how does the marginal product of labor
In a manufacturing plant, workers use a specialized machine to produce belts. A new machine is invented that is laborsaving. With the new machine, the firm can use fewer workers and still produce the same number of belts as it did using the old machine. In the long run, both labor and capital (the
Until the mid-eighteenth century when spinning became mechanized, cotton was an expensive and relatively unimportant textile (Virginia Postrel, “What Separates Rich Nations from Poor Nations?” New York Times, January 1, 2004). Where it used to take a hand—spinner 50,000 hours to hand-spin 100
During recessions, U.S. firm lay off a larger proportion of their workers than Japanese firm do. (It has been claimed that Japanese firms continues to produce at high levels and store the output or sell it at relatively low process during the recession.) Assuming that the production function
Many corporations allow CEOs to use the firm’s corporate jet for personal travel (see the Mini- Case “Company Jets” in Chapter 7 for more details). The Internal Revenue Service (IRS) requires that the firm report personal use of its corporate jet as taxable executive income, and the
A firm purchased copper pipes a few years ago at $ 10 per pipe and stored them, using them only as the need arises. The firm could sell its remaining pipes in the market at the current price of $ 9. What is the opportunity cost of each pipe and what is the sunk cost?
There are certain fixed costs when you own a plane,’ [Andre] Agassi explained during a break in the action at the Volvo/ San Francisco tennis tournament, ‘ so the more you fly it, the more economic sense it makes. . . . The first flight after I bought it, I took some friends to Palm Springs for
Give the formulas for and plot AFC, MC, AVC, and AC if the cost function isa. C = 10 + 10q,b. C = 10 + q2, orc. C = 10 + 10q - 4q2 + q3. C
In 1796, Gottfried Christoph Härtel, a German music publisher, calculated the cost of printing music using an engraved plate technology and used these estimated cost functions to make production decisions. Härtel figured that the fixed cost of printing a musical page—the cost of engraving the

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