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business
managerial economics

Managerial Economics: Tools For Analyzing Business Strategy 1st Edition Thomas J Webster - Solutions

A firm sells its product in two separable and identifiable markets. The firm’s total cost of production is TC = 5 + 5Q.The demand equations for these products are Q P 1 1 = 10 −
A car dealership is offering a GPS system, DVD player and UBS audio interface in all its new models. The manager of the dealership believes that its customers fall into three groups, and there are 100 buyers each group. The manager does not know which buyer belongs to what group. Suppose that it
Blotto Brothers Lumber Supply sells lumber to local construction companies. Blotto has estimated that the demand for plywood by home contractors is given by the equation Q = 51− P 110.Blotto’s total cost of procuring and packaging plywood for delivery to its customers is TC = 10Q.a. If Blotto
An amusement park has estimated the following demand equation for the average park guest Q = 16 − 2P, where Q represents the number or rides per guest, and P the price per ride. The total cost of providing a ride is TC = 2 + 0.5Q.a. How much should it charge per ride basis if the park wishes to
An industry consists of five, Cournot output-setting firms producing a homogeneous product. The market price elasticity of demand is –2.5.If the market price is $64.20, what is the firm’s marginal cost?
The manager of a retail computer equipment outlet uses the company’s standard 100 percent mark-up and charges $200 for its most popular model of motherboards. The manager recently read in an economic journal that the price elasticity of demand for motherboards is –3.5.Is this manager optimally
Consider the following static game.a. Does either player have a dominant strategy?b. Does this game have a unique Nash equilibrium strategy profile?c. Suppose that this is a multistage game and player A moves first.Illustrate the extensive form of this game.d. What is the subgame-perfect
Consider the sequential-move game depicted in the following figure.a. How many subgames are there?b. What is the subgame-perfect equilibrium? Up (1, 2, 3) (3,2,1) Down C Left (2,3,3) Yes Up Right Down (1,2,2) No (2,4,3) Up B Down (1,5, 1) Payoffs: (A, B, C)
Consider the following infinitely-repeated static game.a. What strategy profile would result in the best payoff for both players?b. Above what interest rate used to discount future values can we expect cooperation to break down? B1 B B2 A1 (5,5) (16,1) A A2 (1,16) (6,6) Payoffs: (A, B)
Consider the following static game. The numbers in each cell represent the expected profits in thousands of dollars from alternative aggressive and reactive price strategy profiles.a. What is the Nash equilibrium if this game is played just once?b. What strategy profile results in the best payoff
Two radio stations, KRZY and KRUD, are contemplating three possible broadcast formats: Rock, country, and talk radio. Surveys indicate that the market shares for these formats are 40 percent, 30 percent, and 20 percent, respectively. If both stations choose the same format, they will split that
Fly-by-night Airlines and Going-going-gone Airways are considering whether to switch from their current standard fare schedule or implement a frequent-flyer program. The following figure summarizes the monthly profits in thousands of dollars from alternative pricing strategies.a. Does this game
Consider the competitive, static, one-time game depicted in the following figure.a. If larger payoffs are preferred, does either player have a dominant strategy?b. If B believes that A will move A1, how should B move?c. If B believes that A will move A2, how should B move?d. What is the Nash
Determine the pure-strategy Nash equilibrium for the following static game. Guildenstern Left Center Right Left (5, 4) (6, 1) (7,3) Rosencrantz Center (3,2) (8,5) (4,7) Right (4,1) (10,7) (1,9) Payoffs: (Rosencrantz, Guildenstern)
Suppose that the editors of Time and Newsweek are trying to decide upon their cover story for the week. There were two major news developments: The leaking of a clandestine CIA officer’s identity and a terrorist suicide bombing in Amman, Jordan. It is important that the news weeklies not choose
Suppose that the manager of Trinity Company wants to increase profits by determining the optimal level of advertising expenditures. The estimated price and advertising elasticities of demand are −4 and 0.1, respectively. How much will the economist recommend that Trinity spend on advertising?
