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managerial economics
Managerial Economics 5th Edition William F. Samuelson, Stephen G. Marks - Solutions
In evaluating an investment, a manager forecasts cash flows to increase 2 percent in real terms over the life of the project. There is little or no uncertainty associated with these cash flows. Thus, the manager believes they should be discounted at a risk-free rate of return. The current treasury
A state commission runs a lottery in which it sells 1 million $1 tickets, one of which will be selected as the grand-prize winner. The winner will receive $1 million payable in 20 annual installments of $50,000 each, with the first payment today. At an interest rate of 8 percent, what is the
A tax-exempt, private university is considering whether to build a new dormitory. The university's financial vice president has the following facts. The university plans to start construction in 2009 and will complete it in two years at a total cost of $10 million. The university estimates that the
Describe how you would compute the net present value of a personal investment decision, such as whether to pursue an M.B.A. degree, purchase a car, or pay a higher price for an energy-saving refrigerator.
A private company is considering building and operating a downtown parking garage. The company would site the garage on company-owned land, and construction would require demolition of a small, company- owned apartment building. Which of the following items constitute an incremental benefit or cost
A soft-drink producer must decide how to divide its spending between two forms of media: television advertising and magazine advertising. Each 30-second commercial on prime-time network television costs $120,000 and, by the company's estimate, will reach 10,000 viewers, 5,000 of whom are in the
Explain whether linear programming techniques can be used in each of the following economic settings.a. There are increasing returns to scale in production.b. The objective function and all constraints are linear, but the number of decision variables exceeds the number of constraints.c. The firm
Firms J and K are competing to supply high-tech equipment to a government buyer. Firm J's expected production cost is $105 million and its profit requirement (on top of this) is $5 million. (The firm demands this profit because it can earn this amount on a comparable contract.) Firm K has an
In many sealed-bid auctions, one expects that an increase in the number of bidders will cause each potential buyer to raise his or her equilibrium bid. In some cases, the impact is just the reverse; a buyer is wise to lower his or her bid against a greater number of competitors.a. Explain why this
Do the tables support similar policy actions? Which table embodies better information?
Table 2 shows the information the firm collected on the lowest competing bid for each auction during this period.a. Based on the information in Table 1, what is the firm's optimal markup?b. Answer part a using the information in Table
Reliant Press produces business forms for large customers: major banks, insurance companies, and the government. More than half of its sales are by competitive bid. Its largest facility receives an average of 10 bid requests per week and responds to 90 percent of them. The firm typically is one of
In a second-bid auction, buyers submit sealed bids, and the highest bidder obtains the item for sale but pays the seller an amount equal to the second-highest bid.a. Suppose buyers hold different private values for the item. Show that each player's dominant strategy is to bid his true value in this
Firm A is attempting to acquire firm T but is uncertain about T's value. It judges that the firm's value under current management (call this vr) is in the range of $60 to $80 per share, with all values in between equally likely. A estimates that, under its own management, T will be worth VA - 1.5v
A buyer has value v, for a potential acquisition and believes the seller's reservation price has the cumulative probability distribution F(v). The buyer chooses P to maximize its expected profit: = (P)Pr(P accepted) (P)F(P).Find the buyer's marginal profit and set it equal to zero. Show that the
What offer should A make to maximize its expected profit? "11. Suppose two firms, X and Y, are bargaining over how to split a total stake of $120,000. As in the earlier management-labor example, the firms alternate offers. Delay is very costly to both parties. During the time between offers, the
Firms A and B are negotiating to conclude a business deal worth $200,000 in total value to the parties. At issue is how this total value will be split. Firm A knows B will agree to a 50-50 split, but it also has thought about claiming a greater share by making a take-it-or-leave-it offer. The firm
In the quantity-price contract example in Figure 16.3, we noted that the order quantity, Q 20, is efficient. We can demonstrate that seemingly reasonable contracting methods can lead to inefficient results: too little output being produced and sold. As before, let benefits and costs be B 3Q Q/20
