Managerial Economics A Mathematical Approach 1st Edition M. J. Alhabeeb, L. J. Moffitt - Solutions

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Explain the difference between time series data and cross-sectional data. Provide examples of each type of data.
Briefly explain the meaning of R2. A time series analysis of demand tends to result in a higher R2 than one using cross-sectional data. Why do you think this is the case?
What is the identification problem? What effect will this problem have on the regression estimates of a demand function? Explain.
Would there be any differences in the set of variables used in a regression model of the demand for consumer durable goods (e.g., automobiles, appliances, furniture) and a regression model of the demand for “fast-moving consumer goods” (e.g., food, beverages, personal care products)? Explain.
Summarize the steps involved in conducting the t-test. What is the basis for using the “rule of 2” as a convenient method of evaluating t-ratios?
What is multicollinearity? How can researchers detect this problem? What is the impact of this problem on the regression estimates? What steps can be taken to deal with this problem?
Briefly explain the meaning of the F-test. Why do you think this test is considered to be more important in multiple regression analysis than it is in simple regression analysis?
A book store opens across the street from the University Book Store (UBS). The new store carries the same textbooks but offers a price 20 percent lower than UBS. If the cross-price elasticity is estimated to be 1.5, and UBS does not respond to its competition, how much of its sales is it going to
ABC Sports, a store that sells various types of sports clothing and other sports items, is planning to introduce a new design of Arizona Diamondbacks’ baseball caps. A consultant has estimated the demand curve to be Q = 2,000 - 100P where Q is cap sales and P is price.a. How many caps could ABC
According to a study, the price elasticity of shoes in the United States is 0.7, and the income elasticity is 0.9.a. Would you suggest that the Brown Shoe Company cut its prices to increase its revenue?b. What would be expected to happen to the total quantity of shoes sold in the United States if
The Acme Paper Company lowers its price of envelopes (1,000 count) from $6 to $5.40. If its sales increase by 20 percent following the price decrease, what is the elasticity coefficient?
Mr. Smith has the following demand equation for a certain product: Q = 30 - 2P.a. At a price of $7, what is the point elasticity?b. Between prices of $5 and $6, what is the arc elasticity?c. If the market is made up of 100 individuals with demand curves identical to Mr. Smith’s, what will be the
The Compute Company store has been selling its special word processing software, Aceword, during the last 10 months. Monthly sales and the price for Aceword are shown in the following table. Also shown are the prices for a competitive software, Goodwrite, and estimates of monthly family income.
Is the demand curve elastic or inelastic at these points?b. Calculate arc elasticity at the interval between P = 5 and P = 6.c. At which price would a change in price and quantity result in approximately no change in total revenue? Why?
The demand function for a cola-type soft drink in general is Q = 20 - 2P, where Q stands for quantity and P stands for price.a. Calculate point elasticities at prices of 5 and
The Teenager Company makes and sells skateboards at an average price of $70 each. During the past year, they sold 4,000 of these skateboards. The company believes that the price elasticity for this product is about −2.5. If it decreases the price to $63, what should be the quantity sold? Will
The Efficient Software Store had been selling a spreadsheet program at a rate of 100 per month and a graphics program at the rate of 50 per month. In September 2012, Efficient’s supplier lowered the price for the spreadsheet program, and Efficient passed on the savings to customers by lowering
Given the demand equation Q = 1,500 - 200P, calculate all the numbers necessary to fill in the following table: P e Point $7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 Elasticity Total Marginal Arc Revenue Revenue
What is the price elasticity at P = 8?
The equation for a demand curve has been estimated to be Q = 100 - 10P + 0.5Y, where Q is quantity, P is price, and Y is income. Assume P = 7 and Y = 50.a. Interpret the equation.b. At a price of 7, what is price elasticity?c. At an income level of 50, what is income elasticity?d. Now assume income
Also, Alex’s sales of soft drinks rose from 40 to 90.a. Calculate the arc price elasticity of demand for the pizza rolls.b. Calculate the arc cross-price elasticity of demand between soft drink sales and pizza rolls prices.
