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Managerial Economics 12th edition Mark Hirschey - Solutions

Environmental Designs, Inc., produces and installs energy-efficient window systems in commercial buildings. During the past ten years, sales revenue has increased from $25 million to $65 million. A. Calculate the company's growth rate in sales using the constant growth model with annual
Dorothy Gale, a quality-control supervisor for Wizard Products, Inc., is concerned about unit labor cost increases for the assembly of electrical snap-action switches. Costs have increased from $80 to $100 per unit over the previous three years. Gale thinks that importing switches from foreign
Claire Littleton has discovered that the change in Product A demand in any given week is inversely proportional to the change in sales of Product B in the previous week. That is, if sales of B rose by X% last week, sales of A can be expected to fall by X% this week.A. Write the equation for next
Kate Austen must generate a sales forecast to convince the loan officer at a local bank of the viability of Marina Del Rey, a trendy west-coast restaurant. Austen assumes that next-period sales are a function of current income, advertising, and advertising by a competing restaurant.A. Write an
Dr. Isobel Stevens is supervising physician at the Westbury HMO, a New York City-based medical facility serving the poor and indigent. Stevens is evaluating the cost effectiveness of a preventive maintenance program, and believes that monthly downtime on the packaging line caused by equipment
Toys Unlimited Ltd., must forecast sales for a popular adult computer game to avoid stock outs or excessive inventory charges during the upcoming Christmas season. In percentage terms, the company estimates that game sales fall at double the rate of price increases and that they grow at triple the
Mid-Atlantic Cinema, Inc., runs a chain of movie theaters in the east-central states and has enjoyed great success with a Tuesday Night at the Movies promotion. By offering half off its regular $9 admission price, average nightly attendance has risen from 500 to 1,500 persons. Popcorn and other
Supersonic Industries, based in Seattle, Washington, manufactures a wide range of parts for aircraft manufacturers. The company is currently evaluating the merits of building a new plant to fulfill a new contract with the federal government. The alternatives to expansion are to use
A. A simple regression model over the 1980-2003 period where the Y-variable is the Disney year-end stock price and the X-variable is Disney’s earnings per share reads as follows (statistics in parentheses):Pt = -$1.661 + $31.388EPSt, R2 = 86.8% (-1.13) (12.03)Use this model to forecast
Is use of least-cost input combinations a necessary condition for profit maximization? Is it a sufficient condition? Explain.
“Output per worker is expected to increase by 10 percent during the next year. Therefore, wages can also increase by 10 percent with no harmful effects on employment, output prices, or employer profits.” Discuss this statement.
“Hourly wage rates are an anachronism. Efficiency requires incentive-based pay tied to performance.” Discuss this statement.
Explain why the MP/P relation is deficient as the sole mechanism for determining the optimal level of resource employment.
Clarify how profits are maximized and the optimal level of employment is achieved in a competitive labor market when the price of labor PL = MRPL.
“Oregon’s minimum wage increased from $4.75 in 1996 to $5.50 in 1997, to $6 in 1998, and to $6.50 in 1999. According to a study by the Oregon Center for Public Policy, the minimum wage increases in Oregon did not harm welfare recipients’ opportunities to find work. In fact, a larger
Powerful unions like the AFL-CIO are staunch advocates for increasing the federal minimum wage despite the fact that highly-trained and experienced AFL-CIO workers tend to earn far more than the minimum wage. Can you give an economic rationale for the AFL-CIO’s position?
Cite some ways for increasing productivity growth in the United States.
Explain why company productivity is important to managers, employees, and investors. Is superior worker productivity a necessary and sufficient condition for above-average compensation?
Commission-based and piece-rate-based compensation plans are commonly employed by businesses. Use the concepts developed in the chapter to explain these phenomena.
Medical Testing Labs, Inc., provides routine testing services for blood banks in the Los Angeles area. Tests are supervised by skilled technicians using equipment produced by two leading competitors in the medical equipment industry. Records for the current year show an average of 27
Washington-Pacific, Inc., manufactures and sells lumber, plywood, veneer, particle board, medium-density fiberboard, and laminated beams. The company has estimated the following multiplicative production function for basic lumber products in the Pacific Northwest market using monthly production
The following production table gives estimates of the maximum amounts of output possible with different combinations of two input factors, X and Y. (Assume that these are just illustrative points on a spectrum of continuous input combinations.)A. Do the two inputs exhibit the characteristics of
Indicate whether each of the following statements is true or false. Explain your answers.A. Decreasing returns to scale and increasing average costs are indicated when εQ < 1.B. If the marginal product of capital falls as capital usage grows, the returns to capital are decreasing.C.