Firm B and firm S are in the process of negotiating a contract whereby S will synthesize a hormone for B. Besides the payment from B to S, three issues are involved: (1) whether the hormone will be 95 percent or only 80 percent pure, (2) whether the target date for completion will be three or five
Firm S supplies inputs to firm B. Because producing the input is quite complicated, some defects are inevitable. Firm S can reduce the rate of defects at a cost. In turn, defective parts lower firm B's profits (because of lost sales and unhappy customers). The firms' profits and costs (in thousands
In labor negotiations, failure to reach a contract agreement frequently results in a labor strike or work slowdown. In each of the following situations, identify which side-labor or management-is better positioned to obtain favorable contract terms from the other.a. Demand for the firm's products
a. In 1999, Procter & Gamble and Ford Motor Co., two of the world's largest spenders on advertising, changed the way they paid their advertising agencies. Formerly, these agencies' fees were set as a percentage of each firm's total advertising spending (primarily through television, magazines, and
For planning purposes, company headquarters seeks to obtain accurate information about the productive capacity of one of its plants. The plant manager knows that the facility's capacity is Q-10,000 units but knows that headquarters is in the dark. Using a bonus system, headquarters also wants to
When a corporation offers shares of stock or other securities to the public, it hires an underwriter to conduct the sale. (The underwriter is an investment bank such as Morgan Stanley or Merrill Lynch.) Most commonly, firms and investment bankers use a procedure known as "firm commitment"
In the aftermath of the September 11, 2001, terrorist attacks in New York City and Washington, DC, there has been renewed con- cern about airport security. To date, security services at major airports have been provided by a small number of private firms under contract with the air- lines.a. Many
A state highway safety agency must allocate its budget for the next fiscal year. A total funding of $32 million has been granted for reducing fatalities and property damage due to automobile accidents. However, detailed funding decisions concerning specific programs remain to be made. The table
In the early 1970s, the governor of Maine assembled a task force to evaluate several oil company proposals to develop a deep-water harbor for tankers and to build a refinery at Machias, a seaport at the northeastern end of the state's rocky and unspoiled coast. Following are miscellaneous facts
Three blocs of nations are beginning negotiations aimed at reducing the emissions of greenhouse gases (GHGs). The blocs are the United States, the European Community, and a coalition of developing countries (DNS). Table A shows each bloc's current GHG emissions and the annual cost of reducing
Two large manufacturing firms are major sources of airborne pollutants in a metropolitan area. Currently, each firm generates about 15 million units of pollution per year. The firms' costs of reducing pollution are =20+.10 and C = .150, where Q and Q denote the C amounts of pollution cleaned up by
Suppose Coca-Cola and Pepsi announced plans to merge into a single global soft-drink company. What would be the possible effects on soft- drink consumers of such a union? What kind of regulatory scrutiny should the U.S. government cast on the proposed merger?In each of the following situations,
Consider the following payoff tables. In the first period, each firm determines its price (high or low). In the second period, each firm chooses a design standard (design 1 or design 2). They both gain if they choose the same compatible standard. They receive no gain if they choose different
The following payoff table lists the profits of a buyer and a seller. The seller acts first by choosing a sale price ($9, $8, or $6). The buyer then decides the quantity of the good to purchase (two units, four units, six units, or eight units).a. Suppose the buyer and seller transact only once.
In the following game tree, players A and B alternate moves. At each turn, a player can terminate the game or pass the move to the next player. By passing, the player increases the rival's potential payoff by five units and reduces her own by one unit. Thus, as long as both players pass the move on
One way to lower the rate of auto accidents is strict enforcement of motor vehicle laws (speeding, drunk driving, and so on). However, maximum enforcement is very costly. The following payoff table lists the payoffs of a typical motorist and a town government. The motorist can obey or disobey motor
Firm A and firm B are battling for market share in two separate markets. Market I is worth $30 million in revenue; market II is worth $18 million. Firm A must decide how to allocate its three salespersons between the markets; firm B has only two salespersons to allocate. Each firm's revenue share
The following payoff table depicts service competition between two hospitals in a southeastern city. (Each payoff represents profit in millions of dollars.) Hospital B's Service Basic All Purpose Speciality Basic 5,4 12, 6 Hospital A's Services All Purpose 4,5 8,7 7,4 Speciality 6,10 3,12 3,3a.
