Managerial Economics 5th Edition Luke M. Froeb, Brian T. McCann, Michael R. Ward - Solutions

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Why do accountants not measure opportunity cost?
Any distortion of market prices would reduce economic efficiency. True or false?
Explain how the invisible hand allocates resources in an economically effi cient way.
A new shipping line has reduced the cost of transporting cars from Germany to Australia. Who would benefit? German car manufacturers or Australian consumers?
Luna Catering pays a 20% fee to a contractor for delivering meals to customers. Explain the difference between the buyer’s price and seller’s price.
Consider a market for used cars in which sellers pay a commission to the marketplace. Explain the difference between the buyer’s price and seller’s price.
Explain why the effect of an increase in wages of waiters and kitchen staff on the market price of restaurant meals depends on the price elasticity of demand.
Explain why the effect of an increase in consumer incomes on the produc tion of cars depends on the price elasticity of demand.
Explain why the effect of colder weather on the market price of heating oil depends on the price elasticity of supply.
Suppose that there is excess supply of apartments. How would a fall in con sumer incomes affect the excess supply?
Suppose consumers are queuing to buy tickets for a World Cup soccer match. Does this indicate excess demand or excess supply?
If the market is in excess demand, what will happen to the price?
If the market is in excess supply, what will happen to the price?
How would a requirement that sellers be licensed by the government affect the competitiveness of an industry?
To what extent does the market for used cars meet the conditions for per fect competition?
To what extent does the market for fresh vegetables meet the conditions for perfect competition?
For a given increase in price of the product, will the increase in seller sur plus be smaller or larger if the supply is more elastic? (Hint: Draw two supply curves, one more elastic than the other.)
Consider the price elasticity of the market supply of crude oil. Do you expect supply to be relatively more price elastic in the short run or long run?
If the supply curve slopes upward, the price elasticity of supply will be posi tive. True or false?
How would (a) a higher price of lumber, and (b) lower wages affect the supply of furniture?
Explain the differences between the short- run and long- run decisions to continue in business.
Explain why the following two conditions for long- run break- even are equivalent: (a) revenue covers total cost; and (b) price covers average cost.
Some companies continue in business even though they are losing money. Are they making a mistake?
Explain why the following two conditions for short- run break- even are equivalent: (a) revenue covers variable cost; and (b) price covers average variable cost.
Does the following analysis under- or overestimate the change in profit? The price of eggs is 60 cents per dozen and a farmer produces 10,000 dozen eggs a month. If the price rises to 70 cents, profit would increase by $1,000.
Jupiter Oil produces 2,000 barrels of crude oil a day, at marginal cost of $20 per barrel. The market price is $15 per barrel. Explain how the company can increase its profit.
Under what conditions would a seller’s marginal revenue equal the market price of its product?
Explain the principle of diminishing marginal product.
Farmer Axel’s fixed cost of growing corn is higher than that of Farmer Julia. What, if anything, does this imply for the difference in their marginal costs of growing corn?
Comment on the following statement: “It costs our factory an average of $5 to produce a shirt. I cannot accept any order for less than $5 per shirt.”
Explain the distinction between the short run and long run. How is this related to the distinction between fixed and variable costs?
Explain why the advertising elasticity of the market demand for beer may be less than the advertising elasticity of the demand for one par ticular brand.
Battery manufacturers use lithium and cobalt to produce batteries. Are the two metals substitutes or complements? Would the cross- price elasticity of demand for lithium with respect to the price of cobalt be positive or negative?
Under what conditions would the income elasticity of demand for a product be (a) negative, or (b) positive?
Consider a good that you buy frequently. (a) Suppose that your income is 10% higher. How much more would you buy each year? (b) Calculate the income elasticity of your demand.
Compare the own- price elasticity of the demand for a particular brand of inkjet cartridges: (a) before the user has bought an inkjet printer; and (b) after the user has bought the printer.
Explain why the demand for a category of products is more price elastic than the demand for one brand in the category.
The demand for low involvement products is price inelastic. True or false?
“I won’t raise price because that would reduce sales.” What’s wrong with this statement?
If the demand for your product is price elastic, should you raise the price?
Suppose that the own- price elasticity of the market demand for gasoline is −0.7. Owing to a pipeline failure, the price of gasoline rose by 10%. In percentage terms, how would that affect the quantity of gasoline purchased and expenditure?
