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Managerial Economics Economic Tools For Today's Decision Makers 7th Global Edition Paul G Keat, Philip K Y Young - Solutions
Why are focal points important for noncooperative games?
Is the prisoners’ dilemma more of a problem for a one-shot or a repeated game?
The responses to Question 18 provide an example of what game theory concept?
Suppose you are asked to write down the name of a single card in a standard deck of playing cards. You cannot ask your neighbor what he or she is writing down, but you wish to write down the same card. What card would you write down?
Why might demand be downward sloping in a market with imperfect information even though the market is otherwise perfectly competitive?
How is the menu of insurance contracts offered by an insurance company like the menu of wage choices available to individuals hired by a company?
How can education act as a separating device?
Is the lemons model an example of the adverse selection problem?
Is a prisoners’ dilemma game a zero sum or variable sum game?
What does Spence argue is required for a signal to be effective?
Does advertising have signaling value?
Is it easier for a rational or irrational person to make a credible threat?
How do warranties and guarantees act as signals?
Does the buyer or seller of insurance typically have better information?
Which side has the informational advantage that is the key to the lemons model?
Is an insurance policy with a high deductible aimed at low-risk or high-risk individuals?
In Spence’s model, does the educated job seeker receive higher wages because education increases the worker’s productivity?
Provide two examples of incentive-compatible mechanisms that reduce the principal-agent problem.
Who has more information in the job market: the job seeker or the potential employer?
Is cost-plus pricing necessarily inconsistent with marginal pricing?
Which products in each pair would tend to have higher markups in a supermarket?a. Cigarettes versus tomatoesb. Potatoes versus orange juice
Many years ago, a neighborhood lunch counter charged 15 cents for a cup of coffee and 15 cents for a buttered hard roll. One day, a customer ordered the two items and was told that the total price was 35 cents. When the customer asked which of the two items had been raised by 5 cents, the owner’s
Explain the key difference between perfect competition and monopolistic competition.
Why do oligopolists often rely on a price leader to raise the market price of a product?
Explain why it is sometimes difficult to apply the MR 5 MC rule in actual business situations.
Compare and contrast Porter’s Five Forces model with the four basic types of markets first described in Chapter 8 in the section “Market Structure.”
Would you expect a company whose production is rather stable from period to period and growing slowly from year to year to have relatively high fixed costs?
How would you account for required profit in the break-even formula whena. Profit is set as a requirement for a time period (e.g., a year)?b. Profit is set as a specific monetary amount per unit?
The difference between price (P) and variable cost (V) is named as contribution. Refer to your favorite applications of the break-even equation to describe the effect of movements in P and V as a reflection of profitability.
Business risk is usually defined in terms of variations of return (or profit) to a firm due to changes in activity resulting from changes in general economic activity. Can the degree of operating leverage therefore be described as a measure of business risk? Why?
How realistic is the assumption of constant variable unit costs in volume-cost-profit analysis?Does it detract a great deal from the value of this analysis? Explain briefly.
Refer to Chapter 2 to answer this question. Describe the term leverage. How are operating leverage, financial leverage, and total leverage related to the income statement in Appendix 8B. Do these types of leverage complement one another? Explain.
Changes in profits are determined by changes in sales volumes. If the firm increases its operating leverage, would a larger or smaller profit change be associated with changes in sales level under these conditions?
How would each of the following scenarios affect the break-even point (unit of sales):(i) Fixed cost decrease, variable cost increase, sales price increase.(ii) Unit costs remain constant, while sales prices increase.(iii) Variable costs decrease, fixed costs increase.(iv) All other things held
Can the degree of operating leverage be measured at the break-even quantity point? Why or why not?
Is volume-cost-profit analysis a good planning tool? Discuss briefly.
What is the effect on break-even quantity ofa. A decrease in unit price?b. A decrease in average variable cost?c. A decrease in fixed cost?Assume some numbers and illustrate the effect by drawing graphs showing the break-even point.
Discuss the estimation of long-run cost functions. Which regression method is most frequently used, and what are some of the problems a researcher will encounter? What adjustment factors may have to be employed?
Discuss the estimation of short-run cost functions. Which regression method is most frequently used, and what are some of the problems a researcher will encounter? What adjustment factors may have to be employed?
Comment briefly on the following methods of cost estimation:a. Engineering costsb. Survivorship principle Discuss the strengths and shortcomings of these methods and the circumstances under which each can be applied.
Define and compare the following types of cost:a. Sunk cost versus incremental costb. Fixed cost versus variable costc. Incremental cost versus marginal costd. Opportunity cost versus out-of-pocket cost Refer to Appendix 7B for help in answering questions 14 through 16.
“Because of economies of scale, it is sometimes more cost effective for a firm to operate a large plant at less than maximum efficiency than a small plant at maximum efficiency.” Do you agree with this statement? Explain.
Define the experience curve. Compare its impact on a firm’s cost function with that of the learning curve.