Consider the following zero-sum game.a. Does either player have a dominant strategy? Does either have a dominated strategy? Explain.b. Find the players' equilibrium strategies. Player C Cl C2 C3 R1 13 12 10.Player R R2 14 6 8 R3 3 16 7
In 2008, Saudi Arabia and Venezuela (both members of OPEC) produced an average of 8 million and 3 million barrels of oil a day, respectively. Production costs were about $10 per barrel and the price of oil averaged $28 per barrel. Each country had the capacity to produce an additional 1 million
Two firms dominate the market for surgical sutures and compete aggressively with respect to research and development. The following payoff table depicts the profit implications of their different R&D strategies.a. Suppose that no communication is possible between the firms; each must choose its R&D
Firms J and K produce compact-disc players and compete against one another. Each firm can develop either an economy player (E) or a deluxe player (D). According to the best available market research, the firms' resulting profits are given by the accompanying payoff table.a. The firms make their
a. Identify the equilibrium outcome(s) in each of the three payoff tables. I. RI Cl 12.10 10,4 C2 II. Cl C2 III. CI C2 RI 12,10 4,4 R1 12, 10 4,4 R2 4,8 9,6 R2 4,4 9,6 R2 4.-100 9,6b. In each table, predict the exact outcome that will occur and explain your reasoning.c. In table III, suppose the
Consider the accompanying zero-sum payoff table.a. Does either player have a dominant strategy? Does either have a dominated strategy? Explain.b. Once you have eliminated one dominated strategy, see if some other strategy is dominated. Solve the payoff table by iteratively eliminating dominated
Choose a good or service that is supplied by a small num- ber of oligopoly firms. (Examples range from athletic shoes to aircraft to tooth- paste, or choose a product from the industry list in Table Gather information on the good from public sources (business periodicals, trade mag- azines, or
a. Using the marginal condition in Equation 12.7, show that an equivalent condition for the optimal level of advertising is (P-MC)Q/A = 1/EA, where EA (3Q/Q)/(A/A) is the elasticity of demand with respect to advertising. In words, the ratio of advertising spending to operating profit should equal
Firm Z faces the price equation P = 50 + A-Q and the cost function C 200+ A, where A denotes advertising spending.a. Other things (price) held constant, does an increase in advertising spending lead to greater sales? Does advertising spending represent a fixed cost or a variable cost?b. Find the
Suppose instead that the firms in Problem 9 compete by setting quantities rather than prices. All other facts are the same. It is possible to rewrite the original demand equations as P [150 (2/3)Q] - (4/3)Q and P2 [150 (2/3)Q1 (4/3)Q. In words, increases in the competitor's output lowers the
Two firms produce differentiated products. Firm 1 faces the demand curve Q 75-P+5P. (Note that a lower competing price robs the firm of some, but not all, sales. Thus, price competition is not as extreme as in the Bertrand model.) Firm 2 faces the analogous demand curve Q=75-P+5P. For each firm, AC
Suppose four firms engage in price competition in a Bertrand setting in which the lowest-price firm will capture the entire market. The firms differ with respect to their costs. Firm A's marginal cost per unit is $8, firm B's is $7, firm C's is $9, and firm D's is $7.50.a. Which firm will serve the
In each of the following cases, provide a brief explanation of whether a prisoner's dilemma is present. If so, suggest ways the dilemma can be overcome.a. When there is a bumper crop (a large supply and, therefore, low prices), farmers incur losses.b. Individual work effort has been observed to
Firms M and N compete for a market and must independently decide how much to advertise. Each can spend either $10 million or $20 million on advertising. If the firms spend equal amounts, they split the $120 million market equally. (For instance, if both choose to spend $20 million, each firm's net
Two firms serve a market in which demand is described by P 40-5(Q+Q). Each firm's marginal cost is 20.a. Suppose each firm maximizes its own profit, treating the other's quantity as constant. Find an expression for firm 1's optimal output as it depends on firm 2's. In equilibrium, what common level
Firm A is the dominant firm in a market where industry demand is given by Q 48-4P. There are four "follower" firms, each with long- run marginal cost given by MC 6+ Q. Firm A's long-run marginal cost is 6.a. Write the expression for the total supply curve of the followers (Qs) as this depends on
The OPEC cartel is trying to determine the total amount of oil to sell on the world market. It estimates world demand for oil to be Qw-60-.5P,where Qw denotes the quantity of oil (in millions of barrels per day) and Pis price per barrel. The cartel's marginal cost is approximately $20 per barrel.a.