Suppose that there are two firms producing an identical product for sale in the same market. The market demand for the product is given by the equation Q = 1,200 − P.Each firm has a marginal cost of MC = 0. Neither firm incurs a fixed cost.Firms 1 and 2 have 200 units and 300 units of capacity,
Suppose that the demand equation for the output of the industry is P = 145 − 5(Q +Q ) 1 2 .The total cost equations are:TC Q 1 1 = 5 ;TC Q 2 2 = 3 .Suppose that firm 1 is a Stackelberg leader and firm 2 is a Stackelberg follower.a. What is the output of each firm?b. What is the market price?c.
Suppose that two firms are Cournot competitors producing a homogeneous product. The market demand and firm cost equations are:P = 200 − 2(Q +Q ) 1 2 ;TC Q 1 1 = 2 ;TC Q 2 2 = 4 .a. Calculate each firm’s reaction function.b. What is the Cournot-Nash equilibrium?c. What is the market price?d.
Suppose that market demand equation for the output of two firms that are Cournot competitors is P = 100 − 5(Q +Q ) 1 2 .The total cost equations for the two firms are:TC Q 1 1 = 5 ;TC Q 2 2 = 5 .a. Determine each firm’s reaction function.b. What is the Cournot-Nash equilibrium?c. What is the
Suppose that the inverse demand equation for an industry’s output is P = 55 −Q.The industry consists of two profit-maximizing firms with constant average total and marginal cost equal to $5 per unit and no fixed cost. Both firms are Cournot competitors.a. Determine the reaction function for
The market equation for a product sold by a monopolist is Q = 100 − 4P.The monopolist’s total cost equation is TC = 500 +10Q + 0.5Q2 .a. What are the profit-maximizing price and quantity?b. What is the firm’s maximum profit?
The demand equation for a product sold by a monopolist is Q = 25 − 0.5P.The firm’s total cost equation is TC = 225 + 5Q + 0.25Q2 .a. Calculate the profit-maximizing price and quantity?b. What is the monopolist’s profit?
A monopoly faces the following demand and total cost equations for its product:Q P = 30 −3;TC = 100 − 6Q +Q2 .a. What is firm’s profit-maximizing price and output level?b. What is the monopolist’s economic profit?
Bucolic Farms supplies milk to B&Q Food Stores. Bucolic has estimated the following total cost function for its product.TC = 100 +12Q + 0.06Q2 , where Q is measured in hundreds of gallons.a. What are the ATC, AVC, MC, and TFC equations?b. What is the shut-down quantity and price?c. What is the
The total cost (TC) and inverse demand equations for a monopolist are:TC = 100 + 5Q2 ;P = 200 − 5Q.a. What is the profit-maximizing quantity?b. What is the profit-maximizing price?c. What is the monopolist’s maximum profit?
Suppose that the total cost equation of a perfectly competitive firm is TC = 100 + 0.01Q2 .a. If the market-determined price is $25, what is the firm’s profitmaximizing level of output?b. What is the firm’s maximum profit?
A firm’s total cost equation is TC = 50 + 5Q + 0.025Q2 .The firm can sell all its output for $10 per unit.a. What is the profit-maximizing output level?b. What is the firm’s maximum profit?
What do contestable markets imply about government regulation to promote allocative efficiency?
Why do governments grant patents and copyrights?
Maximizing total revenues the same thing as maximizing total profits?
Why do monopolists always price their product along the elastic portion of the demand curve for their product?
A monopolist’s supply curve is the portion of its marginal cost curve that lies above minimum average variable cost. Do you agree?
What will likely happen to the market-determined price when that price is greater than average variable cost for a typical firm in a perfectly competitive industry?
The perfectly competitive firm’s marginal cost curve is also its supply curve. Do you agree with this statement?
In the standard model, a perfectly competitive firm in long-run equilibrium produces at minimum per-unit cost. Explain.
A profit-maximizing firm produces an output level where the price is less than the average total cost. Under what conditions will this firm continue to operate? Under what conditions will this firm shut down?
Under what circumstances should a perfectly competitive firm shut down?
