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managerial economics
Managerial Economics And Organizational Architecture 7th International Edition Clifford W. Smith, Jerold Zimmerman, James Brickley - Solutions
2. What are the total profits from offering the two plans?
1. Design a menu plan that extracts all of the consumer surplus from the Type A customers and as much as possible from the Type B customers given that they have the option to purchase your first plan (it might help to graph the problem). Each of the plans on the menu must offer a maximum number of
3. Describe how you might capture additional profits using a more sophisticated pricing policy that does not involve capturing more of the consumer surplus. Explain.
2. Calculate the surplus that goes to consumers.
1. What are the optimal price, quantity, and profits under this pricing policy?
9. Discuss how product bundling might increase profits and provide examples.
8. Understand how coupons and rebates are sometimes used to price discriminate.
7. Explain “menu pricing” (second-degree priced discrimination) and provide examples.
6. Explain “group pricing” (third-degree price discrimination) and provide examples.
5. Explain “personalized pricing” (first-degree price discrimination) and provide examples; discuss the social cost implications.
4. Develop both cost and valuation-related explanations for real-world examples of apparently similar goods sold at different prices.
3. Define price discrimination and explain how it can sometimes be used to increase profits relative to the benchmark case of a single per-unit price.
2. Explain how block pricing and two-part tariffs can sometimes be used to increase profits when facing a homogeneous group of consumers.
1. Explain a profit-maximizing firm’s basic pricing objective.
6–13. Will a monopolist ever choose to produce on the inelastic portion of its demand curve?Explain.
6–12. Candak Corporation produces professional quality digital cameras. The market for professional digital cameras is monopolistically competitive. Assume that the inverse demand curve faced by Candak (given its competitors’ prices) can be expressed as P = 1,000 −0.2Q and Candak’s total
6–11. What is a Nash equilibrium? Explain why a joint confession is the Nash equilibrium in the prisoners’ dilemma.
6–10. Compare the industry output and price in a Cournot versus a competitive equilibrium.Do firms earn economic profits in the Cournot model? Does economic theory predict that firms always earn economic profits in oligopolistic industries? Explain. What does the empirical evidence indicate?
6–9. In 1981, the United States negotiated an agreement with the Japanese. The agreement called for Japanese auto firms to limit exports to the United States. The Japanese government was charged with helping make sure the agreement was met by Japanese firms.Were the Japanese firms necessarily
6–8. Assume the industry demand for a product is P = 1,000 − 20Q. Assume that the marginal cost of product is $10 per unit.
6–7. The Suji Corporation has a monopoly in a particular chemical market. The industry demand curve is P = 1,000 − 5Q. Marginal cost is 3Q. What is Suji’s profit-maximizing output and price? Calculate the corresponding profits.
6–6. A Michigan court ruled in the 1990s that General Motors did not have the right to close a particular Michigan plant and lay people off. Do you think this ruling benefited the people of Michigan? Explain.
6–5. The Johnson Oil Company has just hired the best manager in the industry. Should the owners of the company anticipate economic profits? Explain.
6–4. What are economic profits? Does a firm in a competitive industry earn long-run economic profits? Explain.
6–3. Should a company ever produce an output if the managers know it will lose money over the period? Explain.
6–2. The short-run marginal cost of the Ohio Bag Company is 2Q. Price is $100. The company operates in a competitive industry. Currently, the company is producing 40 units per period. What is the optimal short-run output? Calculate the profits that Ohio Bag is losing through suboptimal output.
6–1. What four basic conditions characterize a competitive market?
6–3. Genesee and Natural Light are the two sole competitors in the ultra low-end beer market in the Rochester metro area. Both firms have marginal costs of 0 and fixed costs of 200.The industry demand curve is P = 100 − 0.1Q, where Q = Q1 + Q2.a. Assume the firms compete on quantity (Cournot
6–2. Suppose your firm faces a demand curve of P = 90 − 0.30Q and the marginal cost of production is $10 per unit. Find the profit-maximizing output and price. Display this choice graphically (showing the demand, marginal revenue, and marginal cost curves). Is this outcome on the elastic,
6–1. The total and marginal cost of producing Product A are TC = $1,000 + 2Q2 MC = 4Q The $1,000 is a fixed cost in the short run, but can be avoided in the long run by shutting down (going out of business). There is only one possible plant size for this operation; thus, SRMC = LRMC = 4Q in this
2. How do your profits and those of your competitor compare to the case of simultaneous decisions discussed in the text? Would you say that this example of output competition has a first mover advantage or disadvantage?
