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Managerial Economics 12th edition Mark Hirschey - Solutions

Assume that you are willing to pay $1,100 for a new personal computer that has all the “bells and whistles.” On the Internet, you buy one for the bargain price of $900. Unbeknownst to you, the Internet retailer’s marginal cost was only $750. How much consumer surplus, producer surplus, and
After having declined during the 1970s and 1980s, the proportion of teenage smokers in the United States has risen sharply since the early-1990s. To reverse this trend, advertising programs have been launched to discourage teenage smoking, penalties for selling cigarettes to teenagers have been
In 2004, OPEC reduced the quantity of oil it was willing to supply to world markets. Explain why the resulting price increase was much larger in the short run than in the long run.
The demand for basic foodstuffs, like feed grains, tends to be inelastic with respect to price. Use this fact to explain why highly fertile farmland will fetch a relatively high price at any point in time, but that rising farm productivity over time has a negative overall influence on farmland
In 1990, Congress adopted a luxury tax to be paid by buyers of high-price cars, yachts, private airplanes, and jewelry. Proponents saw the levy as an effective means of taxing the rich. Critics pointed out that those bearing the hardship of a tax may or may not be the same as those who pay the tax
Both employers and employees pay Social Security (FICA) on wage income. While the burden of this tax is designed to be borne equally by employers and employees, is a straight 50/50 sharing of the FICA tax burden likely? Explain.
The Fair Labor Standards Act establishes a federal minimum wage of $7.25 per hour effective July 24, 2009. Use your knowledge of market equilibrium and the elasticity of demand to explain how an increase in the minimum wage could have no effect on unskilled worker income. When will increasing the
The New York City Rent Stabilization Law of 1969 established maximum rental rates for apartments in New York City. Explain how such controls can lead to shortages, especially in the long run, and other economic costs. Despite obvious disadvantages, why does rent control remain popular?
Wal-Mart founder Sam Walton amassed an enormous fortune in discount retailing, one of the most viciously competitive markets imaginable. How is this possible?
A number of domestic and foreign manufacturers produce replacement parts and components for personal computer systems. With exacting user specifications, products are standardized and price competition is brutal. To illustrate the net amount of social welfare generated in this hotly competitive
The local government in a West Coast college town is concerned about a recent explosion in apartment rental rates for students and other low-income renters. To combat the problem, a proposal has been made to institute rent control that would place a $900 per month ceiling on apartment rental rates.
Indicate whether each of the following statements is true or false, and explain why.A. In competitive market equilibrium, social welfare is measured by the net benefits derived from consumption and production as measured by the difference between consumer surplus and producer surplus.B. The market
People of many different age groups and circumstances take advantage of part-time employment opportunities provided by the fast-food industry. Given the wide variety of different fast-food vendors, the industry is fiercely competitive, as is the unskilled labor market. In each of the following
Natural gas is in high demand as a clean-burning energy source for home heating and air conditioning, especially in major metropolitan areas where air quality is a prime concern. The domestic supply of natural gas is also plentiful. Government reports predict that gas recoverable with current
To many upscale homeowners, no other flooring offers the warmth, beauty, and value of wood. New technology in stains and finishes call for regular cleaning that takes little more than sweeping and/or vacuuming, with occasional use of a professional wood floor cleaning product. Wood floors are also
In 1998, California’s newly deregulated power market began operation. The large power utilities in the state turned over control of their electric transmission facilities to the new Independent System Operator (ISO) to assure fair access to transmission by all generators. The new California Power
In Africa, the continent where the polio epidemic has been most difficult to control, international relief efforts aimed at disease eradication often work against a backdrop of civil unrest and war. In some countries, temporary cease-fire agreements must be negotiated to allow vaccination and
Each year, about 9 billion bushels of corn are harvested in the United States. The average market price of corn is a little over $2 per bushel, but costs farmers about $3 per bushel. Tax payers make up the difference. Under the 2002 $190 billion, 10-year farm bill, American taxpayers will pay
Critics argue that if Congress wants to make the tax code more equitable, a good place to start would be removing unfair tariffs and quotas. Today, there are more than eight thousand import tariffs, quotas, so-called voluntary import restraints, and other import restrictions. Tariffs and quotas
In the United States, steel production has remained constant since the 1970s at about 100 million tons per year. Large integrated companies, like U.S. Steel remain important in the industry, but roughly 50% of domestic production is now produced by newer, nimble and highly efficient mini-mill
The Federal Trade Commission seeks to ensure that the process of bringing new low-cost generic alternatives to the marketplace and into the hands of consumers is not impeded in ways that are anti-competitive. To illustrate the potential for economic profits from delaying generic drug competition
A. Describe some of the advantages and disadvantages of ROE as a measure of corporate profitability. What is a typical level of ROE, and how does one know if the ROE reported by a given company reflects an adequate return on investment?B. Define the profit margin, total asset turnover, and
Describe the monopoly market structure and provide some examples.