“Pay for performance” means that employee compensation closely reflects the amount of value derived from each employee’s effort. In economic terms, the value derived from employee effort is measured by net marginal revenue product. It is the amount of profit generated by the employee, before
Determine whether the following production functions exhibit constant, increasing, or decreasing returns to scale.A. Q = 0.5X + 2Y + 40ZB. Q = 3L + 10K + 500C. Q = 4A + 6B + 8ABD. Q = 7L2 + 5LK + 2K2E. Q = 10L0.5K0.3
CafÃ©-Nervosa.com, based in Seattle, Washington, is a rapidly growing family business that offers a line of distinctive coffee products to local and regional coffee shops. Assume founder and president Frasier Crane is reviewing the company's sales force compensation plan. Currently, the
The First National Bank received 3,000 inquiries following the latest advertisement describing its 30-month IRA accounts in the Boston World, a local newspaper. The most recent ad in a similar advertising campaign in Massachusetts Business, a regional business magazine, generated 1,000 inquiries.
To better serve customers interested in buying cars over the Internet, Smart Motors, Inc., hired Nora Jones to respond to customer inquiries, offer price quotes, and write orders for leads generated by the company’s web site. During last year, Jones averaged 1.5 vehicle sales per week. On
Ticket Services, Inc., offers ticket promotion and handling services for concerts and sporting events. The Sherman Oaks, California, branch office makes heavy use of spot radio advertising on WHAM‑AM, with each 30-second ad costing $100. During the past year, the following relation between
Crane, Poole & Schmidt, LLC is a successful Boston-based law firm. Worker productivity at the firm is measured in billable hours, which vary between partners and associates. Partner time is billed to clients at a rate of $250 per hour, whereas associate time is billed at a rate of $125
Consider the following Cobb-Douglas production function for bus service in a typical metropolitan area:WhereQ = output in millions of passenger miles,L = labor input in worker hours,K = capital input in bus transit hours, andF = fuel input in gallons.Each of the parameters of this model was
A. What firm-specific and industry-specific factors might be used to explain differences among giant corporations in the amount of revenue per employee and profit per employee?B. A multiple regression analysis based upon the data contained in Table 7.6 reveals the following (t statistics in
Assume that a firm produces its product in a system described in the following production function and price data:Q = 3X + 5Y + XYPX = $3PY = $6Here, X and Y are two variable input factors employed in the production of Q.A. What are the optimal input proportions for X and Y in this production
What advantages or disadvantages do you see in using current costs for tax and stockholder reporting purposes?
Assume that two years ago, you purchased a new Jeep Wrangler SE 4WD with a soft top for $16,500 using five-year interest-free financing. Today, the remaining loan balance is $9,900 and your Jeep has a trade-in value of $9,500. What is your opportunity cost of continuing to drive the Jeep? Discuss
Southwest Airlines offers four flights per weekday from Cleveland, Ohio to Tucson, Arizona. If adding a fifth flight per weekday would cost $15,000 per flight, or $110 per available seat, calculate the incremental costs borne by Southwest following a decision to go ahead with a fifth flight per
Suppose the Big Enchilada restaurant has been offered a binding one-year lease agreement on an attractive site for $5,200 per month. Before the lease agreement has been signed, what is the incremental cost per month of site rental? After the lease agreement has been signed, what is the incremental
What is the relation between production functions and cost functions? Be sure to include in your discussion the effect of competitive conditions in input factor markets.
The definition of point output elasticity is εQ = ∂Q/Q ÷ ∂X/X (X represents all inputs), whereas the definition of point cost elasticity is εC = ∂C/C ÷ ∂Q/Q. Explain why εQ > 1 indicates increasing returns to scale, whereas εC < 1 indicates economies of scale.
With traditional medical insurance plans, workers pay a premium that is taken out of each paycheck and must meet an annual deductible of a few hundred dollars. After that, insurance picks up most of their healthcare costs. Companies complain that this gives workers little incentive to help control
Will firms in industries in which high levels of output are necessary for minimum efficient scale tend to have substantial degrees of operating leverage?