1. Suppose that each firm must make an upfront investment of $1,000 to enter the market and that your competition has already paid this investment and chosen to produce 50 units.This investment is nonrecoverable (sunk).Should you make the $1,000 investment and enter the market? If so, how much
3. Suppose that you could increase the capacity of your plant to 3,000,000 pills within a two-year period for a cost of $30,000,000. Should you undertake the investment (for simplicity, assume you can borrow the funds for the expansion at a 0 percent interest rate)?
2. Suppose that your production facility can only produce 1,000,000 pills. What is your optimal price and quantity, given the production constraint? What are your profits?
1. Your marginal cost for producing a Hair Grow pill is $1. What is the profit-maximizing price and quantity? What is your profit?
11. Describe the “prisoner’s dilemma” and discuss how it relates to cartel incentives.
10. Describe standard economic models of oligopolies focusing on output and price competition, respectively.
9. Define oligopoly and a Nash equilibrium.
8. Contrast the monopolistic and competitive market outcomes.
7. List potential barriers to entry in an industry.
6. Explain the difference between a constant cost and increasing cost industry.
5. Explain graphically and intuitively long-run equilibrium and how changes in a market affect the equilibrium in the short and long run.
4. Explain shutdown and exit decisions.
3. Explain a firm’s short-run supply decision and firm and industry supply curves.
2. Explain why perfect competition is a useful benchmark model.
1. List the basic characteristics of market structure.
5–24. Assume DurableTires Corp. faces the following demand curve, P = 250 − 0.1Q. If DurableTires’ marginal cost is constant at $35, how many tires should it produce in order to maximize its profits? What’s DurableTires’ profit in this case? Should the elasticity of demand be greater,
5–21. Assume Canon’s production function for digital cameras is given by Q = 100(L0.7K0.3), where L and K are the number of workers and machines employed in a month, respectively, and Q is the monthly output. Moreover, assume the monthly wage per worker is $3,000 and the monthly rental rate per
5–17. The Workerbee Company employs 100 high school graduates and 50 college graduates at respective wages of $10 and $20. The total product for high school graduates is 1,000 + 100QH, whereas the total product for college graduates is 5,000 + 50QC. QH =the number of high school graduates, while
5–15. The AFL-CIO has been a steadfast proponent of increasing the minimum wage. Offer at least two reasons it might lobby for such increases.
5–14. Semiconductor chips are used to store information in electronic products, such as personal computers. One of the early leaders in the production of these chips was Texas Instruments (TI). During the early period in the development of this industry, TI made
5–12. Textbook authors typically receive a simple percentage of total revenue generated from book sales. The publisher bears all the production costs and chooses the output level.Suppose the retail price of a book is fixed at $50. The author receives $10 per copy, and the firm receives $40 per
5–10. Discuss two problems that arise in estimating cost curves.
5–8. What is the difference between economies of scale and learning effects?
5–7. What is the difference between economies of scale and economies of scope?
5–6. Suppose that average cost is minimized at 50 units and equals $1. What is marginal cost at this output level?
5–4. Is the “long run” the same calendar time for all firms? Explain.
5–3. Your company currently uses steel and aluminum in a production process. Steel costs$0.50 per pound, and aluminum costs $1.00 per pound. Suppose that inflation doubles the price of both inputs. What effect will this have on your optimal input mix? Show using isoquants and isocost lines.
5–2. Your company currently uses steel and aluminum in a production process. Steel costs$0.50 per pound, and aluminum costs $1.00 per pound. Suppose the government imposes a tax of $0.25 per pound on all metals. What effect will this have on your optimal input mix? Show using isoquants and
5–1. Distinguish between returns to scale and returns to a factor.
5. How will a $3 increase in the price of machine parts affect Gina’s own production decisions?
4. Is the increase more likely to be justified in the short run or the long run? Explain.
3. Should Gina contest the price increase?Explain.
2. What potential problems do you envision with cost-plus pricing?
1. Why do many firms use cost-plus pricing for supply contracts?
5. Are there any other factors that should be considered in making this decision on the optimal mix of machines and clerks? Discuss briefly.
4. Suppose that the cost of leasing a machine declines to $500 per week. What is your new optimal input mix? How does this affect your graph?
3. Suppose that the marginal product of clerks at the optimal input combination is 500. Explain in words what this means. What is the marginal product of machines at this point? Explain why.
