Questions and Answers of Managerial Economics

In the magazine Budget Travel, a hotel maid admits, “I cut corners everywhere I could. Instead of vacuuming, I found that just picking up the larger crumbs from the carpet would do. Rather than
Local Spanish TV markets cater to individual cities by producing local content. This content can be produced in-house by a network or they can also purchase rights to third-party produced content.
CUS Pharmacy wishes to carry Pepgro blue pills. But Daisy Pharmaceuticals, the maker of Pepgro, will not supply CUS unless CUS agrees to carry other medications that Daisy makes. This is an example
Identify a vertical relationship in your company, and determine whether it could be managed more profitably by outsourcing, untying, unbundling, inclusion of rivals, or vertical disintegration.
Which of the following provides an example of divisions based on a functional organizational structure?a. Americas, Africa, Asia, Europeb. Research and development, production, finance, marketingc.
Is your company organized around functional divisions? If so, what kind of problems does this cause? What can you do to fix these problems?Compute the profit consequences of fixing the problem.
Does your company tie compensation to meeting a budget? If so, what kind of problems does this practice cause? What can you do to fix these problems? Compute the profit consequences of changing the
Discuss a division or subunit of your organization and how it is evaluated (revenue center, profit center, cost center, etc.). How does the evaluation scheme affect performance? If it is optimal,
Which of the following changes might help solve a divisional conflict regarding a decision?a. Change who has authority to make the decisionb. Transfer information to the decision-makers so they are
Does your company use transfer pricing to “charge” divisions for the cost of the products they consume? Are these prices set equal to the opportunity cost of the product? Why or why not? Can you
Suppose that a paper mill “feeds” a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the first unit of boxes
A firm faces two kinds of employees, those able to sell 10 units/year, and those able to sell 5 units/year. High-productivity employees are willing to work for $100K/year, while low-productivity
Principal–agent problemsa. Occur when firm managers have more incentive to maximize profit than shareholders do.b. Would be reduced if firm owners had better information about the actions of the
Describe a decision that is centralized (or decentralized) in your company. How could you decentralize (or centralize) the decision?What would happen if it were decentralized (or centralized)?
Describe a job compensated with incentive pay in your company. What performance evaluation metric is used, and how is it tied to compensation?Does this compensation scheme align the incentives of the
A good incentive-compensation schemea. Maximizes the agent’s utility.b. Anticipates how an agent will game the scheme.c. Does not subject a risk-averse agent to risk.d. Accompanies centralized
Describe a moral hazard problem your company is facing. What is the source of the asymmetric information? Who is the less-informed party? Are there any wealth-creating transactions not consummated as
Describe an adverse selection problem your company is facing. What is the source of the asymmetric information? Who is the less informed party? What transactions are not being consummated as a result
Your company has a customer list that includes 3,000 people. Your market research indicates that 90 of them responded to the coupon. If you send a coupon to one customer at random, what’s the
To test the effectiveness of two Web advertising agencies, you increase your ad purchase with agency A by 50% without changing your purchase through agency B. The referrals to your website from
Suppose an investment project has an NPV of $75 million if it becomes successful and an NPV of 2$25 million if it is a failure. What is the minimum probability of success above which you should make
Your software development company is considering investing in a new mobile app. If it goes viral (10% probability), you expect an NPV of $1,000,000; if it is moderately successful (20% probability),
You’ve just decided to add a new line to your manufacturing plant. Compute the expected loss/profit from the line addition if you estimate the following:There’s a 50% chance that profit will
The residential division of Prism’s high-speed Internet service uses one advertising agency while its commercial division uses another. Two analysts, Andy and Brad, are asked to test evaluate the
A franchise restaurant chain is considering a new store in an unserved part of town.Its finance group estimates an NPV of $10 million if the population growth is 10% (40% probability), an NPV of $4
In the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million to $2 million. If they are wrong, their prize is decreased to $500,000. A contestant
Two hospitals are bargaining with an insurance company to get into its provider network. The insurance company can earn $100 if it puts one of the hospitals in its network and $200 if it puts both
George and KC have been working jobs that pay $60,000 and $30,000 per year, respectively. They are trying to decide whether to quit their jobs and jointly open up a taco stand on the beach, which
Consider bargaining in which each party increases its outside option by $10,000. Which of the following is a likely result.a. The chance of a deal increases.b. Each party’s share of the bargaining
In the game in Question 3, how much does Labor earn if they can move first?a. 10b. 15c. 18d. 20 Labor Bargain Hard Be Nice Bargain Hard 0, 0 20, 10 Management Be Nice 12, 18 15, 15
How many pure strategy equilibria does the following game have?a. 0b. 1c. 2d. 3 Labor Bargain Hard Be Nice Bargain Hard 0, 0 20, 10 Management Be Nice 12, 18 15, 15
Fred and his employer both know that Fred can generate $200,000 of profit per year for his company. After negotiations, they agree that he will earn $110,000 in annual compensation. What does this
