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managerial economics
Managerial Economics 5th Edition Luke M. Froeb, Brian T. McCann, Michael R. Ward - Solutions
To test the effectiveness of two Web advertising agencies, you increase your ad purchase with agency A by 50% without changing your purchase through agency B. The referrals to your website from agency A increased by only 34% but the referrals from agency B fell by 21%. What do you estimate the
Suppose an investment project has an NPV of $75 million if it becomes successful and an NPV of 2$25 million if it is a failure. What is the minimum probability of success above which you should make the investment?a. 1/2b. 1/3c. 1/4d. 1/10
Your software development company is considering investing in a new mobile app. If it goes viral (10% probability), you expect an NPV of $1,000,000; if it is moderately successful (20% probability), you expect an NPV of $200,000; and if it fails (70% probability), you expect an NPV of 2$200,000.
You’ve just decided to add a new line to your manufacturing plant. Compute the expected loss/profit from the line addition if you estimate the following:There’s a 50% chance that profit will increase by $100,000.There’s a 30% chance that profit will remain the same.There’s a 20% chance that
The residential division of Prism’s high-speed Internet service uses one advertising agency while its commercial division uses another. Two analysts, Andy and Brad, are asked to test evaluate the effectiveness of the two agencies. Andy proposes an A/B test that compares the click-through rates
A franchise restaurant chain is considering a new store in an unserved part of town.Its finance group estimates an NPV of $10 million if the population growth is 10% (40% probability), an NPV of $4 million if the population does not grow (30% probability), and an NPV of 2$4 million if the
In the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million to $2 million. If they are wrong, their prize is decreased to $500,000. A contestant thinks his guess will be right 50% of the time. Should he play? What is the lowest probability of a
Two hospitals are bargaining with an insurance company to get into its provider network. The insurance company can earn $100 if it puts one of the hospitals in its network and $200 if it puts both hospitals in its network. If both hospitals merge and bargain jointly, how much more will they earn?a.
George and KC have been working jobs that pay $60,000 and $30,000 per year, respectively. They are trying to decide whether to quit their jobs and jointly open up a taco stand on the beach, which they estimate can earn $150,000 per year. How will the taco stand proceeds be split?a. They won’t
Consider bargaining in which each party increases its outside option by $10,000. Which of the following is a likely result.a. The chance of a deal increases.b. Each party’s share of the bargaining surplus increases by $10,000.c. The bargaining split remains the same.d. Each party share of the
In the game in Question 3, how much does Labor earn if they can move first?a. 10b. 15c. 18d. 20 Labor Bargain Hard Be Nice Bargain Hard 0, 0 20, 10 Management Be Nice 12, 18 15, 15
How many pure strategy equilibria does the following game have?a. 0b. 1c. 2d. 3 Labor Bargain Hard Be Nice Bargain Hard 0, 0 20, 10 Management Be Nice 12, 18 15, 15
Fred and his employer both know that Fred can generate $200,000 of profit per year for his company. After negotiations, they agree that he will earn $110,000 in annual compensation. What does this imply for the value of his outside or next best alternative?a. $0b. $5,000c. $10,000d. $20,000
Describe some bargaining interaction your company has with another entity (firms producing complementary or substitute products, upstream suppliers, or downstream customers), or between internal divisions within your firm.Describe the bargaining as either a strategic or nonstrategic interaction.
In a Nash equilibrium,a. Players are always maximizing their joint profit.b. One player is always earning a higher profit than the other.c. Players must be playing the game sequentially.d. None of the above.
Describe some interaction your company has with another entity (firms producing complementary or substitute products, upstream suppliers, or downstream customers), or between internal divisions within your firm that can be described as a sequential or simultaneous game.Diagram the strategies,
The pricing model for iTunes has been to price songs individually. Instead, Spotify opted to offer unlimited song playing for a monthly fee. Would Spotify’s pricing model likely yield more profit than pricing songs individually?
Perfect price discrimination is when a firm can charge each customer exactly what they are willing to pay. In this case,a. The demand curve is very inelastic.b. The marginal revenue is the demand curve.c. The demand curve is very elastic.d. The marginal cost curve is the average cost curve.
Collect a set of price quotes for no fewer than 30 airplane tickets. Examine how these price quotes change as you vary the tickets—one characteristic at a time. For instance, suppose you get a price quote for a ticket on United Airlines from Raleigh-Durham to Chicago, departing on May 17 and
German brothels recently began offering a monthly subscription service for multiple purchasers. If you wished to reduce the incidence of prostitution, would you consider this pricing plan to be a desirable change?