2. Plot the input combinations in the table on a graph that contains clerks on the vertical axis and machines on the horizontal axis. Connect the points by lines to approximate an isoquant as pictured in Figure 5.6. Add the cost minimizing isocost curve to the graph (you can derive this line from
1. You conduct additional analysis and estimate that you can service the 30,000 customers with the following combinations of clerks and machines. Calculate the total costs for each of these combinations. What combination of inputs serves the customers at the lowest possible cost?Clerks Machines 80
10. Understand how many units of a factor (such as labor) a firm should purchase at different factor prices.
9. Explain why MR = MC at the profit maximizing output.
8. Explain long-run costs, sources of economies and diseconomies of scale and scope, and the notion of minimum efficient scale.
7. Define fixed and variable costs and their role in decision making.
6. Distinguish between short- and long-run costs curves.
5. Describe the connection between production and cost functions.
4. Define and describe the relations among total, marginal, and average costs.
3. Create a graphical analysis of the cost-minimizing input mix and explain how it is affected by changes in relative prices of inputs.
1. Explain what is meant by a production function.
4–30. Japan had approximately 4,350 miles of expressway in 2003—all toll roads. In fact, the tolls are so high that many drivers avoid using expressways. A typical 3-hour expressway trip can cost $47. A new $12 billion bridge over Tokyo Bay that takes 10 minutes and costs $25 rarely is busy.
4–29. The accompanying chart presents data on the price of fuel oil, the quantity demanded of fuel oil, and the quantity demanded for insulation.Fuel Oil Insulation Quantity Demanded Quantity Demanded Price per Gallon (millions of gallons) (millions of tons)$3 100 30$5 90 35$7 60 40a. Calculate
4–28. Assume the demand curve for gasoline is given by the equation P = 10 − 0.0005Q, where P is the price per gallon and Q is the quantity of gasoline in gallons. Assume that the only supplier of gasoline in the region is General Gasoline Co. and that the marginal cost of production is
4–26. OPEC is a cartel of oil producing countries that attempts to use its market power to control oil prices. Assume the current daily demand for OPEC’s oil is given by the following equation:P = 50 − 0.001Q where P is the price per barrel (ppb) and Q is the quantity of barrels sold daily
4–22. Gasoline prices increased substantially in 2004 and 2005. What adjustments did people make to minimize the long-term effects of this price increase?
4–21. Southwest Airlines estimates the short-run price elasticity of business air travel to be 2 and the long-run elasticity to be 5. Is ticket demand more elastic in the short run or long run? Does this seem reasonable? Explain.
4–20. Seven teenagers, four boys and three girls, were given $200 each to go on a shopping spree. An advertising agency, which specializes in youth markets, gave the teens the money. An account executive accompanied the teens while they were shopping. The agency wanted to learn not only what they
4–19. Rochester, New York, experienced a serious ice storm. Electric power was out in houses for days. The demand for power generators increased dramatically. Yet the local merchants did not increase their prices, even though they could have sold the units for substantially higher prices. Why do
4–18. Define marginal revenue. Explain why marginal revenue is less than price when demand curves slope downward.
4–15. Alexander Machine Tool faces the demand curve P = $70 − 0.001Q. What price and quantity maximize total revenue? What is the price elasticity at this point?
4–12. The cross elasticity between Product A and Product B is 10. Do you think that Product A is likely to face an elastic or inelastic demand curve? Explain.
4–9. Suppose the price of heating oil increases significantly. Discuss the likely short-run and long-run effects.
4–8. How can cross elasticities be used to help define the relevant firms in an industry?
4–6. Is it true that a normal good must have an income elasticity that is more than 1?Explain.
4–5. Distinguish between normal and inferior goods.
4–4. What are the signs of cross elasticities for substitute products? Explain.
4–3. If the demand for a product is inelastic, what will happen to total revenue if price is increased? Explain.
4–2. How will each of the following affect the position of the demand curve for DVD players?a. An increase in the price of DVD movies.b. A decrease in the price of DVD players.c. An increase in per capita income.d. A decrease in the price of streaming movies on the Internet.
4–1. What is the difference between a demand function and a demand curve?
4–4. Last year, Americans bought 5,000 Ferraris. The average retail price of a Ferrari was$100,000. Statistical studies have shown that the price elasticity of demand is 0.4.Assume the demand curve is linear. Estimate it using the above information.a. Is demand elastic or inelastic?b. What will
4–3. The BJC Company has the following demand function:Q = 300 − 30(price) + 0.01(income)Currently, price is $5 and income is $20,000.a. Calculate the point elasticities for price and income.b. Is the product a normal or an inferior good?
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