The own- price elasticity of the demand for one brand of toilet paper is −1.5. Suppose that the manufacturer reduces price by 5%. In percentage terms, how would that affect the volume of sales?
Consider the demands for Netflix and HBO Max. If we want to compare how sensitive are the demands to price changes, why should we use the own- price elasticity?
Referring to the own- price elasticity, under what conditions is demand price elastic or price inelastic?
Explain why the own- price elasticity is a pure number with no units and is negative.
Consider a service that you buy frequently. (a) Suppose that the price is 5% lower. How much more would you buy each year? (b) Calculate the own- price elasticity of your demand.
Should managers operating in an imperfect market: (a) set high prices to make up for the imperfection; or (b) act strategically to resolve the imperfection?
What distinguishes a manufacturer with market power from one without market power?
What is another name for the model of competitive markets?
In every market, all buyers are consumers and all sellers are businesses. True or false?
Explain the difference between: (a) the market for electricity; and (b) the electricity industry.
In the context of manufacturing Apple iPhones, explain the concepts of outsourcing and vertical integration.
Describe the horizontal boundaries of your university. In what ways could the horizontal boundaries be expanded or reduced?
Describe the vertical boundaries of your local cable television provider. In what ways could the vertical boundaries be expanded or reduced?
Why do individuals act with bounded rationality?
In deciding how many hours to work, why should a worker compare the marginal earnings and marginal cost of each hour?
In decisions on participation, managers should compare the total benefit and total cost. True or false?
Explain the difference between the marginal and average values.
Maggie works ten hours a day at a supermarket. The store pays $10 per hour for a basic eight- hour day and $15 per hour for overtime. What are Maggie’s (a) marginal pay and (b) average pay?
Consider a charity that gives free meals. Since the charity receives no rev enue while meals are costly, do the free meals mean that the charity is destroying value?
Explain the difference between value added and economic profit.
What is two- part pricing? How can a mobile telecommunications provider use two- part pricing to increase profit?
What is a package deal? How can a ride hail operator use package deals to increase profit?
“Summer sale: the more you buy, the more you save.” Comment.
The price of mobile telephone calls is 10 cents a minute. Antonella buys 200 minutes a month. Illustrate her demand curve and identify her buyer surplus.
Passengers on a London to Sydney flight compared fares and discovered that they had paid different prices for the same flight. Explain how this illustrates that the market demand curve is downward- sloping.
Buyer surplus applies to consumer demand but not business demand. True or false?
Explain the meaning of buyer surplus.
Why are automated teller machines (ATMs) relatively more common in countries with higher labor costs?
A key component of mobile phones is the microprocessor. Explain how changes in consumer incomes affect Apple’s demand for microprocessors.
How would 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. Would this new product affect the demand for male condoms or birth- control pills relatively more?
Give an example of two products which are complements, and explain why they are complements.
Think of a good or service that you bought recently. Would you have bought more or less of the item if your income had been lower? Explain why or why not.
Give an example of an inferior product, and explain why it is an inferior product.
Think of a good or service that you bought recently. Would you have bought less of the item if the price had been lower? Explain why or why not.
Suppose you were to estimate a statistical model explaining the relation between the degree of ownership concentration and t he following variables: 1) the degree of regulation in the industry, 2) firm size, a nd 3) stock price volatility. Predict the signs on each of these variables and
(Extended activity) Go to the SEC EDGAR website ( http://www.sec.gov/cgibin/srch-edgar ). Search for the recent SEC filings of a publicly traded company (such as Wal Mart Stores Inc.). Review the firm’s most recent proxy statement (form DEF 14 A). Summarize and evaluate the firms’ board of
For the linear demand curve in Technical Problem 12 (on the next page):a. Write the equation for the demand curve.b. Write the equation for the inverse demand curve.c. Write the equation for the total revenue curve.d. Write the equation for the marginal revenue curve.e. Check your answers for
a. For the linear demand curve in Technical Problem 7, compute the price elasticity at each of the price points given in the following table. Make the elasticity calculations using the two alternative formulas, E = (ΔQ/ΔP) × (P/Q) and E = P/(P - A).b. Which formula is more accurate for computing
The figure on the next page shows a linear demand curve. Fill in the blanks a through l as indicated in the figure.