In order to attract more customers on Mondays (a slow day), Alex’s Pizza Shop in Austin decided to reduce the price of their pizza rolls from $3.50 to $2.50. As a result, Monday sales increased from 70 to
When the iPhone was launched in the second quarter of 2008, it was priced at $599, and Apple sold 270,000 units during this quarter. In mid-September of that year, Apple reduced the price to $434, and sales rose to 1,119,000 during this next quarter. Without even doing any calculation, these
The Distinctive Fashions Company increased its advertising budget for its leading brand of women’s yoga apparel from $10,000 in 2011 to $15,000 in 2012. Its sales increased from 900 units to 1,050 units, while the price remained the same at $120 per garment. Calculate the advertising elasticity
A local supermarket lowers the price of its vanilla ice cream from $3.50 per half gallon to$3. Vanilla ice cream (unit) sales increase by 20 percent. The store manager notices that the (unit) sales of chocolate syrup increase by 10 percent.a. What is the price elasticity of vanilla ice cream?b. Why
The demand curve for product a is given as Q = 2000 - 20P.a. How many units will be sold at $10?b. At what price would 2,000 units be sold? 0 units? 1,500?c. Write equations for total revenue and marginal revenue (in terms of Q).d. What will be the total revenue at a price of $70? What will be the
The ABC Company manufactures digital clock radios and sells on average 3,000 units monthly at $25 each to retail stores. Its closest competitor produces a similar type of radio that sells for $28.a. If the demand for ABC’s product has an elasticity coefficient of −3, how many will it sell per
The Mesa Redbirds football team plays in a stadium with a seating capacity of 80,000. However, during the past season, attendance averaged only 50,000. The average ticket price was$30. If price elasticity is −4, what price would the team have to charge in order to fill the stadium? If the price
The Transportation Authority in Anytown, USA, raised bus fares from $1 to $1.15 on January 1, 2011. The authority’s statistics show that the number of passengers riding buses decreased from 672,000 in 2011 to 623,000 in 2012.a. How much did revenue change?b. What is the arc elasticity for bus
(Read the “Newspapers and Their Price Elasticity” section in Appendix 4A before answering the question.) What is the arc demand elasticity for the London Times? What happened to revenue as a result of the price decrease?
Manning Inc., is the leading manufacturer of garage doors. Demand for residential garage door sales depends, of course, on the rate of new house building activity, which in turn depends on changes in income per capita. During the past year, Manning sold 10,000 garage doors at an average price of
Explain the difference between point elasticity and arc elasticity. What problem can arise in the calculation of the latter, and how is it usually dealt with? In actual business situations, would you expect arc elasticity to be the more useful concept? Why or why not?
Which products would exhibit a higher elasticity with respect to interest rates, automobiles or small appliances? Why?
Suppose the federal tax on gasoline increased by 5 cents per gallon. Do you think that such an increase, reflected in the price of gasoline, would have a significant impact on gasoline consumption?
If the income elasticity of tomatoes is estimated to approximate +0.25, what would you expect to happen to the consumption of tomatoes as personal income rises?
The U.S. Postal Service has been raising postal rates on a regular basis. The service had been losing money. One of the reasons is increased competition from companies such as United Parcel Service and Federal Express. Another reason is the use of faxes and e-mail, as well as electronic bill
Would you expect the cross-elasticity coefficients between each of the following pairs of products to be positive or negative? Why?a. Personal computers and softwareb. Electricity and natural gasc. Apples and orangesd. Bread and DVRs
The immediate effect of gasoline price increases in the aftermath of the Persian Gulf crisis in August 1990 on gasoline consumption was not very significant. Would you expect the consumption of gasoline to be more severely affected if these higher prices remained in effect for a year or more? Why
Could a straight-line demand curve ever have the same elasticity on all its points?
(Read the “The Market for Used Automobiles” section in Appendix 4A before answering the question.) When prices of used cars dropped about 10 percent in October 2001, their sales increased by 4.5 percent. Does this mean that the demand elasticity for used cars is 0.45?
A Canadian apparel company, Roots, agreed to provide the U.S. Olympic team at the 2002 Winter Olympics with various types of clothing, including berets, for free, and further, to turn over a portion of its profits on sales of this clothing to the U.S. Olympic Committee.The beret became an instant
You know that the slope does not change (i.e., demand for wine BTG is linear).For a review of slopes and equations, go to the Mathematical Appendix on the Companion Website or see Appendix 3A.Excel Sheet 3.1 shows a screenshot of cells A1:K28 from the Single Demand worksheet of the Demand Excel
You know the slope of the BTG demand curve at this point is P/Q = .05.
You know a point on the BTG demand curve (e.g., P = $10 and Q = 200).