Describe some bargaining interaction your company has with another entity (firms producing complementary or substitute products, upstream suppliers, or downstream customers), or between internal
In a Nash equilibrium,a. Players are always maximizing their joint profit.b. One player is always earning a higher profit than the other.c. Players must be playing the game sequentially.d. None of
Describe some interaction your company has with another entity (firms producing complementary or substitute products, upstream suppliers, or downstream customers), or between internal divisions
The pricing model for iTunes has been to price songs individually. Instead, Spotify opted to offer unlimited song playing for a monthly fee. Would Spotify’s pricing model likely yield more profit
Perfect price discrimination is when a firm can charge each customer exactly what they are willing to pay. In this case,a. The demand curve is very inelastic.b. The marginal revenue is the demand
Collect a set of price quotes for no fewer than 30 airplane tickets. Examine how these price quotes change as you vary the tickets—one characteristic at a time. For instance, suppose you get a
German brothels recently began offering a monthly subscription service for multiple purchasers. If you wished to reduce the incidence of prostitution, would you consider this pricing plan to be a
On average, if demand is unknown and costs of underpricing are ____ than the costs of overpricing, then ____.a. Smaller; overpriceb. Smaller; underpricec. Larger; underpriced. None of the above
Does your company price discriminate? Explain how the practice works (direct or indirect) and estimate the profit consequences of price discrimination relative to charging a single, uniform price. If
After running a promotional campaign, the owners of a local hardware store decided to decrease the prices for the advertised products sold in their store. One can infer thata. The promotional
A firm started advertising its product and this changed the product’s elasticity from - 2 to -1.5. If, prior to advertising, the firm charged $10, the firm shoulda. Raise price from $10 to
Evaluate a pricing decision of your company based on psychological pricing. Was price set optimally? If not, why not? How would you adjust price? Compute the profit consequences of the change.
A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that the firm’s aggregate demand (shoes 1 laces) will bea. Less elastic than the individual demands.b. More
Evaluate a pricing decision of your company that coincided with a promotional or advertising campaign. Was price set optimally? If not, why not? How would you adjust price? Compute the profit
A firm that acquires a substitute product can reduce cannibalization bya. Doing nothing.b. Repositioning a product so that it does not directly compete with the substitute.c. Setting the same price
Evaluate a pricing decision your company made that involved a product or service with fixed capacity. Was price set optimally? If not, why not? How would you adjust price? Compute the profit
All of the following choices are examples of promoting a firm’s product, excepta. Celebrity endorsements.b. Pricing.c. Discount coupons.d. End-of-aisle displays.
After massive promotion of Rihanna’s latest music album, the producers reacted by raising prices for her albums. This implies that promotion expenditures made the album demanda. More elastic.b.
Evaluate a pricing decision your company made involving commonly owned products. Was it optimal? If not, why not? How would you adjust price? Compute the profit consequences of this adjustment.
If buyers expect future price increases, they will ____ their purchases to avoid it. Similarly, sellers will ____ selling to take advantage of it.a. Accelerate; accelerateb. Accelerate; delayc.
If the U.S. economy strengthens, consumer incomes increase, and consumers buy more imported goods and services. How will this affect exchange rates?a. The dollar will appreciate relative to the yuan,
In July 2014 the price of a Big Mac was $4.80 in the United States, while in China it was only $2.73 at market exchange rates. So the “raw” Big Mac index says that the yuan was under-valued by
Explain the effect of a dollar depreciation on domestic firms and domestic consumers for goods with less than 100% domestic content.
Most of the appliances that Whirlpool sells in the UK, are built in the EU. What is the effect of a pound depreciation on Whirlpool’s profit margin.
Explain the effects of the pound devaluation on (1) Imports and tourism to Great Britain and (2) Profits of U.S. bank with European trading subsidiaries in London (which earn profit in
If the Chinese yuan devalues relative to the U.S. dollar, thena. U.S. producers will benefit; Chinese consumers will benefit.b. U.S. producers will benefit; Chinese consumers will be hurt.c. U.S.
Describe how a change in the exchange rate affected your firm. Explain what happened to your price and quantity. How can you profit from future shifts in the exchange rate? How do you predict future
When Great Britain voted to leave the Eurozone, the pound depreciated 17% against the dollar. It also raised fears that the Eurozone would fall apart. Explain how this fear would affect the
In 2014, the euro was trading at $1.35 on the foreign exchange market. By 2015, the rate had fallen to $1.10, due to falling European interest rates. Explain the fall in the price of a euro using
If a firm successfully adopts a product differentiation strategy, the elasticity of demand for its products shoulda. Increase.b. Decrease.c. Become marginal.d. Be unaffected.
The concept that describes firms possessing different bundles of resources isa. Resource heterogeneity.b. Resource immobility.c. Barriers to entry.d. Imitability.
Which of the following is not a factor that contributes to higher rivalry in an industry?a. Numerous competitorsb. High fixed costsc. Fast industry growthd. Low switching costs for buyers
Which of the following is not an example of an entry barrier?a. Government protection through patents or licensing requirementsb. Strong brandsc. Low capital requirements for entryd. Lower costs
What are your firm’s key resources and/or capabilities? How do these translate into a competitive advantage?
