Questions and Answers of Managerial Economics

Mr. D’s Barbeque of Pickwick, TN, produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D’s fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total
Does your company make decisions based on depreciation or overhead? If so, does this lead to bad decisions? What can be done to fix the problem? Compute the profit consequences of the change.
Does your company charge your division for the capital that it uses? If not, does this lead to bad decisions? What can be done to fix the problem? Compute the profit consequences of the change.
Opportunity costs arise due toa. Resource scarcity.b. Lack of alternatives.c. Limited wants.d. Abundance of resources.
Describe a decision that you or your company made that involved opportunity costs that should have been considered. Why did your company make the decision? What should it have done? Compute the
Describe a decision made by your company that involved costs that should have been ignored. Why did your company make the decision? What should it have done? Compute the profit consequences of the
Voluntary transactionsa. Always produce gains for both parties.b. Produce gains for at least one party.c. Always increase wealth for everyone.d. Are inefficient.
A consumer values a car at $525,000 and a seller values the same car at $485,000. If sales tax is 8% and is levied on the seller, then the seller’s bottom-line price is (rounded to the nearest
A consumer values a car at $20,000 and it costs a producer $15,000 to make the same car. If the transaction is completed at $18,000, the transaction will generate a. No surplus.b. $5,000 worth
Taxesa. Impede the movement of assets to higher-valued uses.b. Reduce incentives to work.c. Decrease the number of wealth-creating transactions.d. All of the above.
Which of the following are examples of a price floor?a. Minimum wagesb. Rent controls in New Yorkc. Both a and bd. None of the above
Which of these actions creates value?a. Buying a struggling firm and selling off its assets for more than the purchase priceb. A baseball slugger drawing paying fans into the ballparkc. A student
Wealth-creating transactions are more likely to occura. With private property rights.b. With strong contract enforcement.c. With black markets.d. All of the above.
The biggest advantage of capitalism is thata. It allows the market to self-regulate.b. It allows a person to follow his self-interest.c. It allows voluntary transactions, which create wealth.d. All
Why might a supermarket advertise low prices on certain high-profile items and sell them at a loss?a. It is a way for companies to be charitable.b. The store will sell other groceries to the same
What might happen if a car dealership is awarded a bonus by the manufacturer for selling a certain number of its cars monthly, but the dealership is just short of that quota near the end of the
Why might a “bonus cap” for executives be a bad policy for the company?a. It isn’t. Executives shouldn’t make more than a certain amount.b. It would sow discontent.c. It would encourage
Why might welfare for low-income households reduce the propensity to work?a. It will not.b. It reduces the incentive to work.c. It is unfair.d. It encourages jealousy.
In 2008, the Labour Party in Britain promised that patients would have to wait for no more than four hours to be seen in an emergency room. The National Health Service started rewarding hospitals
The problem-solving framework analyzes firm problemsa. From the organization’s point of view.b. From the manager’s point of view.c. From the worker’s point of view.d. From society’s point of
The rational-actor paradigm assumes that people do NOTa. Act rationally.b. Ase rules of thumb.c. Act optimally.d. Act self-interestedly.
Why might it be bad for hotels to not charge higher prices when rooms are in higher demand?a. Arbitrageurs might establish a black market by reserving rooms and then selling the reservations to
Redesign the contract to better align the incentives of the new vice president with the profitability goals of the owners.
Which of the following is NOT one of the three problem-solving principles laid out in Chapter 1?a. Under whose jurisdiction is the problem?b. Who is making the bad decision?c. Does the decision maker
Identify a contract between your company and a supplier or customer. Does it align the incentives of the parties? If not, suggest a change that would address the problem. Compute the profit
What is a possible consequence of a performance compensation reward scheme?a. It creates productive incentives.b. It creates harmful incentives.c. Both a and b.d. Neither a nor b.