Background Information: Restaurants have traditionally used bottom-end wines to sell by the glass (BTG) at reasonably low prices per glass. In recent years, there has been a growing trend within the restaurant industry to extend BTG programs to higher-end wines. In doing so, they have greatly
Suppose a firm has the following demand equation:Q = 1,000 - 3,000P + 10A where Q = quantity demanded P = product price (in dollars)A = advertising expenditure (in dollars)Assume for the following questions that P = $3 and A = $2,000.a. Suppose the firm dropped the price to $2.50. Would this be
The following relations describe monthly demand and supply for a computer support service catering to small businesses.QD = 3,000 - 10P QS = -1,000 + 10P where Q is the number of businesses that need services and P is the monthly fee, in dollars.a. At what average monthly fee would demand equal
Joy’s Frozen Yogurt shops have enjoyed rapid growth in northeastern states in recent years. From the analysis of Joy’s various outlets, it was found that the demand curve follows this pattern:Q = 200 - 300P + 120I + 65T - 250Ac + 400Aj where Q = number of cups served per week P = average price
Over the years, the market demand for “long-playing records made of polyvinyl has fallen considerably as new technologies replaced the old “LP.” Yet, LPs are still available for sale and they sell at price points higher (in some cases much higher) than CDs. According to economic theory, when
The ABC marketing consulting firm found that a particular brand of tablet PCs has the following demand curve for a certain region:Q = 10,000 - 200P + 0.03Pop + 0.6I + 0.2A where Q is the quantity per month, P is price ($), Pop is population, I is disposable income per household (S), and A is
The following function describes the demand condition for a company that makes caps featuring names of college and professional teams in a variety of sports.Q = 2,000 - 100P where Q is cap sales and P is price.a. How many caps could be sold at $12 each?b. What should the price be in order for the
Following are three sample equations. Plot them on a graph in which Q is on the vertical axis and P is on the horizontal axis. Then transform these equations so P is expressed in terms of Q and plot these transformed equations on a graph in which P is on the vertical axis and Q is on the horizontal
Consider the following supply and demand curves for a certain product.QS = 25,000P QD = 50,000 - 10,000Pa. Plot the demand and supply curves.b. What are the equilibrium price and equilibrium quantity for the industry? Determine the answer both algebraically and graphically. (Round to the nearest
A travel company has hired a management consulting company to analyze demand in twenty-six regional markets for one of its major products: a guided tour to a particular country. The consultant uses data to estimate the following equation (the estimation technique is discussed in detail in Chapter
The following relations describe the supply and demand for posters.QD = 65,000 - 10,000P QS = -35,000 + 15,000P where Q is the quantity and P is the price of a poster, in dollars.a. Complete the following table.Price QS QD Surplus or Shortage $6.00 5.00 4.00 3.00 2.00 1.00b. What is the equilibrium
Define the guiding or allocating function of price.
Define the rationing function of price. Why is it necessary for price to serve this function in the market economy?
Discuss the differences between the short run and the long run from the perspective of producers and from the perspective of consumers.
Overheard at the water cooler in the corporate headquarters of a large manufacturing company: “The competition is really threatening us with their new product line. I think we should consider offering discounts on our current line in order to stimulate demand.”In this statement, is the term
Why do you think it is important for managers to understand the mechanics of supply and demand both in the short run and in the long run? Give examples of companies whose business was either helped or hurt by changes in supply or demand in the markets in which they were competing.
Explain the difference between shortages and scarcity. In answering this question, you should consider the difference between the short run and the long run in economic analysis.
Briefly list and elaborate on the factors that will be affecting the demand for the following products in the next several years. Do you think these factors will cause the demand to increase or decrease?a. Convenience foods (sold in food shops and supermarkets)b. Products purchased on the
Define comparative statics analysis. How does it compare with sensitivity analysis or what-if analysis used in finance, accounting, and statistics?
Briefly list and elaborate on the factors that will be affecting the supply of the following products in the next several years. Do you think these factors will cause the supply to increase or decrease?a. Crude oilb. Beefc. Computer memory chipsd. Hotel roomse. Fast food outlets in emerging
If you bought a “share of stock,” how and when would you expect to be compensated? How certain can you be about your expectations?
“The growth of consumer information organizations, legal requirements, and warranty requirements has caused significant increases in the cost of customer satisfaction. Thus it is no longer useful to talk about profit maximization as a company objective.” Comment on this quote.
The following is a quote from a New York Times article: “If a company makes product donations to the school—computers for instance—then the image of a company goes up as graduate students use the company’s products.” Does such action square with a company’s objective of profit
Why must management consider risk as well as return while evaluating alternatives or choosing a course of action?
Discuss the major actions taken by the market to minimize or prevent agency problems.