In granting (or prohibiting) proposed acquisitions or mergers in an industry, government regulators consider a number of factors, including the acquisition's effect on concentration, ease of entry into the market, extent of ongoing price competition, and potential efficiency gains. In 1985, the
Pharmaceutical companies can expect to earn large prof- its from blockbuster drugs (for high blood pressure, depression, ulcers, aller- gies, sexual dysfunction) while under patent protection. What is the source of these profits? Upon patent expiration, numerous rival drug companies offer generic
A single buyer who wields monopoly power in its purchase of an item is called a monopsonist. Suppose that a large firm is the sole buyer of parts from 10 small suppliers. The cost of a typical supplier is given by C = 20 + 4Q + Qa. Suppose that the large firm sets the market price at some level P.
Consider again the New York taxi market, where demand is given by Q=7-5P, each taxi's cost is C 910+ 1.5Q, and ACmin $8 at 140 trips per week.a. Suppose that, instead of limiting medallions, the commission charges a license fee to anyone wishing to drive a cab. With an average price of P $10, what
Firms A and B make up a cartel that monopolizes the market for a scarce natural resource. The firms' marginal costs are MCA 6+ 2QA and MCB 18+Q, respectively. The firms seek to maximize the cartel's total profit.a. The firms have decided to limit their total output to Q-18. What outputs should the
Suppose that, over the short run (say, the next five years), demand for OPEC oil is given by Q 52.5-1.25P or, equivalently, P = 42-.8Q(Here Q is measured in millions of barrels per day.) OPEC's marginal cost per barrel is $10.a. What is OPEC's optimal level of production? What is the prevailing
Let's reconsider the case of gasoline price gouging.a. Suppose that, during the day, the station owner's demand is given by PD 2.06-00025Q. The marginal cost of selling gasoline is $1.31 per gallon. At his current $1.69 price, he sells 1,500 gallons per week. Is this price-output combination
Consider a natural monopoly with declining average costs summarized by the equation AC 16/Q+ 1, where AC is in dollars and Q is in millions of units. (The total cost function is C 16+Q) Demand for the natural monopolist's service is given by the inverse demand equation P 11-Qa. Determine the price
Until recently, the market for air travel within Europe was highly regulated. Entry of new airlines was severely restricted, and air fares were set by regulation. Partly as a result, European air fares were and continue to be higher than U.S. fares for routes of comparable distance. Suppose that,
A pharmaceutical company has a monopoly on a new medicine. Under pressure by regulators and consumers, the company is considering lowering the price of the medicine by 10 percent. The company has hired you to analyze the effect of such a cut on its profits. How would you carry out the analysis?
Over the last 30 years in the United States, the real price of a college education (i.e., after adjusting for inflation) has increased by almost 70 percent. Over the same period, an increasing number of high school graduates have sought a college education. (Nationwide college enrollments almost
a. When a best-selling book was first released in paperback, the Hercules Bookstore chain seized a profit opportunity by setting a selling price of $9 per book (well above Hercules' $5 average cost per book). With paperback demand given by P15.50, the chain enjoyed sales of Q-12 thousand books per
The market for rice in an East Asian country has demand and supply given by Q 28-4P and Q-12+ 6P, where quantities denote millions of bushels per day.a. If the domestic market is perfectly competitive, find the equilibrium price and quantity of rice. Compute the triangular areas of consumer surplus
Consider once again the digital watch numerical example.a. Suppose U.S. demand for watches increases to Q-65-2Py at the same time that the dollar depreciates from 100 per dollar to V90 per dollar. Find the dollar price of watches and the amount of U.S. watch imports.b. Does the dollar depreciation
Demand for microprocessors is given by P-35-50, where Q is the quantity of microchips (in millions). The typical firm's total cost of producing a chip is C = 5q,, where q; is the output of firm i.a. Under perfect competition, what are the equilibrium price and quantity?b. Does the microchip
In a competitive market, the industry demand and supply curves are P 70 Q and P40+2Q5.a. Find the market's equilibrium price and output.b. Suppose that the government provides a subsidy to producers of $15 per unit of the good. Since the subsidy reduces each supplier's marginal cost by 15, the new
In a perfectly competitive market, industry demand is given by Q=1,000 20P. The typical firm's average cost is AC300/Q+Q/3.a. Confirm that Qmin 30.(Hint: Set AC equal to MC.) What is ACmin?b. Suppose 10 firms serve the market. Find the individual firm's supply curve. Find the market supply curve.