Attractive industries have all the following, excepta. High supplier power.b. Low buyer power.c. High entry barriers.d. Low rivalry.
What would happen to revenues if a firm in a perfectly competitive industry raised price?a. They would increase.b. They would increase but profit would decrease.c. They would increase along with
Which of the following products is closest to operating in a perfectly competitive industry?a. Nike shoesb. Cottonc. Perdue Chickend. Restaurants
Give an example of a compensating wage differential, a risk premium, or some kind of long-run equilibrium price difference your company faces. How can your company profitably exploit this difference?
At a university faculty meeting in 2012, a proposal was made to increase the housing benefits for new faculty to keep pace with the high cost of housing. What will likely be the long-run effect of
Suppose a new employer is also relocating to Lampard City and will be attracting many new people who will want to buy new houses. Assume that the change in licensing requirements mentioned in
Say the average price of a new home in Lampard City is $160,000. The local government has just passed new licensing requirements for housing contractors. Based on possible shifts in demand or supply
Suppose a recent and widely circulated medical article has reported new benefits of cycling for exercise. Simultaneously, the price of the parts needed to make bikes falls. If the change in supply is
It costs a firm $90 per unit to produce product A and $70 per unit to produce product B individually. If the firm can produce both products together at $175 per unit of products A and B, this
Following are the costs to produce Product A, Product B, and Products A and B together. Which of the following exhibits economies of scope?a. 100, 150, 240b. 100, 150, 250c. 100, 150, 260d. All of
A security system company’s total production costs depend on the number of systems produced according to the following equation: Total Costs = $20,000,000 + $4,000* quantity produced. Given these
Describe two activities inside your organization, or one inside and one outside your organization, that exhibit economies (or diseconomies) of scope. Describe the source of the scope economies. How
Describe an activity or process or product of your company characterized by learning curves. Describe the source of the learning curve. How could your organization exploit the learning curve? Compute
Describe an activity, process, or product of your company that exhibits economies or diseconomies of scale. Describe the source of the scale economy. How could your organization exploit the scale
Its lunch time, you are hungry and would like to have some pizza. By the law of diminishing marginal value,a. You would pay more for your first slice of pizza than your second.b. You would pay more
In the short run, a firm’s decision to shut down should not take into considerationa. Avoidable costs.b. Variable costs.c. Fixed costs.d. MCs.
Describe a pricing decision your company has made. Was it optimal? If not, why not? How would you adjust price? Compute the profit consequences of the change.
Break-even quantity is a point wherea. The level of profit is maximized.b. The level of cost is minimized.c. Only variable costs are covered.d. There are zero profits.
If GDP is expected to increase at a steady rate of 3% per year, how many years would it take for living standards to double?a. 10b. 20c. 24d. 30
A firm sells 1,000 units per week. It charges $70 per unit, the average variable costs are $25, and the average costs are $65.a. What should the firm do in the short run? Why?b. What should the firm
Describe an investment or potential investment your company (or one of your suppliers or customers) has made that is subject to post-investment hold-up. What could or does your company do to solve
Assume a firm has the following cost and revenue characteristics at its current level of output: price 5 $10.00, average variable cost 5 $8.00, and average fixed cost 5 $4.00. This firm isa.
Describe an investment decision your company has made. Compute the opportunity costs and benefits of the decision. Did your company make the right decision? If not, what would you do differently?
The higher the discount rates,a. The more value individuals place on future dollars.b. The more value individuals place on current dollars.c. The more investments will take place.d. Does not affect
Describe a shut-down decision your company has made. Compute the opportunity costs and benefits of the decision (using break-even analysis if appropriate). Did your company make the right decision?
Food Fanatics caters meals where its cost of producing an extra meal is $25. Each of its meals sells for $20. At this rate, what should the company do?a. Produce more meals and increase its profit.b.
A company is producing 15,000 units. At this output level, MR is $22, and the MC is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?a.
If a firm’s AC is rising, thena. MC is less than AC.b. MC is rising.c. MC is greater than AC.d. The firm is making an economic profit.
Does your firm use royalty rate contracts or fixed-fee contracts? Describe the incentive effects of the contracts. Should you change the contract from one to the other? Compute the profit
Describe an extent decision made by your company. Compute the MC and marginal benefit of the decision. Was the right decision reached? If not, what would you do differently? Compute the profit
When a firm ignores the opportunity cost of capital when making investment or shutdown decisions, this is a case of a. Fixed-cost fallacy.b. Sunk-cost fallacy.c. Hidden-cost fallacy.d. None of
The U.S. government bought 112,000 acres of land in southeastern Colorado in 1968 for $17,500,000. The cost of using this land today exclusively for the reintroduction of the black-tailed prairie
All the following are examples of variable costs, excepta. Hourly labor costs.b. Cost of raw materials.c. Accounting fees.d. Electricity cost.
A business incurs the following costs per unit: labor $125/unit, materials $45/unit, and rent $250,000/month. If the firm produces 1,000,000 units a month. Calculate the following:a. Total variable

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