On average, if demand is unknown and costs of underpricing are ____ than the costs of overpricing, then ____.a. Smaller; overpriceb. Smaller; underpricec. Larger; underpriced. None of the above
Does your company price discriminate? Explain how the practice works (direct or indirect) and estimate the profit consequences of price discrimination relative to charging a single, uniform price. If your company doesn’t currently price discriminate, are there opportunities to do so? How would
After running a promotional campaign, the owners of a local hardware store decided to decrease the prices for the advertised products sold in their store. One can infer thata. The promotional expenditures made the demand for the advertised products more elastic.b. The promotional expenditures made
A firm started advertising its product and this changed the product’s elasticity from - 2 to -1.5. If, prior to advertising, the firm charged $10, the firm shoulda. Raise price from $10 to $15.00.b. Reduce price from $10 to $6.67.c. Raise price from $10 to $13.33.d. Reduce price from $10 to $7.50.
Evaluate a pricing decision of your company based on psychological pricing. Was price set optimally? If not, why not? How would you adjust price? Compute the profit consequences of the change.
A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that the firm’s aggregate demand (shoes 1 laces) will bea. Less elastic than the individual demands.b. More elastic than the individual demands.c. Equally elastic as the individual demands.d. None of the above.
Evaluate a pricing decision of your company that coincided with a promotional or advertising campaign. Was price set optimally? If not, why not? How would you adjust price? Compute the profit consequences of the change.
A firm that acquires a substitute product can reduce cannibalization bya. Doing nothing.b. Repositioning a product so that it does not directly compete with the substitute.c. Setting the same price on both products.d. Lowering prices on the low-margin products.
Evaluate a pricing decision your company made that involved a product or service with fixed capacity. Was price set optimally? If not, why not? How would you adjust price? Compute the profit consequences of the change.
All of the following choices are examples of promoting a firm’s product, excepta. Celebrity endorsements.b. Pricing.c. Discount coupons.d. End-of-aisle displays.
After massive promotion of Rihanna’s latest music album, the producers reacted by raising prices for her albums. This implies that promotion expenditures made the album demanda. More elastic.b. Unitary elastic.c. Change due to psychological pricing.d. Less elastic.
Evaluate a pricing decision your company made involving commonly owned products. Was it optimal? If not, why not? How would you adjust price? Compute the profit consequences of this adjustment.
If buyers expect future price increases, they will ____ their purchases to avoid it. Similarly, sellers will ____ selling to take advantage of it.a. Accelerate; accelerateb. Accelerate; delayc. Delay; accelerated. Delay; delay
If the U.S. economy strengthens, consumer incomes increase, and consumers buy more imported goods and services. How will this affect exchange rates?a. The dollar will appreciate relative to the yuan, and U.S. prices will increase.b. The dollar will appreciate relative to the yuan, and U.S. prices
In July 2014 the price of a Big Mac was $4.80 in the United States, while in China it was only $2.73 at market exchange rates. So the “raw” Big Mac index says that the yuan was under-valued by 43% at that time. How would domestic inflation in China affect the Big Mac Index?a. The Big Mac Index
Explain the effect of a dollar depreciation on domestic firms and domestic consumers for goods with less than 100% domestic content.
Most of the appliances that Whirlpool sells in the UK, are built in the EU. What is the effect of a pound depreciation on Whirlpool’s profit margin.
Explain the effects of the pound devaluation on (1) Imports and tourism to Great Britain and (2) Profits of U.S. bank with European trading subsidiaries in London (which earn profit in pounds).
If the Chinese yuan devalues relative to the U.S. dollar, thena. U.S. producers will benefit; Chinese consumers will benefit.b. U.S. producers will benefit; Chinese consumers will be hurt.c. U.S. producers will be hurt; Chinese consumers will benefit.d. U.S. producers will be hurt; Chinese
Describe how a change in the exchange rate affected your firm. Explain what happened to your price and quantity. How can you profit from future shifts in the exchange rate? How do you predict future changes in the exchange rate?
When Great Britain voted to leave the Eurozone, the pound depreciated 17% against the dollar. It also raised fears that the Eurozone would fall apart. Explain how this fear would affect the euro/dollar exchange rate.
In 2014, the euro was trading at $1.35 on the foreign exchange market. By 2015, the rate had fallen to $1.10, due to falling European interest rates. Explain the fall in the price of a euro using supply and demand curves, and in words.