Overheard at the water cooler: “I think our company should take advantage of economies of scale by increasing our output, thereby spreading out our overhead costs.” Would you agree with this statement (assuming this person is not your boss)? Explain.
When a company states its financial results in its annual report, it typically presents its income statement in the following way:Revenue 2 Cost of Goods Sold (including some depreciation)Gross Profit 2 Selling, General, and Administrative Expenses 2 Research and Development 2 Depreciation
Explain the relationship between the learning curve and a firm’s cost function. Would economists consider the learning curve a short-run or a long-run phenomenon?
Explain the relationship between a firm’s short-run production function and its shortrun cost function. Focus on the marginal product of an input and the marginal cost of production.
Define economies of scope. Is this concept related to economies of scale? Explain.
Define diseconomies of scale. Cite and briefly discuss the main determinants of this phenomenon.
Define economies of scale. How does this relate to returns to scale? Cite and briefly discuss the main determinants of economies of scale.
Point out which costs in the preceding question are considered “relevant” and which are considered “irrelevant” to a business decision. Explain why.
“If it were not for the law of diminishing returns, a firm’s average cost and average variable cost would not increase in the short run.” Do you agree with this statement?Explain.
Explain the distinction made in economic analysis between the short run and the long run.
Show what will happen to the diagram above as a result of the changes listed.a. The firm’s budget increases.b. The price of Y decreases.c. The price of X decreases.d. Y becomes more expensive, and X becomes less expensive.e. Technology makes the Y input more productive.f. Technology increases the
Use the production matrix presented to answer the following questions.Y 8 31 67 101 133 161 184 202 213 7 30 62 93 122 147 168 184 193 6 27 54 82 108 130 149 168 163 5 23 45 69 91 108 126 137 142 4 17 34 54 72 89 101 108 111 3 12 25 38 54 65 74 79 79 2 6 14 24 33 44 54 47 43 1 3 7 11 17 27 19 16 8
Following are different algebraic expressions of the production function. Decide whether each one has constant, increasing, or decreasing returns to scale.a. Q 5 75L0.25K0.75b. Q 5 75A0.15B0.40C0.45c. Q 5 75L0.60K0.70d. Q 5 100 1 50L 1 50Ke. Q 5 50L 1 50K 1 50LKf. Q 5 50L2 1 50K2 g. Based on the
The economist for the ABC Truck Manufacturing Corporation has calculated a production function for the manufacture of their medium-size trucks as follows:Q 5 1.3L0.75K0.3 where Q is number of trucks produced per week, L is number of labor hours per day, and K is the daily usage of capital
An American company that sells consumer electronics products has manufacturing facilities in Mexico, Taiwan, and Canada. The average hourly wage, output, and annual overhead cost for each site are as follows:Mexico Taiwan Canada Hourly wage rate $1.50 $3.00 $6.00 Output per person 10 18 20 Fixed
The Oceanic Pacific fleet has just decided to use a pole-and-line method of fishing instead of gill netting to catch tuna. The latter method involves the use of miles of nets strung out across the ocean and therefore entraps other sea creatures besides tuna (e.g., porpoises, sea turtles). Concern
Indicate whether each of the following statements is true or false. Explain why.a. When the law of diminishing returns takes effect, a firm’s average product will start to decrease.b. Decreasing returns to scale occurs when a firm has to increase all its inputs at an increasing rate to maintain a
The owner of a small car rental service is trying to decide on the appropriate numbers of vehicles and mechanics to use in the business for the current level of operations. He recognizes that his choice represents a trade-off between the two resources. His past experience indicates that this
A firm has the following short-run production function:Q 5 50L 1 6L2 2 0.5L3 where Q 5 Quantity of output per week L 5 Labor (number of workers)a. When does the law of diminishing returns take effect?b. Calculate the range of values for labor over which Stages I, II, and III occur.c. Assume each
The International Calculator Company of China produces handheld calculators in its plant.It tries to keep the number of workers in the plant constant so the only variable factor that can be measured is materials. Over the last seven monthly periods, the data for materials and quantity produced were
Discuss, among other things, the implications for the three stages of production.
Suppose Noble’s production function (see Problem 3) is as follows:Q 5 7V 2 0.5V 2 where Q is the number of widgets produced per day and V is the number of production workers working an 8-hour day.a. Develop a production schedule with V equaling 1 to 10.b. Calculate average and marginal
The Noble Widget Corporation produces just one product, widgets. The company’s new economist has calculated a short-run production function as follows:Q 5 7V 1 0.6V 2 2 0.1V 3 where Q is the number of widgets produced per day and V is the number of production workers working an 8-hour day.a.
The owner of a car wash is trying to decide on the number of people to employ based on the following short-run production function:Q 5 6L 2 0.5L2 where Q 5 Number of car washes per hour L 5 Number of workersa. Generate a schedule showing total product, average product, and marginal product.Plot
The Brady Corporation has eleven plants located around the world. In a recent year, the data for each plant gave the number of labor hours (in thousands), capital (total net plant assets, in millions), and total quantity produced:Capital Labor Quantity 30 250 245 34 270 240 44 300 300 50 320 320 70
What are the properties of the Cobb-Douglas function Q 5 aLbK1 −b. What conceptual change occurs when the equation is changed to Q 5 aLbKc?
