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Managerial Economics And Organizational Architecture 7th International Edition Clifford W. Smith, Jerold Zimmerman, James Brickley - Solutions
Suppose that the income elasticity of the demand for cars is 0.285 in the short run and 0.391 in the long run. Compare the effect of a 10% rise in incomes on the demand for cars in the short and long run.
Consider the effect of changes in fares on the quantity demanded of taxi services. Do you expect demand to be more elastic with respect to fare changes in the short run or in the long run?
Suppose that the advertising elasticity of the demand for one brand of cigarettes is 1.3.If the manufacturer raises advertising expenditure by 5%, by how much will the demand change?
Tire manufacturers use both natural and synthetic rubber to produce tires. Suppose that the cross-price elasticity of demand for natural rubber with respect to changes in the price of synthetic rubber is negative. Are the two types of rubber substitutes or complements?
Changes in the price of an item may affect the income elasticity of demand. True or false?
The own-price elasticity of the demand for one brand of frozen vegetables is −1.5. Suppose that the manufacturer reduces the price by 5%.What would be the percentage effect on the volume of sales?
Suppose that the own-price elasticity of the market demand for food is −0.7 and that, as a result of a severe drought, the price of food rises by 10%.Will expenditure on food rise or fall?
How would the sunk-cost fallacy (a behavioral bias arising from bounded rationality, explained in Chapter 1) affect the elasticity of demand?
Consider the intuitive factors that influence the own-price elasticity of demand. Apply the factors to gauge the own-price elasticity of demand for air travel among executives traveling at the expense of their employers.
Under what conditions is demand “price elastic” or “price inelastic”?
Consider a service that you buy frequently. (a) Suppose that the price was 5% lower.How much more would you buy each year? (b) Calculate the own-price elasticity of your demand.
What is two-part pricing? How can a broadband service provider use two-part pricing to increase profit?
What is a package deal? How can a broadband service provider use package deals to increase profit?
minutes a month. Illustrate her demand curve and identify her buyer surplus.
cents a minute. Antonella buys
The price of mobile telephone calls is
A key component of mobile phones is the microprocessor. Explain how changes in consumer incomes affect Nokia’s demand for microprocessors.
How does Pepsi advertising affect the demand for: (a) Pepsi, and (b) Coca-Cola?
A new birth-control device protects women against pregnancy but not sexually transmitted diseases. How will this new product affect the demand for: (a) male condoms, and(b) birth-control pills?
Define what is meant by (a) a substitute, and (b) a complement, and give examples to illustrate your definitions.
Define (a) normal product, and (b) inferior product, and give examples to illustrate your definitions.
Explain the consequences of the falling costs of international communication and trade.
True or false?(a) In every market, all buyers are consumers.(b) In every market, all sellers are businesses.
Referring to the net present value example in the section above on timing, under what circumstances, if any, could the NPV be positive?
Explain why an employer expecting $1 million of future pension costs need not provide$1 million today in order to meet the pension fund’s future obligations.
Give an example in which the marginal is less than the average value.
Give an example in which the marginal exceeds the average value.
How does economic profit differ from accounting profit?
Consider a charity that gives free mosquito nets to poor people. Since the charity receives no revenue while mosquito nets are costly, does the free distribution mean that the charity is destroying value?
2-32. If you were expecting a snow storm, how might this change your analysis? What are some other costs you may want to take into consideration?
2-31. What are some other costs you may want to consider in this analysis?
2–30. The school is having a happy hour on Friday. If you go, you will get two free drink tickets and snacks, for which you would normally pay $15. However, you will have to pay$10 for the cab fare home. You also have a free student ticket to the local profession team’s soccer game. There is no
2–28. An entrepreneur quits his job as a banker and invests $100,000 of his savings in a new business venture that he will manage. Discuss the two most obvious opportunity costs that he will incur from this decision.2–29. You are trying to decide whether to fly or drive from Rochester to Boston
2–27. Michael is a fan of the Rhinos—the local professional soccer team. At the beginning of the season, he purchased nonrefundable season tickets to their 10 home games for a total of $100. Michael places equal value on each of the home games. His value for any given game is independent of how
2–26. Russell and Joe have hired Maria to help cook in their restaurant. Maria had previously owned her own breakfast business. Her speed in cooking was well-known. Russell and Joe have been surprised that her productivity has fallen significantly since she became their paid employee. Use the
2–25. According to an article in the Atlanta Journal-Constitution (January 29, 2004),“materialism, not necessity, gave birth to dual-income families.” In supporting the argument, the author cites the following figures from the Department of Commerce: In 1970 the average wage per job was
2–24. Accounting problems at Enron ultimately led to the collapse of the large accounting firm Arthur Andersen. When the Enron scandal first became public, Andersen’s top management blamed one “rogue partner” in the Houston office who they claimed was less honest than other partners at the
2–23. Jenny is an investor in the stock market. She cares about both the expected value and standard deviation of her investment. Currently she is invested in a security that has an expected value of $15,000 and a standard deviation of $5,000. This places her on an indifference curve with the
2–22. Discuss the following statement: “Sunk costs matter. People who pay $20,000 to join a golf club play golf more frequently than people who play on public golf courses.”