Do operating strategies of average cost minimization and profit maximization always lead to identical levels of output?
The president of a small firm has been complaining to the controller about rising labor and material costs. However, the controller notes that average costs have not increased during the past year. Is this possible?
Suppose Modern Merchandise, Inc., makes and markets do-it-yourself hardware, house wares, and industrial products. The company's new Aperture Moonblind is winning customers by virtue of its high quality and quick order turnaround time. The product also benefits because its price point bridges the
Assume Kanata Corporation is a leading manufacturer of telecommunications equipment based in Ontario, Canada. Its main product is microprocessor controlled telephone switching equipment, called automatic private branch exchanges (PABXs), capable of handling 8 to 3,000 telephone extensions. Severe
Determine whether each of the following is true or false. Explain why.A. Average cost equals marginal cost at the minimum efficient scale of plant.B. When total fixed cost and price are held constant, an increase in average variable cost will typically cause a reduction in the breakeven activity
Indicate whether each of the following involves an upward or downward shift in the long-run average cost curve or, instead, involves a leftward or rightward movement along a given curve. Also indicate whether each will have an increasing, decreasing, or uncertain effect on the level of average
South Park Software, Inc. produces innovative interior decorating software that it sells to design studios, home furnishing stores, and so on. The yearly volume of output is 15,000 units. Selling price and costs per unit are as follows:Management is evaluating the possibility of using the
Three graduate business students are considering operating a fruit smoothie stand in the Harbor Springs, Michigan, resort area during their summer break. This is an alternative to summer employment with a local firm, where they would each earn $6,000 over the three-month summer period. A fully
Angelica Pickles is manager of a Quick Copy franchise in White Plains, New York. Pickles projects that by reducing copy charges from 5¢ to 4¢ each, Quick Copy's $600-per-week profit contribution will increase by one-third.A. If average variable costs are 2¢ per copy, calculate Quick Copy's
Textbook publishers evaluate market size, the degree of competition, expected revenues, and costs for each prospective new title. With these data in mind, they estimate the probability that a given book will reach or exceed the breakeven point. If the publisher estimates that a book will not exceed
Power Brokers, Inc. (PBI), a discount brokerage firm, is contemplating opening a new regional office in Providence, Rhode Island. An accounting cost analysis of monthly operating costs at a dozen of its regional outlets reveals average fixed costs of $4,500 per month and average variable costs
Appalachia Beverage Company, Inc. is considering alternative proposals for expansion into the Midwest. Alternative 1: Construct a single plant in Indianapolis, Indiana, with a monthly production capacity of 300,000 cases, a monthly fixed cost of $262,500, and a variable cost of $3.25 per case.
The St. Thomas Winery plans to open a new production facility in the Napa Valley of California. Based on information provided by the accounting department, the company estimates fixed costs of $250,000 per year and average variable costs ofAVC = $10 + $0.01QWhere AVC is average variable cost (in
Untouchable Package Service (UPS) offers overnight package delivery to Canadian business customers. UPS has recently decided to expand its facilities to better satisfy current and projected demand. Current volume totals two million packages per week at a price of $12 each, and average variable
A. Interpret the coefficient of determination (R2) estimated for the nursing cost function.B. Describe the economic and statistical significance of each estimated coefficient in the nursing cost function.C. Average nursing costs for the eight for‑profit hospitals in the sample are
Give some illustrations of managerial decision situations in which you think the linear programming technique would be useful.
Assume that output can be produced only using processes A and B. Process A requires inputs L and K to be combined in the fixed ratio 2L: 4K, and process B requires 4L: 2K. Is it possible to produce output efficiently using 3L and 3K? Why or why not?
Describe the relative distance method used in graphic linear programming analysis.
In linear programming, why is it so critical that the number of nonzero-valued variables exactly equal the number of constraints at corners of the feasible space?
The primal problem calls for determining the set of outputs that will maximize profit, subject to input constraints.A. What is the dual objective function?B. What interpretation can be given to the dual variables called the shadow prices or implicit values?C. What does it mean if a dual variable or
How are the solution values for primal and dual linear programming problems actually employed in practice?
Will maximizing a profit contribution objective function always result in also maximizing total net profits?