In the standard model, perfectly competitive firms are referred to as price takers. What does this imply for the price and output decisions of profit-maximizing firms?
The price elasticity of demand for the output of a firm is −2 and the price elasticity of demand for the output of the entire industry is −0.5.a. Calculate the Rothschild Index for this industry.b. Suppose that firm and industry prices increase by 5 percent. What is the relative impact on firm
The inverse demand equation for the product sold by a monopolist is P(Q) = 6 −Q.The monopolist’s total cost equation is TC(Q) = 5 + 0.5Q2 .Calculate the Lerner Index and price elasticity of demand?
The market-determined price of a product produced in a perfectlycompetitive industry is $5. The total cost equation of a firm in that industry is TC(Q) = 25 − 5Q + 0.5Q2 .Calculate the Lerner Index and price elasticity of demand.
An industry consists of five firms with annual sales of $1.2 million,$250,000, $100,000, $75,000 and $50,000.a. Calculate the Herfindahl-Hirschman Index for this industry.b. Calculate the 4-firm concentration ratio for this industry.c. In your opinion, would the U.S. Justice Department approve a
Consider an industry that consists of 12 firms. Total annual sales of the largest firm are $10 million. Total annual sales of the next three firms average $7.5 million each. Total annual sales of the next four firms in the industry average $2 million each. Finally, total annual sales of the
In what way is the Herfindahl-Hirschman Index is superior to concentration ratios? How does the U.S. Justice Department use the Herfindahl-Hirschman Index to monitor suspected violations of antitrust legislation?
Electronic Communications and Control (EComCon) Corporation produces cell phones. The company outsources its marketing (MKT), payroll (PAY), health care and retirement (HCR) benefits programs.EComCon also outsources its production to firms A, B, and C, which are located in three different
Suppose that a firm manufactures multiple lines of household appliances.This company enjoys economies of scale because many of these products are made with similar electronic components. In your opinion, should this company be organized along multidivisional lines according to product, or along
Grip Right, Inc. manufactures made-to-order hand tools specializing in crescent wrenches. Production is organized around teams of 30 workers with a daily production quota of 100 wrenches. Once the high quality sheet metal is procured by the purchasing department and the company takes delivery, the
Suppose that a company outsources finance, production, sales, distribution, marketing, and human resources to outside contractors. The company also employs the services of an independent consulting firm to help coordinate the activities of the marketing and sales contractors.Finally, the company
In what ways do you believe that the opening quotation by Harold S.Geneen relates to topics discussed in this chapter?
How can a clash of cultures following a merger affect a firm’s performance?
Explain what is meant by corporate culture. How can a company’s culture be a source of competitive advantage?
Is there a link between corporate strategy and structure?
What organizational structure is most appropriate when employees from different functional departments are organized into teams according to product types, geographic regions, customer types, and so on?
What is the role of economies of scale in a company’s decision to choose a network organizational structure?
What is the difference between a conglomerate merger, strategic alliance, and joint venture?
Explain the importance of economies of scale and economies of scope in company’s merger and acquisition decisions?
Under what circumstances would a firm choose to vertically integrate instead of procuring an input from an independent supplier under a contract?
Why would a company choose to produce an input under contract as opposed to purchasing the input in the spot market?
What is a specialized investment and how can it affect the manner in which a company procures its inputs?
How can a firm’s organizational structure be a source of competitive advantage?