Do you agree with the following statement: “All corporate projects have equal risk levels”?If you do not agree, how does a company’s investment appraisal decision affect the degree of risk associated with its stock? Explain.
Discuss the relationship between corporate organizational structure and agency problems.What are the implications of structure on management compensation plans to minimize the agency problems?
Because of inflation, a company must replace one of its (fully depreciated) machines at twice the nominal price paid for a similar machine 8 years ago. Based on present accounting rules, will the company have covered the entire cost of the new machine through depreciation charges? Explain by
Discuss basic reasons that profit maximization is not consistent with the maximization of shareholders’ welfare.
Various depreciation methods can be used to arrive at an accounting profit number. From the viewpoint of the economist, how should annual depreciation be determined?
Do you believe that the profit maximization model can be applied to the activities of a multinational corporation? Explain.
What are some reasons for companies internalizing transaction costs?
You have a choice of opening your own business or being employed by someone else in a similar type of business. What are some of the considerations in terms of opportunity costs that you would have to include in arriving at your decision?
A company has 2 million shares outstanding. It paid a dividend of $2 during the past year, and expects that dividends will grow at 6 percent annually in the future. Stockholders require a rate of return of 13 percent. What would you expect the price of each share to be today, and what is the value
The outsourcing of important parts of a company’s production has been growing in recent years. How would you explain these changes? How has the Internet contributed to these changes?
What are transaction costs? How does opportunistic behavior tend to increase transaction costs?
Discuss the difference between the calculation of shareholder wealth and the concept of Market Value Added. Which of the two would appear to be more meaningful from the viewpoint of a shareholder?
(Optional) Have you been personally involved in the making of a decision for a business concerning what, how, or for whom? If so, explain your rationale for making such decisions.Were these decisions guided by the market process, the command process, or the traditional process? Explain.
Following are examples of typical economic decisions made by the managers of a firm.Determine whether each is an example of what, how, or for whom.a. Should the company make its own spare parts or buy them from an outside vendor?b. Should the company continue to service the equipment that it sells
How important are the views of Robert Anthony and Peter Drucker (presented in the chapter)to understanding the science of management under the conditions of scarcity? Support your views with industrial examples.
Explain the implications of resources, scarcity, opportunity cost, production, and market for the managerial decision-making process.
Discuss the implications of profit for managers as entrepreneurs versus owners as entrepreneurs.
What do you think is the key to success in the soft drink industry? What chance do you think Global Foods has in succeeding in its new venture into the soft drink market? Explain.(Answer these questions on the basis of the information provided in the chapter and any other knowledge you might have
Suppose that the probability of every uncertain event is the same so that uncertainty about what event will occur is in a real sense maximized. Use the information in exercise 7 to see if the expected value of perfect information necessarily increases with this uncertainty.
Using the information in the last question, find the probability of a good macroeconomy given a negative forecast and the probability of a bad macroeconomy given a positive forecast.
Suppose you know the following probabilities that describe the reliability of a macroeconomic forecasting firm’s past performance:The probability of a positive forecast given a good macroeconomy is 0.60.The probability of a negative forecast given a good macroeconomy is 0.40.The probability of a
Evaluate the expected value of perfect information that might be obtained from a management consultant for the decision problem depicted in the table given below.Event⇒ E1 E2 E3 Probability⇒ 0.2 0.4 0.4 Act ⇓A1 160 150 350 A2 100 400 200 A3 75 50 500
Suppose a coin has been flipped but you do not know the outcome (either heads or tails). How many bits of information are needed to eliminate the uncertainty about the outcome of this random event?
Using the concept of probability, explain what is meant by the reliability of a management consultant’s advice about an uncertain event.
Explain what is meant by the prior and posterior probabilities of an event.
Give an interpretation of the expected value of perfect information.
Discuss how information can be measured as “bits.”
Give reasons why a firm’s management might seek the advice of a consultant.
The following are data on predicted profits and their probabilities for two projects, A and B:Project Predicted Profits Probability 10,000 60%A 15,000 40%7,500 40%B 12,500 30%17,500 30%Find out which project is riskier. Use both the absolute and relative measures of assessment.
What is the managerial decision tree? Can you come up with your own example to illustrate how the decision tree works? Explain how mathematical simulation works to serve business decisions.
Compare the diversifiable and nondiversifiable risks. How would each of them be measured? What is portfolio risk, CAPM, and market beta?

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Managerial Economics A Mathematical Approach 1st Edition M. J. Alhabeeb, L. J. Moffitt - Solutions

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