From a social standpoint, what is the problem with monopoly?
Why are both industry and firm demand curves downward sloping in monopoly markets?
Give an example of monopoly in the labor market. Discuss such a monopoly's effect on wage rates and on inflation.
Given the difficulties encountered with utility regulation, it has been suggested that nationalization might lead to a more socially optimal allocation of resources. Do you agree? Why or why not?
When will an increase in the minimum wage increase employment income for unskilled laborers? When will it cause this income to fall? Based on your experience, which is more likely?
Explain why state tax rates on personal income vary more on a state-by-state basis than do corresponding tax rates on corporate income.
Do the U.S. antitrust statutes protect competition or competitors? What is the difference?
Describe the economic effects of countervailing power, and cite examples of markets in which countervailing power is observed.
It remains a widely held belief that regulation is in the public interest and influences firm behavior toward socially desirable ends. However, in the early 1970s, Nobel laureate George Stigler and his colleague Sam Peltzman at the University of Chicago introduced an alternative capture theory of
The Las Vegas Valley Water District (LVVWD) is a not-for-profit agency that began providing water to the Las Vegas Valley in 1954. The District helped build the city's water delivery system and now provides water to more than one million people in Southern Nevada. District water rates are regulated
Indicate whether each of the following statements is true or false, and explain why.A. The Justice Department generally concerns itself with significant or flagrant offenses under the Sherman Act, as well as with mergers for monopoly covered by Section 7 of the Clayton Act.B. When a single seller
On May 12, 2000, the two daily newspapers in Denver, Colorado, filed an application with the U.S. Department of Justice for approval of a joint operating agreement. The application was filed by The E.W. Scripps Company, whose subsidiary, the Denver Publishing Company, published the Rocky Mountain
An antitrust case launched more than a decade ago sent tremors throughout the academic community. Over the 1989 -91 period, the Department of Justice (DOJ) investigated a number of highly selective private colleges for price fixing. The investigation focused on “overlap group” meetings
In a celebrated case tried during 1998, The Department of Justice charged Microsoft Corporation with a wide range of anti-competitive behavior. Among the charges leveled by the DOJ was the allegation that Microsoft illegally “bundled” the sale of its Microsoft Explorer Internet browser software
Calvin’s Barber Shops, Inc. has a monopoly on barbershop services provided on the south side of Chicago because of restrictive licensing requirements, and not because of superior operating efficiency. As a monopoly, Calvin’s provides all industry output. For simplicity, assume that Calvin’s
The Onondaga County Resource Recovery (OCRRA) system assumed responsibility for solid waste management on November 1, 1990, for thirty-three of the thirty-five municipalities in Onondaga County, New York. OCRRA is a non-profit public benefit corporation similar to the New York State Thruway
The Organization of the Petroleum Exporting Countries (OPEC) was formed on September 14, 1960 in Baghdad, Iraq. The current membership is comprised of five founding members plus six others: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and
Portland Fluid Control, Inc., (PFC) is a major supplier of reverse osmosis and ultrafiltration equipment, which helps industrial and commercial customers achieve improved production processes and a cleaner work environment. The company has recently introduced a new line of ceramic filters that
During recent years, Micro Chips Corp. has enjoyed substantial economic profits derived from patents covering a wide range of inventions and innovations for microprocessors used in high-performance desktop computers. A recent introduction, the Penultimate, has proven especially profitable. Market
Safe card Corporation offers a unique service. The company notifies credit card issuers after being informed that a subscriber's credit card has been lost or stolen. The Safecard service is sold to card issuers on an annual subscription basis. Relevant revenue and cost relations for the service are
The idea of using the difference between the market value of the firm and accounting book values as an indicator of market power and/or valuable intangible assets stems from the pioneering work of Nobel laureate James Tobin. Tobin introduced the so-called q ratio, defined as the ratio of the market
Describe the monopolistically competitive market structure and give some examples.
Describe the oligopoly market structure and give some examples.
Would you expect the demand curve for a firm in a monopolistically competitive industry to be more or less elastic in the long run after competitor entry has eliminated economic profits?
“One might expect firms in a monopolistically competitive market to experience greater swings in the price of their products over the business cycle than those in an oligopoly market. However, fluctuations in profits do not necessarily follow the same pattern.” Discuss this statement.