Firm Z, operating in a perfectly competitive market, can sell as much or as little as it wants of a good at a price of $16 per unit. Its cost function is C=50+ 40+20.The associated marginal cost is MC 4+4Q and the point of minimum average cost is Qmin =5.a. Determine the firm's profit-maximizing
The Green Company produces chemicals in a perfectly competitive market. The current market price is $40; the firm's total cost is C-100+ 4Q+Qa. Determine the firm's profit-maximizing output. More generally, write down the equation for the firm's supply curve in terms of price P.b. Complying with
In a competitive market, the industry demand and supply curves are P-200 20 and P-100+.3Q, respectively.a. Find the market's equilibrium price and output.b. Suppose the government imposes a tax of $20 per unit of output on all firms in the industry. What effect does this have on the industry supply
Potato farming (like farming of most agricultural products) is highly competitive. Price is determined by demand and supply. Based on Department of Agriculture statistics, U.S. demand for potatoes is estimated to be Q 184 -20P, where P is the farmer's wholesale price (per 100 pounds) and Qp is
Consider the regional supply curve of farmers who produce a particular crop.a. What does the supply curve look like at the time the crop is harvested? (Show a plausible graph.)b. Depict the crop's supply curve at the beginning of the growing season (when farmers must decide how many acres to
In August 1999, Bridgestone/Firestone Inc. recalled 6.5 million tires in the wake of a number of tire-related rollover accidents involv ing the Explorer SUV produced by Ford Motor Company. Although Firestone tires have an admirable overall quality record and the Explorer ranks second in its safety
Suppose you will be shown three "prizes" in order. You know absolutely nothing about how valuable the prizes might be; only after viewing all three can you determine which one you like best. However, after you see a prize and decline it, there is no "going back." You must select a prize immediately
A firm is looking for the best (ie., lowest) price from one of two sellers. It can approach each seller only once (and at no cost). Seller X's price is distributed uniformly between $30 and $40. Seller Y's price is distributed uniformly between $32 and $38. Which seller should the firm approach
A firm anticipates an R&D program requiring as many as three stages. A successful program (sooner or later) will earn the firm a commercial profit of $20 million. The investment costs for the respective stages are $5 million, $5 million, and $4 million, and the conditional probabilities of success
An oil wildcatter is considering drilling a site that she judges to be wet with probability .2 and dry with probability .8. Her profit from an oil strike is $1 million, and her loss from a dry hole is -$.8 million.a. Before drilling, the wildcatter can pay for a seismic test that will return an
Firm B is considering whether to pursue an R&D effort to develop a powerful new microchip. One concern with the chip's design is that the chip might generate too much heat operating at high speeds. Indeed, there is the risk that the heat problem will doom the R&D effort. Firm B's scientists believe
Recall the earlier example of assessing the risk of loan defaults. Suppose the bank's top managers are divided on whether to adopt the scoring system permanently. A number of top officers believe their intuitive judgment about risks is superior to an "artificial" score. Accordingly, the bank
On behalf of your company, you are preparing a price bid to supply a fixed quantity of a good to a potential buyer. You are aware that a number of competitors also are eager to obtain the contract. The buyer will select the lowest bid. Your cost is $100,000. If yours is the winning bid, your profit
Consider the following simplified version of the television game show Let's Make a Deal. There is a grand prize behind one of three curtains; the other two curtains are empty. As a contestant, you get to choose a curtain at random. Let's say you choose curtain 3.Before revealing what's behind the
Consider once again the decision to redesign an aircraft (Problem 4 in Chapter 8).a. Find the expected value of perfect information about the redesign program. Calculate separately the expected value of perfect information about the U.S. government's decision.b. Suppose the management of the