2–21. Some states in the United States allow citizens to carry handguns. Citizens can protect themselves in the case of robberies by using these guns. Other states do not allow citizens to carry handguns. Criminals, however, tend to have handguns in all states. Use economic analysis to predict
2–20. The Japanese are very good at returning lost property to local police stations. If you lose a wallet filled with cash in Japan it is likely to be turned into the police. This is true even though the person finding it could keep it without anyone else knowing. This behavior is not what you
2–19. People give to charity.a. Is this action consistent with the “economic view of behavior”? Explain.b. Suppose there is a big drop in charitable giving. At the same time there has been no decline in per capita income or total employment. Using the economic model, what potential factors
2–18. To spur consumer spending, suppose the Japanese government adopts an $85 billion voucher system whereby every Japanese consumer receives a shopping voucher that could be used to purchase Japanese products. For simplicity, assume the following: Each consumer has wealth of 1 million yen,
How much would a risk-averse person be willing to pay for the investment?
How much would a risk-neutral person be willing to pay for the investment?
What is the expected value and standard deviation of the investment?
2–17. Suppose that an investment can yield three possible cash flows: $5,000; $1,000; or $0.The probability of each outcome is 1/3.
2–16. Critically evaluate the following statement: “Risk-averse people never take gambles.”
2–15. Insurance companies have to generate enough revenue to cover their costs and make a normal profit—otherwise, they will go out of business. This implies that the premiums charged for insurance policies must be greater than the expected payouts to the policyholders. Why would a person ever
2–14. One physician who worked for a large health maintenance organization was quoted as saying:One day I was listening to a patient’s heart and realized there was an abnormal rhythm.My first thought was that I hoped that I did not have to refer the patient to a specialist.Indeed, HMO
2–13. A company recently raised the pay of employees by 20 percent. Employee productivity remained the same. The CEO of the company was quoted as saying, “It just goes to show that money does not motivate people.” Provide a critical evaluation of this statement.
2–12. Several school districts have attempted to increase teacher productivity by paying teachers based on the scores their students achieve on standardized tests (administered by outside testing agencies). The goal is to produce higher-quality classroom instruction. Do you think that this type
2–11. One of the main tenets of economic analysis is that people act in their own narrow selfinterest. Why then do people leave tips in restaurants? If a study were to compare the size of tips earned by servers in restaurants on interstate highways with those in restaurants near residential
2–10. Employees at a department store are observed engaging in the following behavior: (a)They hide items that are on sale from the customers, and (b) they exert little effort in designing merchandise displays. They are also uncooperative with one another. What do you think might be causing this
2–9. Employees in a plant in Minnesota are observed to be industrious and very productive.Employees in a similar plant in southern California are observed to be lazy and unproductive. Discuss how alternative views of human behavior and motivation might suggest different explanations for this
2–8.a. Briefly describe the five models of behavior presented in this chapter.b. What are the implications of these models for managers attempting to influence their employees’ behavior?
2–7. Suppose that Bob’s indifference curves are perfectly L-shaped with the right angle occurring when Bob has equal amounts of both goods. What does this imply about Bob’s willingness to trade one good for the other? Give examples of goods where this type of behavior might be expected?
2–6. Suppose that Bob’s indifference curves are straight lines (as opposed to being convex to the origin). What does this imply about Bob’s willingness to trade one good for the other? Give examples of goods where this type of behavior might be expected?