Stay Fresh is a profit-maximizing company that produces filters for air conditioners. Stay Fresh can sell all the filters that it produces in this highly competitive market for $6 each. The company’s total cost equation is TC(Q) = 25 − 2Q + 0.5Q2 .Determine Stay Fresh’s profit-maximizing
Fairway Chemicals manufactures fertilizer for golf courses. The production function for a particular brand of fertilizer is Q = min[3P,N], where Q is pounds of fertilizer, P pounds of phosphate, and N pounds of nitrogen.a. What is the marginal product of phosphate?b. What is the marginal product of
0.7 After automation, Whipple’s production function will be Q(L,K) = 100L0.2K0.8 .Under the terms of Whipple’s current collective bargaining agreement with United Whirly-Gig Workers Local 666, the cost of labor is $12 per worker. The cost of capital is $93.33 per unit.a. Was Whipple maximizing
The W. V. Whipple Corporation specializes in the production of whirlygigs.W. V. Whipple, the company’s founder, president, and chief executive officer, has decided to replace 50 percent of his work force of 100 workers with industrial robots. Whipple’s current capital requirements are 30
The production function of an online retailer that hires unskilled (U)and semiskilled (S) workers in its distribution division is given by the equation Q(U,S) = 2U + 4S.a. What is the marginal product of unskilled labor?b. What is the marginal product of semiskilled labor?c. Unskilled workers earn
MagnaBox installs automobile CD players. Its production function is Q(L,K) = K0.5L0.5 , where Q represents the number of CD players installed, L the number of labor hours, and K the number hours of leased installation equipment, which is fixed at 250 hours. The rental price of labor and capital are
A firm produces at an output level where the marginal products of labor and capital are both 25 units. Suppose that the rental price of labor and capital are $12.50 and $25, respectively.a. Is this firm maximizing profit?b. If the firm is not producing efficiently, how might it do so?
Numeric Calculators produces a line of abaci. Its production function is Q(L,K) = 2L0.6K0.4 .Numeric has a weekly budget of $400,000 and has estimated the unit cost of capital is $5.a. Numeric is maximizing profit. If the cost of labor is $10 per hour, what is the Numeric’s output level?b. The
WordBoss, Inc. uses 4 word processors and 2 desk-top computers to generate reports. The marginal product of word processor is 50 pages per day and the marginal product of a desk-top computer is 500 pages per hour. If the rental price of a word processor is $1 per hour and the rental price of a
Suppose that the total cost of producing goods 1 and 2 is given by the equation TC Q Q aQ bQQ cQ 1 2 1 21 2 2( , ) = − + 2 , wherea, b and c are positive constants. Verify that Q1 and Q2 are cost complements.
Suppose that a firm’s average total cost can be described by the equation ATC Q logQ log ( )= ( )( ) 10 0 8 3 . , /where output (Q) is in hundreds of units. What does this equation imply about the firm’s learning curve effect?
The total cost equation of a firm is TC(Q) = 5,000 + 2,000Q −10Q2 + 0.25Q3 , where Q is the level of output.a. What is the firm’s total fixed cost?b. What is the equation for the firm’s total variable cost?c. What is the equation for the firm’s average total cost?d. What is the equation for
Suppose that the average product of labor is given by the equation AP L L L= 600 + 200 − 2 .a. What is the equation for the total product of labor?b. What is the equation for the marginal product of labor?c. At what level of labor usage is APL = MPL?d. Does this production function exhibit
Suppose that a firm’s short-run production is Q = 2L + 0.4L2 − 0.002L3 , where Q is units of output and L is labor hours.a. Graph the production function for values L = 0 to L = 200.b. What is the firm’s marginal product of labor equation? Graph the marginal product of labor equation for
Suppose that a firm’s production function is Q = 5K0.5L0.5 , where Q is units of output, K and L are machine and labor hours, respectively.Suppose that the amount of K available to the firm is fixed at 100 machine hours.a. What is the firm’s total product of labor equation? Graph the total
Suppose that the production function of a firm is given by the equation Q = 2K0.5L0.5 , where Q represents units of output, K units of capital, and L units of labor.a. What is the marginal product of labor and the marginal product of capital when K = 40 and L = 10?b. What kind of returns to scale
The demand for a product is given by the equation Q = 50 − 2P.a. What is the point price elasticity of demand at P = $20?b. If the price falls to P = $15, what happens to total revenues? What does this imply about the price elasticity of demand?c. Verify your answer to part b by computing the arc
Suppose that the demand equation for widgets is Q = 10,000 − 25P.a. How many widgets will be sold for $100?b. At what price will the demand for widgets zero?c. What is the total revenue equation for widgets in terms of output?What is the marginal revenue equation in terms of output?d. What is the
Suppose that the demand equation for a firm’s product is Q = 10 − 0.4P, where Q is quantity and P is price.a. Calculate the price elasticity of demand using the midpoint formula when P1 = $13 and P2 = $12.b. Calculate the point price elasticity of demand at these prices. What, if anything, can
− 50 , where Px is the price, M median family income, and Pz is the price of bailiwicks. Suppose that Px = $5, M = $20,000, and Pz = $15.a. What is the price elasticity of demand?b. Is the firm maximizing its total revenue at Px = $5. If not, what price should Paradox charge?c. Calculate the
The market research department of Paradox Enterprises has determined that the demand for its product is Q P M P x x z = 1,000 − 5 +
Just-the-Fax, Max, Inc. has determined that the demand for its FAX machines is Q = 3,000 −1.5P.a. Calculate the point price elasticity of demand when P = $600.b. At P = $600 what is Max’s marginal revenue?c. Determine the total revenue maximizing price and quantity for the firm.