Which oligopoly model(s) result in long-run oligopoly market equilibrium that is identical to a competitive market price/output solution?
Why is the four-firm concentration ratio only an imperfect measure of market power?
The statement “You get what you pay for” reflects the common perception that high prices indicate high product quality and low prices indicate low quality. Irrespective of market structure considerations, is this statement always correct?
“Economic profits result whenever only a few large competitors are active in a given market.” Discuss this statement.
Explain the process by which economic profits are eliminated in a monopolistically competitive market as compared to a perfectly competitive market.
What is the essential difference between the Cournot and Stackelberg models?
Over the last century, The Boeing Co. has become the largest aerospace company in the world. Boeing’s principal global competitor is Airbus, a company that has its roots in a European consortium of French, German and later, Spanish and U.K companies. Though dominated by Boeing and Airbus, smaller
Soft Lens, Inc., has enjoyed rapid growth in sales and high operating profits on its innovative extended-wear soft contact lenses. However, the company faces potentially fierce competition from a host of new competitors as some important basic patents expire during the coming year. Unless the
Indicate whether each of the following statements is true or false and explain why.A. Equilibrium in monopolistically competitive markets requires that firms be operating at the minimum point on the long-run average cost curve.B. A high ratio of distribution cost to total cost tends to increase
Would the following factors increase or decrease the ability of domestic auto manufacturers to raise prices and profit margins? Why?A. Decreased import quotasB. Elimination of uniform emission standardsC. Increased automobile price advertisingD. Increased import tariffs (taxes)E. A rising value of
Suppose the City of Columbus, Ohio, is considering two proposals to privatize municipal garbage collection. First, a handful of leading waste disposal firms have offered to purchase the city's plant and equipment at an attractive price in return for exclusive franchises on residential service in
Gray Computer, Inc., located in Colorado Springs, Colorado, is a privately held producer of high-speed electronic computers with immense storage capacity and computing capability. Although Gray’s market is restricted to industrial users and a few large government agencies (e.g., Department of
Assume the Hand Tool Manufacturing Industry Trade Association recently published the following estimates of demand and supply relations for hammers:QD = 60,000 - 10,000P (Demand),QS = 20,000P(Supply).A. Calculate the perfectly competitive industry equilibrium price/output combination.B. Now assume
VisiCalc, the first computer spreadsheet program, was released to the public in 1979. A year later, introduction of the DIF format made spreadsheets much more popular because they could now be imported into word processing and other software programs. By 1983, Mitch Kapor used his previous
Imagine that a two-firm duopoly dominates the market for spreadsheet application software for personal computers. Also assume that the firms face a linear market demand curveP = $1,250 - QWhere P is price and Q is total output in the market (in thousands) . Thus Q = QA + QB. For simplicity, also
Coke and Pepsi dominate the U. S soft-drink market. Together, they account for about 75% of industry sales. Suppose the quantity of Coke demanded depends upon the price of Coke (PC) and the price of Pepsi (PP)QC = 15 - 2.5PC + 1.25PPWhere output (Q) is measured in millions of 24-packs per month,
Assume Safety Service Products (SSP) faces the following segmented demand and marginal revenue curves for its new infant safety seat:1. Over the range from 0 to 10,000 units of output,P1 = $60 - Q,MR1 = ∂TR1/∂Q = $60 - $2Q.2. When output exceeds 10,000 units,P2 = $80 - $3Q,MR2 = ∂TR2/∂Q =
In 2005, Federated Department Stores, Inc. proposed to acquire The May Department Stores Co., thereby combining the two largest chains in the United States of so-called “traditional” or “conventional” department stores. Conventional department stores typically anchor enclosed shopping
A. Describe the overall explanatory power of this regression model, as well as the relative importance of each continuous variable.B. Based on the importance of the binary or dummy variable that indicates superstore competition, do superstores pose a serious threat to Columbia’s profitability?C.
From a game theory perspective, how would you characterize the bargaining between a customer and a used car dealer?
Characterize the essential difference between a sequential game and a simultaneous-move game.
Explain how the Prisoner’s Dilemma example shows that rational self-interested play does not always result in the best solution for all parties.
Does game theory offer a strategy appropriate for situations in which no strategy results in the highest payoff to a player regardless of the opposing player’s decision?
Instructors sometimes use quizzes to motivate students to adequately prepare for class. However, preparing and grading quizzes can become time-consuming and tedious. Moreover, if students prepare adequately for class, there is no need for quizzes. What does game theory prescribe for instructors
The typical CEO of a major U. S. corporation is 56-58 years old and gets paid $3-5 million per year. From a game-theory perspective, explain why corporate governance experts advise that such executives be required to hold common stock worth 7-10 years of total compensation.