If a firm successfully adopts a product differentiation strategy, the elasticity of demand for its products shoulda. Increase.b. Decrease.c. Become marginal.d. Be unaffected.
The concept that describes firms possessing different bundles of resources isa. Resource heterogeneity.b. Resource immobility.c. Barriers to entry.d. Imitability.
Which of the following is not a factor that contributes to higher rivalry in an industry?a. Numerous competitorsb. High fixed costsc. Fast industry growthd. Low switching costs for buyers
Which of the following is not an example of an entry barrier?a. Government protection through patents or licensing requirementsb. Strong brandsc. Low capital requirements for entryd. Lower costs driven by economies of scale
What are your firm’s key resources and/or capabilities? How do these translate into a competitive advantage?
Attractive industries have all the following, excepta. High supplier power.b. Low buyer power.c. High entry barriers.d. Low rivalry.
What would happen to revenues if a firm in a perfectly competitive industry raised price?a. They would increase.b. They would increase but profit would decrease.c. They would increase along with profit.d. They would fall to zero.
Which of the following products is closest to operating in a perfectly competitive industry?a. Nike shoesb. Cottonc. Perdue Chickend. Restaurants
Give an example of a compensating wage differential, a risk premium, or some kind of long-run equilibrium price difference your company faces. How can your company profitably exploit this difference?
At a university faculty meeting in 2012, a proposal was made to increase the housing benefits for new faculty to keep pace with the high cost of housing. What will likely be the long-run effect of this proposal?
Suppose a new employer is also relocating to Lampard City and will be attracting many new people who will want to buy new houses. Assume that the change in licensing requirements mentioned in Question 7 occurs at the same time. What do you think will happen to the equilibrium quantity of new homes
Say the average price of a new home in Lampard City is $160,000. The local government has just passed new licensing requirements for housing contractors. Based on possible shifts in demand or supply and assuming that the licensing changes don’t affect the quality of new houses, which of the
Suppose a recent and widely circulated medical article has reported new benefits of cycling for exercise. Simultaneously, the price of the parts needed to make bikes falls. If the change in supply is greater than the change in demand, the price will ________________ and the quantity
It costs a firm $90 per unit to produce product A and $70 per unit to produce product B individually. If the firm can produce both products together at $175 per unit of products A and B, this exhibits signs ofa. Economies of scale.b. Economies of scope.c. Diseconomies of scale.d. Diseconomies of
Following are the costs to produce Product A, Product B, and Products A and B together. Which of the following exhibits economies of scope?a. 100, 150, 240b. 100, 150, 250c. 100, 150, 260d. All of the above
A security system company’s total production costs depend on the number of systems produced according to the following equation: Total Costs = $20,000,000 + $4,000* quantity produced. Given these data, which of the following is a false statement?a. There are economies of scale.b. There are fixed
Describe two activities inside your organization, or one inside and one outside your organization, that exhibit economies (or diseconomies) of scope. Describe the source of the scope economies. How could your organization exploit the scope economy or diseconomy? Compute the profit consequences of
Describe an activity or process or product of your company characterized by learning curves. Describe the source of the learning curve. How could your organization exploit the learning curve? Compute the profit consequences of the advice.
Describe an activity, process, or product of your company that exhibits economies or diseconomies of scale. Describe the source of the scale economy. How could your organization exploit the scale economy or diseconomy? Compute the profit consequences of the advice.
Its lunch time, you are hungry and would like to have some pizza. By the law of diminishing marginal value,a. You would pay more for your first slice of pizza than your second.b. You would pay more for your second slice of pizza than your first.c. You would pay an equal amount of money for both the
In the short run, a firm’s decision to shut down should not take into considerationa. Avoidable costs.b. Variable costs.c. Fixed costs.d. MCs.
Describe a pricing decision your company has made. Was it optimal? If not, why not? How would you adjust price? Compute the profit consequences of the change.
Break-even quantity is a point wherea. The level of profit is maximized.b. The level of cost is minimized.c. Only variable costs are covered.d. There are zero profits.
If GDP is expected to increase at a steady rate of 3% per year, how many years would it take for living standards to double?a. 10b. 20c. 24d. 30
A firm sells 1,000 units per week. It charges $70 per unit, the average variable costs are $25, and the average costs are $65.a. What should the firm do in the short run? Why?b. What should the firm do in the long run? Why?c. At what price would the firm consider shutting down in the short run?d.