The table that follows (compiled from police reports) shows the driving safety records for three age groups over the last year in a large metropolitan area.a. An analyst points out that of 57,051 drivers involved in accidents last year, drivers aged 31 to 55 accounted for 24,265 cases, or some 43
A health club has sent promotional material to a mailing list consisting of local college students, area doctors, and lawyers. The accompanying table shows the record of individuals taking up the club's introductory offer in the first two weeks of the promotion. Frequency of Respondents Responded
Just prior to baseball's spring training season, you are asked to assess the probability that a particular baseball team will win the coming World Series.a. How would you go about making this assessment? In what sense is this assessment subjective?b. If you knew absolutely nothing about baseball,
It is time to buy a new car, and you have done a considerable amount of research on the matter over the past weeks. From several articles in consumer magazines and scrutiny of numerous auto-buying Web sites, you have reviewed an impressive body of information on different models repair records,
a. You are given $1,000 to keep. You then are offered a choice between receiving an additional $500 for certain or taking a 50-50 gamble with outcomes of $1,000 and $0. Which would you choose?b. You are given $2,000 to keep. You then are offered a choice between paying $500 for certain or taking a
Put yourself in the yacht dealer's shoes. You currently are considering other order quantities in addition to 50 and 100.Find the optimal order quantity, that is, the exact quantity that maximizes your expected profit. (Hint: From the two demand curves, find the expected-price equation, that is,
In attempting to quantify its attitude toward risk, top management of the pharmaceutical company has reported certainty equivalent values for a variety of 50-50 risks. These are summarized in the following table.For instance, the company's CE for a 50-50 risk between $200 million and $0 is $50
Firm A is about to embark on a risky development project that offers a .2 chance of a $4 million profit and a .8 chance of a $0 profit. Unexpectedly, firm B proposes a joint venture. In return for its expertise, firm B will receive 25 percent of any profit. With firm B aboard, the chance of success
Consider once again the dilemma facing Consolidated Edison's system operator. To keep things simple, we focus on one of the decisions he faced: to maintain load or to shed load. Suppose his choices are to shed 50 percent of the load (which will "solve" the problem at the cost of blacking out 50
Consider once again the R&D strategies of the pharmaceutical company described earlier in this chapter. Suppose the company's management is risk averse and has assessed the following utility values for the set of possible outcomes (in millions of dollars). Outcome Utility Outcome Utility $200 100
As CEO of firm M, you and your management team face the decision of whether to undertake a $200 million R&D effort to create a new megamedicine. Your research scientists estimate that there is a 40 percent chance of successfully creating the drug. Success means securing a worldwide patent worth
Filene's Basement, a Boston-based department store, has a policy of marking down the price of sale items each week that they go unsold. You covet an expensive brand of winter coat that is on sale for $100. In fact, you would be willing to pay as much as $120 for it. Thus, you can buy it now (for a
Firm A is facing a possible lawsuit by legal firm B. Firm B represents the family of Mr. Smith, who was killed in a motel fire (allegedly caused by faulty wiring). Firm A was the builder of the motel. Firm A has asked its legal team to estimate the likely jury award it will be ordered to pay in
In 1996, McDonald's (MD) launched Campaign 55, reducing the prices of its "flagship" sandwiches with the objective of regaining market share. Before the launch, suppose MD's management envisioned two possible outcomes: a strong customer response or a weak response. Industry experts were not very
Global Studios is thinking of producing a megafilm, Aqua World, which could be a megahit or a megaflop. Profit is uncertain for two reasons: (1) The cost of producing the film may be low or high, and (2) the market reception for the film may be strong or weak. There is a .5 chance of low costs (C),
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