In the magazine Budget Travel, a hotel maid admits, “I cut corners everywhere I could. Instead of vacuuming, I found that just picking up the larger crumbs from the carpet would do. Rather than scrub the tub with hot water, sometimes it was just a spray-and-wipe kind of day. . . . After several
Local Spanish TV markets cater to individual cities by producing local content. This content can be produced in-house by a network or they can also purchase rights to third-party produced content. Recently, Spanish cities have erected barriers to entry in television content production that allows
CUS Pharmacy wishes to carry Pepgro blue pills. But Daisy Pharmaceuticals, the maker of Pepgro, will not supply CUS unless CUS agrees to carry other medications that Daisy makes. This is an example of a. Exclusion.b. Tying.c. Territory restriction.d. Bundling.
Identify a vertical relationship in your company, and determine whether it could be managed more profitably by outsourcing, untying, unbundling, inclusion of rivals, or vertical disintegration. Clearly identify the source of the profitability and describe how to exploit it. Estimate the gain in
Which of the following provides an example of divisions based on a functional organizational structure?a. Americas, Africa, Asia, Europeb. Research and development, production, finance, marketingc. Youth products, teen products, senior productsd. Business users, home users, educational users
Is your company organized around functional divisions? If so, what kind of problems does this cause? What can you do to fix these problems?Compute the profit consequences of fixing the problem.
Does your company tie compensation to meeting a budget? If so, what kind of problems does this practice cause? What can you do to fix these problems? Compute the profit consequences of changing the process.
Discuss a division or subunit of your organization and how it is evaluated (revenue center, profit center, cost center, etc.). How does the evaluation scheme affect performance? If it is optimal, explain why. Otherwise, explain why you think it is suboptimal, and recommend what you would do if you
Which of the following changes might help solve a divisional conflict regarding a decision?a. Change who has authority to make the decisionb. Transfer information to the decision-makers so they are better informedc. Change the performance evaluation and associated compensation of the
Does your company use transfer pricing to “charge” divisions for the cost of the products they consume? Are these prices set equal to the opportunity cost of the product? Why or why not? Can you think of a better organizational architecture? Compute the profit consequences of changing the
Suppose that a paper mill “feeds” a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the first unit of boxes increases earnings by $10, the second by $9, the third by $8, and so on, until the tenth unit increases
A firm faces two kinds of employees, those able to sell 10 units/year, and those able to sell 5 units/year. High-productivity employees are willing to work for $100K/year, while low-productivity employees are willing to work for only $50K/year. To screen out the low-productivity employees, the firm
Principal–agent problemsa. Occur when firm managers have more incentive to maximize profit than shareholders do.b. Would be reduced if firm owners had better information about the actions of the firm’s managers.c. Are made worse when executives own stock in their companies.d. Are increased as
Describe a decision that is centralized (or decentralized) in your company. How could you decentralize (or centralize) the decision?What would happen if it were decentralized (or centralized)? Compute the profit consequences of the change.
Describe a job compensated with incentive pay in your company. What performance evaluation metric is used, and how is it tied to compensation?Does this compensation scheme align the incentives of the employee with the goals of the company? Estimate the profit consequences of the scheme relative to
A good incentive-compensation schemea. Maximizes the agent’s utility.b. Anticipates how an agent will game the scheme.c. Does not subject a risk-averse agent to risk.d. Accompanies centralized decision-making authority.
Describe a moral hazard problem your company is facing. What is the source of the asymmetric information? Who is the less-informed party? Are there any wealth-creating transactions not consummated as a result of the asymmetric information? If so, could you consummate them? Compute the profit
Describe an adverse selection problem your company is facing. What is the source of the asymmetric information? Who is the less informed party? What transactions are not being consummated as a result of the information? Could you (or do you) use signaling or screening to consummate these
Your company has a customer list that includes 3,000 people. Your market research indicates that 90 of them responded to the coupon. If you send a coupon to one customer at random, what’s the probability that he or she will use the coupon?a. 0.03b. 0.09c. 0.30d. 0.90

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Managerial Economics 5th Edition Luke M. Froeb, Brian T. McCann, Michael R. Ward - Solutions

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