2–5. Suppose Juan’s utility function is given by U = FC, where F and C are the two goods available for purchase: food and clothing.a. Graph Juan’s indifference curves for the following levels of utility: 100, 200, and 300.b. Are these curves convex or concave to the origin? What does this
2–4. Suppose that you have $900 and want to invest the money for one year. There are three existing options.a. The city of Rochester is selling bonds at $90 per unit. The bonds pay $100 at the end of one year when they mature (no other cash flows).b. Put the money under your mattress.c. The
2–3. The Solace Company has an inventory of steel that it originally purchased for $20,000. It currently has an offer to sell the steel for $30,000. Should Solace’s management agree to sell? Explain.
2–2. A noted economist was asked what he did with his “free time.” He responded by saying that “time is not free.” Explain this response.
2–1. Which costs are pertinent to economic decision making? Which costs are not relevant?
2–3. You have won a free ticket to see a Lady Gaga’s concert (which has no resale value). Bob Dylan is performing on the same night and is your next best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan.Assume there are no
2–2. Amiko is an investor in the stock market. She cares about both the expected value and standard deviation of her investment. Currently she is invested in a security that has an expected value of $25,000 and a standard deviation of $10,000. This places her on an indifference curve with the
2–1. Suppose there are only two goods that Bob cares about—(1) material welfare and (2)leisure time that he “buys” from the outside world at $40 per unit and $20 per hour, respectively. He currently lives and works in Atlanta, has a budget totaling $1,000 per week for these two goods, and
4. How does your view of behavior affect how you might address this consulting assignment?
3. What actions might you recommend to increase the accuracy of the data entry?
2. What information would you want to analyze?
1. What are the potential sources of the problem?
2. Now provide a potential preference-based explanation for the differences in wine sales.Suppose that this explanation is correct.Discuss whether there are likely to be feasible policies that you could use to increase wine sales in the country with the low demand.
1. Suppose that your economic explanation is likely to be correct and that your company will not allow you to lower the price per liter that you charge for wine in the two countries.Discuss at least two potential actions that you might take to sell more wine in the country with low demand.
2. Would your answer change if your fuel supplier limited the amount of fuel that you could purchase from him at the wholesale price? Explain.
1. Should you accept or reject the proposed deal?
6. Identify the key concepts that are used to mitigate risk when making decisions under uncertainty.
5. Contrast the implications of the economic model with those from other behavioral models used by some managers.
4. Use graphs to explain, predict, and affect behavior in a wide range of applications.
3. Define and apply the concept of opportunity costs.
2. Define and apply marginal analysis in managerial decisions.
1. Describe the economic model of behavior.
1–3. In the life insurance industry, we see two major ownership structures—common stock insurers and mutual insurers. In a common stock company, the owners—its stockholders—are a separate group from its customers—the policyholders. In a mutual, the policyholders are also the owners of the
3. What lessons might you learn from this case if you were an executive at another bank?Source: This application is based on a series of articles from The New York Times published in early 2008. In particular, see N. D.Schwartz and K. Bennhold (2008), “A Trader’s Secrets, a Bank’s
2. Discuss how the bank’s organizational architecture contributed to the problem.
1. Do you agree with Société Générale’s CEO that Kerviel’s actions were “irrational”?
1–2. In the process of benchmarking, a colleague of yours notes that Lincoln Electric, a producer of electric arc welders, has much higher productivity than does your company.Review Questions who had advanced degrees in math or engineering from the prestigious Grandes Ecoles—the MIT of France.
1–1. What are the three aspects of organizational architecture?
3. What lessons might you learn from this case if you were an executive at another bank?
2. Discuss how the bank’s organizational architecture contributed to the problem.
1. Do you agree with Société Générale’s CEO that Kerviel’s actions were “irrational”?
Who are the firm’s competitors, and how are they likely to respond to the firm’s product offerings?
How should the firm price its products?
What mix of inputs should the firm use in its production?
How differentiated will the firm’s products be?
Which markets will the firm enter?
2. Define economic Darwinism and discuss its implications related to the benchmarking of business practices.
1. Define organizational architecture and discuss how economics can be used to help managers solve organizational problems and structure more effective organizational architectures.
How the three key features of organizational architecture—the assignment of decision-making authority, the reward system, and the performance-evaluation system—can be structured to help managers to achieve their desired results.
How corporate policies such as strategy, financing, accounting, marketing, information systems, operations, compensation, and human resources are interrelated and thus why it is critically important that they be coordinated.
How the firm’s organizational architecture is like its DNA; it plays a key role in determining a firm’s ultimate success or failure because it affects how people in the organization will behave in terms of creating or destroying firm value.
How strategy and the business environment affect the firm’s choice of organizational design—what we call organizational architecture.
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