In a power function Q 5 aVb, how can you tell whether diminishing marginal returns are present?
When a Cobb-Douglas function with at least two inputs shows the existence of constant returns to scale, it implies that the marginal product of each input is diminishing. True or false? Explain.
Write a production function equation that expresses the existence of diminishing marginal returns. How will this equation differ from one that shows both increasing and decreasing marginal returns?
Define the law of diminishing returns. Why is this law considered a short-run phenomenon?Refer to Appendices 6B and 6C to help you answer questions 13–16.
Cite and discuss possible reasons a firm may actually find itself operating in Stage I or Stage III of the short-run production function.
Define returns to scale. Why is this considered a long-run phenomenon?
According to the rule for optimal input usage, a firm should hire a person as long as her marginal revenue product is greater than her marginal cost to the company. It is well known that many companies have management training programs in which new trainees are paid relatively high starting
What are the key points in a short-run production function that delineate the three stages of production? Explain the relationship between the law of diminishing returns and the three stages of production.
Explain why a firm’s adherence to the MRP 5 MLC rule enables it to find the optimal number of units of a variable input to use in the short-run production process.
Explain the relationship between marginal product and average product. Why can we expect marginal product to equal average product at average product’s maximum point?
What are the two statistical methods most frequently used to estimate production functions?What are the advantages and disadvantages of each method?
Explain the difference between a short-run and long-run production function. Cite one example of this difference in a business situation.
For those of you with current or previous work experience, how is (was) productivity measured in your organization?
Discuss the problems of measuring productivity in actual work situations. How might productivity be measured for each of the following industries?a. Education (e.g., elementary and secondary education, higher education—undergraduate and graduate)b. Government (e.g., the Social Security Office,
Design a study of a production function for a steel mill and another one for a call center.Which variables would you use, and what statistical method would you select for each function?In general, compare and contrast the production function for a product and one for a service.
The maker of a leading brand of low-calorie microwavable food estimated the following demand equation for its product using data from 26 supermarkets around the country for the month of April:Q = -5,200 - 42P + 20PX + 5.2l + 0.20A + 0.25M(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)R2 = 0.55 n = 26 F =
You are the manager of a large automobile dealership who wants to learn more about the effectiveness of various discounts offered to customers over the past 14 months. Following are the average negotiated prices for each month and the quantities sold of a basic model(adjusted for various options)
A manufacturer of computer workstations gathered average monthly sales figures from its 56 branch offices and dealerships across the country and estimated the following demand for its product:Q = +15,000 - 2.80P + 150A + 0.3Ppc + 0.35Pm + 0.2Pc(5,234) (1.29) (175) (0.12) (0.17) (0.13)R2 = 0.68 SEE
One of the most difficult tasks in regression analysis is to obtain the data suitable for quantitative studies of this kind. Suppose you are trying to estimate the demand for home furniture. Suggest the kinds of variables that could be used to represent the following factors, which are believed to
You are given the following demand for European luxury automobiles:Q 5 1,000P 20.93PA 0.75PJ 1.2I 1.6 where P 5 Price of European luxury cars PA 5 Price of American luxury cars PJ 5 Price of Japanese luxury cars I 5 Annual income of car buyers Assume that each of the coefficients is statistically
Enumerate methods of qualitative and quantitative forecasting. What are the major differences between the two?
The following are the monthly changes in the index of leading economic indicators during 2001 and January 2002:January +.1 August 0 February +.1 September −.6 March −.3 October +.1 April −.1 November +.8 May +.6 December +1.3 June +.2 January 2002 +.6 July +.3 What would be your prediction
Manhattan was allegedly purchased from Native Americans in 1626 for $24. If the sellers had invested this sum at a 6 percent interest rate compounded semiannually, how much would it amount to today?
a. Why are manufacturers’ new orders, nondefense capital goods, an appropriate leading indicator?b. Why is the index of industrial production an appropriate coincident indicator?c. Why is the average prime rate charged by banks an appropriate lagging indicator?
Discuss some of the important criticisms of the forecasting ability of the leading economic indicators.
“The best forecasting method is the one that gives the highest proportion of correct predictions.”Comment.
The compound growth rate is frequently used to forecast various quantities (sales, profits, and so on). Do you believe this is a good method? Should any cautions be exercised in making such projections?
Discuss the benefits and drawbacks of the following methods of forecasting:a. Jury of executive opinionb. The Delphi methodc. Opinion polls Each method has its uses. What are they?
How do econometric models differ from “naive” projection methods? Is it always advisable to use the former in forecasting?
Describe projections that use either moving averages or exponential smoothing. Under what conditions can these techniques be used? Which of the two appears to be the more useful?
You have been asked to produce a forecast for your company’s product, bottled water.Discuss the kind of information you would look for in order to make this forecast.
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