Idaho Natural Resources (INR) has two mines with different production capabilities for producing the same type of ore. After mining and crushing, the ore is graded into three classes: high, medium, and low. The company has contracted to provide local smelters with 24 tons of
Interstate Bakeries, Inc., is an Atlanta-based manufacturer and distributor of branded bread products. Two leading products, Low Calorie, QA, and High Fiber, QB, bread, are produced using the same baking facility and staff. Low Calorie bread requires 0.3 hours of worker time per case,
Indicate whether each of the following statements is true or false and explain why.A. Constant returns to scale and constant input prices are the only requirements for a total cost function to be linear.B. Changing input prices will always alter the slope of a given isocost line.C. In
Cherry Devices, Inc., assembles connectors and terminals for electronic products at a plant in New Haven, Connecticut. The plant uses labor (L) and capital (K) in an assembly line process to produce output (Q), whereA. Calculate how many units of output can be produced with 4 units of labor and 400
The Syflansyd Nut Company has enjoyed booming sales following the success of its "Sometimes You Feel Like a Nut, Sometimes You Don't" advertising campaign. Syflansyd packages and sells four types of nuts in four different types of mixed-nut packages. These products include bulk (B), economy (E),
Delmar Custom Homes (DCH) uses two types of crews on its Long Island, New York,, home construction projects. Type A crews consist of master carpenters and skilled carpenters, whereas B crews include skilled carpenters and unskilled labor. Each home involves framing (F), roofing (R), and finish
Kate Warner, a senior loan officer with Citybank in Cleveland, Ohio, has both corporate and personal lending customers. On average, the profit contribution margin or interest rate spread is 1.5 percent on corporate loans and 2 percent on personal loans. This return difference reflects the fact that
The James Bond Fund is a mutual fund (open-end investment company) with an objective of maximizing income from a widely diversified corporate bond portfolio. The fund has a policy of remaining invested largely in a diversified portfolio of investment-grade bonds. Investment-grade bonds have high
Carolina Power and Light (CP&L) is a small electric utility located in the Southeast. CP&L currently uses coal-fired capacity to satisfy its base load electricity demand, which is the minimum level of electricity demanded 24 hours per day, 365 days per year.CP&L currently burns both
Creative Accountants, Ltd., is a small San Francisco-based accounting partnership specializing in the preparation of individual (I) and corporate (C) income tax returns. Prevailing prices in the local market are $125 for individual tax return preparation and $250 for corporate tax return
Designed for Sales (DFS), Inc., an Evanston, Illinois-based designer of single-family and multifamily housing units for real estate developers, seeks to determine an optimal mix of output during the current planning period. DFS offers custom designs for single-family units, Q1, for $3,000 and
Omaha Meat Products (OMP) produces and markets Cornhusker Plumpers, an extra-large frankfurter product being introduced on a test market basis into the St. Louis, Missouri, area. This product is similar to several others offered by OMP, and it can be produced with currently available
A. Set up the linear programming problem that a benefits officer might use to determine the total-return maximizing allocation of the employee's pension portfolio. Use the inequality forms of the constraint conditions.B. Solve this linear programming problem and interpret all solution values. Also
Historically, the Regional Bell Operating Companies (RBOCs) had a monopoly on the provision of local voice phone service. Regulation has now been eased to permit competition from Competitive Local Exchange Carriers (CLECs), cable companies, satellite operators and wireless competitors. Is the
One way of inferring competitive conditions in a market is to consider the lifestyle enjoyed by employees and owners. In vigorously competitive markets, employee compensation tends to be meager and profits are apt to be slim. Describe the perfectly competitive market structure and provide some
Competitive firms are sometimes criticized for costly but superfluous product differentiation. Is there an easy means for determining if such efforts are in fact wasteful?
The Worker Adjustment and Retraining Notification Act (WARN) requires employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs. Advance notice gives workers and their families transition time to adjust to the prospective loss of
“A higher minimum wage means some low wage workers will get fired because there will be less money available for labor costs. An international minimum wage, scaled according to the working conditions and cost of living in a particular country, would allow local workers to benefit without
“For smaller firms managed by their owners in competitive markets, profit considerations are apt to dominate almost all decisions. However, managers of giant corporations have little contact with stockholders, and often deviate from profit-maximizing behavior. Get real. Look at Tyco, for
“If excess profits are rampant in the oil business, why aren’t the stockholders of industry giants like Exxon Mobil, Chevron Texaco, and Royal Dutch Petroleum making huge stock-market profits?” Discuss this statement.