Are your incentives aligned with the goals of your company? If not, identify a problem caused by goal misalignment. Suggest a change that would address the problem. Compute the profit consequences of
Why might performance compensation caps be bad?a. Different pay rates promote dissent.b. Compensation caps can discourage employees from being productive after the cap.c. Compensation caps can
In the figure below, consumers buy a good that is competitively supplied. Consumers are poorly informed about the quality of the good, and they believe the quality of the good is lower than the true
How does imperfect information about product prices create market failure? Will too much or too little output be forthcoming in markets in which buyers do not know the prices charged by all sellers
a. What two properties characterize public goods?b. To avoid market failure, what price must be charged for public goods? Why?
What role do property rights play in creating common property resources? Why are common property resources subject to market failure due to non-excludability?
The figure below shows the marginal damage (MD) curve and the marginal abatement cost (MAC) curve facing an industry that discharges a pollutant into the environment. a. If environment regulations do
The firms in the competitive industry shown in the figure below generate a negative externality in the process of supplying the product. The marginal external cost imposed on society is given by the
If the monopoly municipal water utility in Technical Problem 5 does not face any kind of government regulation of price or output:a. The water utility will charge $___________ per 1,000-gallon unit,
Suppose a municipal water utility must pay $250,000 per month for its quasi-fixed capital inputs, the water treatment plant and distribution lines to homes. The figure below shows the cost structure
Use the figure below, which shows the linear demand and constant cost conditions facing a firm with a high barrier to entry, to answer the following questions: a. The profit-maximizing price is $
Under the demand and supply conditions given in Technical Problem 1, suppose that the mayor of NYC asks the city council to impose a price ceiling on bagels sold in NYC. If the ceiling price is set
Using the demand and supply conditions given in Technical Problem 1, answer the following questions concerning consumer, producer, and social surplus in the New York City bagel market.a. For the
The market for bagels in New York City is perfectly competitive. In New York City, the daily demand for bagels is Qd - 20,000 - 5,000P, which is graphed as D in the figure below. The industry supply
Suppose the manager in Technical Problem 2 has absolutely no idea about the probabilities of the two prices occurring. Which option would the manager choose under each of the following rules?a.
The manager in Technical Problem 5 receives an offer from another party to buy the rights to the risky project described in that problem. This party offers the manager $3,200, which the manager
Suppose the manager in Technical Problem 4 can avoid the risky decision in that problem by choosing instead to receive with certainty a sum of money exactly equal to the expected profit of the risky
Derive your own utility function for profit for the range of profits shown in the following table: a. Find the probability p that would make you indifferent between (1) accepting a risky project
Suppose the manager of a firm has a utility function for profit of U(?) = 20 ln(?), where ? is the dollar amount of profit. The manager is considering a risky project with the following profit
A manager’s utility function for profit is U(π) = 20π, where π is the dollar amount of profit. The manager is considering a risky decision with the four possible profit outcomes shown here. The
Suppose in Technical Problem 2 that the price probabilities are reversed: The manager expects a price of $15 with a probability of 60 percent and a price of $20 with a probability of 40 percent.