Silkwood Enterprises specializes in gardening supplies. The demand for its new brand of fertilizer is given by the equation Q = 120 − 4P.a. Silkwood is currently charging $10 a pound. What is the price elasticity of demand?b. At this price, what is Silkwood’s marginal revenue?c. What price
Suppose that the estimated demand equation for a firm’s good is Qx = 100 −10Px − 2Py + 0.1M + 0.2A, where Qx d is unit sales of good x, Px is the price of good x, Py is the price of good y, M is per-family money income in thousands of dollars, and A is the level of advertising expenditures in
Suppose that the income elasticity of demand for a good is 3.5.a. How would you classify this good?b. What increase in income is required for demand to increase by 21 percent?
Suppose that the cross-price elasticity of demand for good m is −1.75 and the price of good n falls by 10 percent.a. What is the relationship between goods m and good n?b. How will the fall in the price of good n affect sales of good m?
and the price of good y increases by 25 percent.a. How would you characterize the relationship between goods x and y?b. How will the increase in the price of good y affect unit sales of good x?
Suppose that the cross-price elasticity of demand for good x is
The Sylvan Corporation produces wood sorrels. The price elasticity of demand is −0.25.a. What will happen to the quantity demanded if Sylvan raises its price by 10 percent?b. What will happen to Sylvan’s revenues following this price increase?
A consortium of the world’s leading coffee bean producers form a cartel to the supply of coffee beans. The objective of the cartel is to lower prices and increase cartel revenues. What must be true about the demand for coffee beans for this policy to be successful?
A consortium of the world’s leading oil producers form a cartel to control the supply of crude oil. The objective of the cartel is to raise price and increase revenues. What must be true about the demand for oil for this policy to be successful?
Explain why a monopolist would never price its product along the inelastic portion of a linear demand curve.
Suppose that crime is positively related to profits from illegal drug sales and that the demand for drugs is price inelastic. The government’s primary weapon in the war on drugs is the interdiction of illegal drugs flowing into the country from outside its borders. What is the likely effect of
Suppose that you are a portfolio manager for a large, diversified mutual fund. The fund’s chief economist is forecasting an economic slowdown. How will your knowledge of estimated income elasticities of demand to alter the composition of the portfolio?
The market demand and supply equations for a good are:Qd = 50 −10P;Qs = 20 + 2.5P.a. What is the equilibrium price and equilibrium quantity?b. What is the value of net social welfare?c. What is the effect on net social welfare if the government imposes a price ceiling of $3.00?
.If the economic professor is correct, forecast Occidental’s full-time enrollment?c. Assuming no change in real GDP or full-time tuition charged by Oriental, will the promotional campaign be effective? (Hint: Compare Occidental’s tuition revenues before and after the promotional campaign.)d.
+
+
y , where Qx is the number of full-time students, Px tuition charged fulltime students per semester, M national income ($ billions), and Py tuition charged full-time students per semester by Oriental Atlantic University in Maryland, Occidental’s closest competitor on the grid iron.a. Suppose that

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