“Airline passenger service is a terrible high-fixed cost business featuring fierce price competition. With uniform safety, customers pick the lowest airfare with the most convenient departures. Except for pilots, nobody in the airline business makes any money.” Use the competitive firm
Suppose that a competitive firm long-run supply curve is given by the expression QF = -500 + 10P. Does this mean that the firm will supply -500 units of output at a zero price? If so, what does output of -500 units mean?
The long-run supply curve for a given competitive firm can be written as QF = -250 + 8P or P = $31.25 + $0.125QF. Explain why the amount supplied by 50 such competitors is determined by multiplying the first expression by 50 rather than by multiplying the second expression by a similar amount.
In some markets, cutthroat competition can exist even when the market is dominated by a small handful of competitors. This usually happens when fixed costs are high, products are standardized, price information is readily available, and excess capacity is present. Airline passenger service in large
Competitive market prices are determined by the interplay of aggregate supply and demand; individual firms have no control over price. Market demand reflects an aggregation of the quantities that customers will buy at each price. Market supply reflects a summation of the quantities that
Indicate whether each of the following statements is true or false, and explain why.A. In long-run equilibrium, every firm in a perfectly competitive industry earns zero profit.B. Perfect competition exists in a market when all firms are price takers as opposed to price makers.C. In competitive
Mankato Paper, Inc., produces uncoated paper used in a wide variety of industrial applications. Newsprint, a major product, is sold in a perfectly competitive market. The following relation exists between the firm's newsprint output and total production costs:A. Construct a table showing Mankato's
Florida is the biggest sugar-producing state, but Michigan and Minnesota are home to thousands of sugar beet growers. Sugar prices in the United States average about 20¢ per pound, or more than double the world-wide average of less than 10¢ per pound given import quotas that restrict imports to
The retail market for unleaded gasoline is fiercely price competitive. Consider the situation faced by a typical gasoline retailer when the local market price for unleaded gasoline is $1.80 per gallon and total cost (TC) and marginal cost (MC) relations are:TC = $40,000 + $1.64Q + $0.0000001Q2MC =
Farm Fresh, Inc., supplies sweet peas to canneries located throughout the Mississippi River Valley. Like many grain and commodity markets, the market for sweet peas is perfectly competitive. With $250,000 in fixed costs, the company's total and marginal costs per ton (Q) are:A. Calculate the
New England Textiles, Inc., is a medium-sized manufacturer of blue denim that sells in a perfectly competitive market. Given $25,000 in fixed costs, the total cost function for this product is described by:TC = $25,000 + $1Q + $0.000008Q2MC = ∂TC/∂Q = $1 + $0.000016QWhere Q is square yards of
The Hair Stylist, Ltd., is a popular-priced hairstyling salon in College Park, Maryland. Given the large number of competitors, the fact that stylists routinely tailor services to meet customer needs, and the lack of entry barriers, it is reasonable to assume that the market is perfectly
Dozens of Internet web sites offer quality auto parts for the replacement market. Their appeal is obvious. Price-conscious shoppers can often obtain up to 80% discounts from the prices charged by original equipment manufacturers (OEMs) for such standard items as wiper blades, air filters, oil
Wal-Mart and other movie DVD retailers, including online vendors like amazon.com, employ a two-step pricing policy. During the first six months following a theatrical release, movie DVD buyers are wiling to pay a premium for new releases. Total and marginal revenue relations for a typical newly
Bada Bing, Ltd., supplies standard 256 MBRAM chips to the U.S. computer and electronics industry. Like the output of its competitors, Bada Bing's chips must meet strict size, shape, and speed specifications. As a result, the chip-supply industry can be regarded as perfectly competitive. The total
A. Based upon the findings reported in Table 10.2, discuss the relation between firm size and profitability, and the link, if any, between firm size and profit rates. In general, does large firm size increase profitability?B. Using a spreadsheet, sort the DJIA according to profit rates and firm
Your best income-earning opportunity appears to be an offer to work for a local developer during the month of June and earn $2,000. However, before taking the job, you accept a surprise offer from a competitor. If you actually earn $2,600 during the month, how much producer surplus have you earned?

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