A firm is making its production plans for next quarter, but the manager of the firm does not know what the price of the product will be next month. He believes that there is a 40 percent probability
Consider the following two probability distributions for sales:a. Graph the two distributions shown in the table. What are the expected sales for the two probability distributions?b. Calculate the
Return to the bundle pricing problem facing Crystal Channel, Inc. In parts a?c, suppose the manager now knows not only the demand price information in Table 14.1, but also knows how to identify
Look again at Zicon Manufacturing—a firm that produces products that are substitutes in consumption. Suppose that the production manager changed the estimates of the total and marginal cost
Suppose the manager in Technical Problem 7 decides to price-discriminate. The long run marginal cost is estimated to beLMC = 4.5 + 0.005Qa. How many units should the manager produce and sell?b. How
manager faces two separate markets. The estimated demand functions for the two markets areQA = 1,600 − 80PA and QB = 2,400 − 100PBa. Find the inverse marginal
A hotel serves both business and vacation travelers and wishes to price-discriminate. The hotel manager can accurately identify and separate sub markets by looking for children when travelers check
Using Figure 14.6, verify that total revenue is higher at points v and v? than at points w and w? by calculating total revenue for both allocations of 500 units. Figure 14.6 08 60 55 50 E2 = -1.67
In Figure 14.5, the declining five-block pricing plan can be expressed as a set of five successive, two-part pricing plans:Block 1: A1 = ___________and f1 = ___________.Block 2: A2 = ___________and
Suppose Northvale Golf Club in Technical Problem 2 also has a second group of 100 identical golfers, weekend players, who wish to play at the club. The demand for rounds of golf by each one of the
At Northvale Golf Club, the demand for rounds of golf by each one of the 100 identical senior golfer members is given by DSR in Figure 14.3. Northvale?s annual fixed costs are $500,000, and variable
Suppose the firm in Figure 14.1 sets a uniform price for its product.a. What is the maximum profit the firm can earn by setting a uniform price?b. What is the maximum profit the firm could earn if it
For each of the following events, explain whether Beta in the previous question would be more or less likely to cooperate.a. Beta expects to be able to cheat for more than two months before getting
Alpha and Beta in Technical Problem 15 repeat their pricing decision on the first day of every month. Suppose they have been cooperating for the past few months, but now the manager at Beta is trying
Suppose the two rival office supply companies Office Depot and Staples both adopt price-matching policies. If consumers can find lower advertised prices on any items they sell, then Office Depot and
Managers at Firm A and Firm B must make pricing decisions simultaneously. The following demand and long-run cost conditions are common knowledge to the managers QA = 72 ? 4PA + 4PB? ? ? ? ? ? ?and ?
In the pricing decision in Technical Problem 15, can Alpha make a credible threat to punish Beta with a retaliatory price cut? Can Beta make a credible threat of a retaliatory price cut? Data From
For the weekly decision by AMD and Intel to set the prices of their semiconductor chips, verify in Table 13.5 that AMD can credibly threaten to make a retaliatory price cut if Intel cheats. Table
Consider again the sequential technology choice game in Technical Problem 13 in which Sony chooses its cell phone technology before Motorola. Motorola makes the most profit for itself if both firms
In the technology choice game presented in Figure 13.4, draw the game tree when Sony makes its technology decision first. Find the outcome of the game using the roll-back method. Does Sony experience
Using the payoff table for Castle Pizza and Palace Pizza in Table 13.2, draw the game tree for a sequential decision situation in which Palace makes its pricing decision first.a. Find the equilibrium
In Figure 13.2, point C makes both Arrow and Bravo more profitable. Getting to point C requires the airlines to cooperate: Arrow agrees to charge $230 per round-trip ticket and Bravo agrees to charge
Carefully explain why Arrow Airlines and Bravo Airways are not likely to choose the pair of prices at point R in Figure 13.2. Do not simply state that point R is not at the intersection of the
Following the procedure illustrated in Panel A of Figure 13.1, show that when Arrow Airlines believes Bravo Airways is going to charge $200 per round-trip ticket, Arrow?s best response is to charge
Verify that each of the following decision pairs is a Nash equilibrium by explaining why each decision pair is strategically stable:a. Cell D of the prisoners? dilemma in Table 13.1.b. The decision
Find the solution to the following advertising decision game between Coke and Pepsi by using the method of successive elimination of dominated strategies. a. Does Coke have a dominated strategy in