Describe the difference between limit pricing and predatory pricing strategies.
Explain why the establishment and exploitation of network effects are key elements in the competitive strategy of computer software provider Microsoft Corp.
Suppose Exxon Mobil Corp. independently reduced the price of gasoline, and that this price cut was quickly matched by competitors. Could these actions be described as reflective of a cooperative game?
Define the Nash equilibrium concept.
Suppose two local suppliers are seeking to win the right to upgrade the communications capability of the internal €œintranets€ that link a number of customers with their suppliers. The system quality decision facing each competitor, and potential profit payoffs, are illustrated
Assume that Hewlett-Packard (H-P) and Dell Computer have a large inventory of personal computers that they would like to sell before a new generation of faster, cheaper machines is introduced. Assume that the question facing each competitor is whether or not they should widely advertise a
Recognize each of the following statements as being true or false and explain why.A. A set of strategies constitutes a Nash equilibrium if no player can improve their position given the strategies chosen by other players.B. A secure strategy is very conservative and should only be considered if the
The classic prisoner's dilemma involves two suspects, A and B, who are arrested by the police. Because the police have insufficient evidence for conviction on a key charge, they place the prisoners in isolation and offer each of them the following deal: If one testifies for the prosecution against
Conceive of two competitors facing important strategic decisions where the payoff to each decision depends upon the reactions of the competitor. Firm A can choose either row in the payoff matrix defined below, whereas firm B can choose either column. For firm A the choice is either
The Home Depot, Inc., and the Lowes Companies are locked in a vicious struggle for market share in the home improvement market. Suppose each competitor is considering the advisability of offering 90-day free financing as a means for boosting sales during the important spring season. The Home Depot
The breakfast cereal industry is heavily concentrated. Kellogg, General Mills, General Foods (Post) and Ralcorp account for over 85 per cent of industry sales. Advertising by individual firms does not convince more people to eat breakfast. Effective advertising simply steals sales from rivals. Big
In the United States any contract, combination or conspiracy in restraint of trade is illegal. In practice, this means it is against the law to control or attempt to control the quantity, price or exchange of goods and services. In addition to this legal prohibition, potential conspirators face
Game theory can be used to analyze conflicts that arise between managers and workers. Managers can choose to monitor worker performance, or not monitor worker performance. For their part, workers can choose to perform the requested task within the time frame requested, or fail to perform as
Prohibitions against predatory pricing stem from big business conspiracy theories popularized in the late nineteenth century by journalists such as Ida Tarbell, author of an influential book titled History of the Standard Oil Company. In that book, Tarbell condemned Standard Oil's allegedly
General Cereals, Inc. (GCI), produces and markets Sweeties!, a popular ready-to-eat breakfast cereal. In an effort to expand sales in the Secaucus, New Jersey, market, the company is considering a one-month promotion whereby GCI would distribute a coupon for a free daily pass to a local amusement
Near the checkout stand, grocery stores and convenience stores prominently display low-price impulse items like candy, gum and soda that customers crave. Despite low prices, such products generate enviable profit margins for retailers and for the companies that produce them. For example, Hershey
A. Was Paramount’s above-market offer for Time, Inc. consistent with the notion that the prevailing market price for common stock is an accurate reflection of the discounted net present value of future cash flows? Was management’s rejection of Paramount’s above-market offer for Time, Inc.
Express the markup on cost formula in terms of the markup on price, and use this relation to explain why a 100% markup implies a 50% markup on price.
Explain why successful firms that employ markup pricing use fully allocated costs under normal conditions, but typically offer price discounts or accept lower margins during off-peak periods when excess capacity is available.
Discuss how seasonal factors influence supply and demand, and why markups on fresh fruits and vegetable are at their highest during the peak of season.
Why does The Wall Street Journal offer bargain rates to students but not to business executives?
“One of the least practical suggestions that economists have offered to managers is that they set marginal revenues equal to marginal costs.” Discuss this statement.
“Marginal cost pricing, as well as the use of incremental analysis, is looked upon with favor by economists, especially those on the staffs of regulatory agencies. With this encouragement, regulated industries do indeed employ these rational techniques quite frequently. Unregulated firms, on the
What is price discrimination?
What conditions are necessary before price discrimination is both possible and profitable? Why does price discrimination result in higher profits?
Discuss the role of common costs in pricing practice.
Why is it possible to determine the marginal costs of joint products produced in variable proportions but not those of joint products produced in fixed proportions?

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