Verify the following statement: ?The solution to the prisoners? dilemma in Table 13.2 is equivalent to the solution found by elimination of dominated strategies.? Table 13.2 Palace's price High
Two firms, Small and Large, compete by price. Each can choose either a low price or a high price. The following payoff table shows the profit (in thousands of dollars) each firm would earn in each of
In each of the following three payoff tables, two decision makers, Gates and Dell, must make simultaneous decisions to either cooperate or not cooperate with each other. Explain, for each payoff
Evaluate the following statement: “In simultaneous decision games, all players know the payoffs from making various decisions, but the players still do not have all the information they would like
For each of the following statements concerning the role of strategic thinking in management decisions, explain whether the statement is true or false.a. “Managers of firms operating in perfectly
Suppose the firm in Technical Problem 19 faces the following demand function:Q = 4,000 − 125Pa. Write the equation for the inverse demand function.b. Find the marginal revenue function.c. How much
Consider a firm that is using two plants, A and B, with these MC functions MCA = 10 + 0.01QA and MCB = 4 + 0.03QB a. Find the
In the following graph, D represents the demand for dishwashers facing the All clean Company. The firm manufactures dishwashers in two plants; MC1 and MC2 are their marginal cost curves. a. How many
The inverse demand equation for a monopoly firm is P = 100 ? 2Q, and the firm faces constant costs of production in the long run with LAC = LMC = $20. a. On the axes above, construct the demand and
For the firm in problem 15, the manager estimated the average variable cost function asAVC = 20 − 0.07Q + 0.0001Q2where AVC was measured in dollars per unit and Q is the number of units sold.a.
The manager of a monopoly firm obtained the following estimate of the demand function for its output:Q = 2,600 − 100P + 0.2M − 500PRFrom an econometric forecasting firm, the manager obtained
The following graph shows the long-run average and marginal cost curves for a monopolistically competitive firm: a. Assume the firm is in the short run and making profits. Draw in the demand and
Describe the features of monopolistic competition:a. How is it similar to monopoly?b. How is it similar to perfect competition?c. What are the characteristics of short-run equilibrium?d. What are the
The following figure shows the average revenue product and the marginal revenue product of labor for a monopoly: a. If the wage is $20, how much labor would the firm hire?b. If the wage is $10, how
In the following table, columns 1 and 2 make up a portion of the production function of a monopolist using a single variable input, labor. Columns 2 and 3 make up the demand function facing the
Consider a monopoly firm with the demand and cost curves below. Assume that the firm is operating in the short run with the plant designed to produce 400 units of output optimally. a. What output
The figure below shows demand, marginal revenue, and short-run cost curves for a monopoly: a. How much should the firm produce? What price should it charge?b. What is the firm?s profit (loss)?c. What
Explain why the manager of a profit-maximizing monopoly always produces and sells on the elastic portion of the demand curve. If costs are 0, what output will the manager produce? Explain.
The following graph shows demand, MR, and cost curves for a monopoly in the short run:a. Profit is maximized at a price of $ ___________.b. The profit-maximizing level of output is ___________.c. At
A monopolist faces the following demand and cost schedules:a. How much output should the monopolist produce?b. What price should the firm charge?c. What is the maximum amount of profit that this firm
The following graph shows demand and MR for a monopoly: a. If the firm wants to sell 200 units, what price does it charge?b. If the firm charges a price of $15, how much will it sell?c. What is MR
Assume a monopoly has the following demand schedule:Price Quantity$20 ................20015 ..................30010 ..................5005.....................700a.
For each of the following products, could consumer lock-in or network externalities (or both) create a barrier to entry? Explain why or why not.a. Toothpaste.b. Vinyl LP record albums.
Explain why input barriers to entry have probably declined in importance with the recent expansion of international markets.
Compare the market power of the following pairs of firms. Explain.a. Bank of America and the First National Bank of Pecos, Texas.b. The “Big Three” U.S. auto manufacturers prior to the early
Suppose that the manager of a firm operating in a competitive market has estimated the firm’s average variable cost function to beAVC = 10 - 0.03Q + 0.00005Q2Total fixed cost is $600.a. What is the
The figure on the next page shows a long-run industry supply curve (SLR) and the demand curve (D) facing the competitive industry. a. In long-run competitive equilibrium, the industry will

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