Describe an investment or potential investment your company (or one of your suppliers or customers) has made that is subject to post-investment hold-up. What could or does your company do to solve the hold-up problem and ensure the investment gets made? Compute the profit consequences of the
Assume a firm has the following cost and revenue characteristics at its current level of output: price 5 $10.00, average variable cost 5 $8.00, and average fixed cost 5 $4.00. This firm isa. incurring a loss of $2.00 per unit and should shut down.b. realizing only a normal profit.c. realizing an
Describe an investment decision your company has made. Compute the opportunity costs and benefits of the decision. Did your company make the right decision? If not, what would you do differently? Compute the NPV of the investment.
The higher the discount rates,a. The more value individuals place on future dollars.b. The more value individuals place on current dollars.c. The more investments will take place.d. Does not affect the investment strategy
Describe a shut-down decision your company has made. Compute the opportunity costs and benefits of the decision (using break-even analysis if appropriate). Did your company make the right decision? If not, what would you do differently? Compute the profit consequences of the decision.
Food Fanatics caters meals where its cost of producing an extra meal is $25. Each of its meals sells for $20. At this rate, what should the company do?a. Produce more meals and increase its profit.b. Produce fewer meals and increase its profit.c. Not change production.d. None of the above.
A company is producing 15,000 units. At this output level, MR is $22, and the MC is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?a. The company is making a loss.b. The company needs to cut production.c. The company needs to increase
If a firm’s AC is rising, thena. MC is less than AC.b. MC is rising.c. MC is greater than AC.d. The firm is making an economic profit.
Does your firm use royalty rate contracts or fixed-fee contracts? Describe the incentive effects of the contracts. Should you change the contract from one to the other? Compute the profit consequences of changing the contract.
Describe an extent decision made by your company. Compute the MC and marginal benefit of the decision. Was the right decision reached? If not, what would you do differently? Compute the profit consequences of the change.
When a firm ignores the opportunity cost of capital when making investment or shutdown decisions, this is a case of a. Fixed-cost fallacy.b. Sunk-cost fallacy.c. Hidden-cost fallacy.d. None of the above.
The U.S. government bought 112,000 acres of land in southeastern Colorado in 1968 for $17,500,000. The cost of using this land today exclusively for the reintroduction of the black-tailed prairie doga. is zero, because they already own the land.b. is zero, because the land represents a sunk cost.c.
All the following are examples of variable costs, excepta. Hourly labor costs.b. Cost of raw materials.c. Accounting fees.d. Electricity cost.
A business incurs the following costs per unit: labor $125/unit, materials $45/unit, and rent $250,000/month. If the firm produces 1,000,000 units a month. Calculate the following:a. Total variable costsb. Total fixed costsc. Total costs
Mr. D’s Barbeque of Pickwick, TN, produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D’s fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total cost per slab then isa. $7.b. $2.c. $5.d. impossible to determine.
Does your company make decisions based on depreciation or overhead? If so, does this lead to bad decisions? What can be done to fix the problem? Compute the profit consequences of the change.
Does your company charge your division for the capital that it uses? If not, does this lead to bad decisions? What can be done to fix the problem? Compute the profit consequences of the change.
Opportunity costs arise due toa. Resource scarcity.b. Lack of alternatives.c. Limited wants.d. Abundance of resources.
Describe a decision that you or your company made that involved opportunity costs that should have been considered. Why did your company make the decision? What should it have done? Compute the profit consequences of the change.
Describe a decision made by your company that involved costs that should have been ignored. Why did your company make the decision? What should it have done? Compute the profit consequences of the change.
Voluntary transactionsa. Always produce gains for both parties.b. Produce gains for at least one party.c. Always increase wealth for everyone.d. Are inefficient.
A consumer values a car at $525,000 and a seller values the same car at $485,000. If sales tax is 8% and is levied on the seller, then the seller’s bottom-line price is (rounded to the nearest thousand)a. $527,000.b. $524,000.c. $525,000.d. $500,000.
A consumer values a car at $20,000 and it costs a producer $15,000 to make the same car. If the transaction is completed at $18,000, the transaction will generate a. No surplus.b. $5,000 worth of seller surplus and unknown amount of buyer surplus.c. $2,000 worth of buyer surplus and $3,000 of
Taxesa. Impede the movement of assets to higher-valued uses.b. Reduce incentives to work.c. Decrease the number of wealth-creating transactions.d. All of the above.
Which of the following are examples of a price floor?a. Minimum wagesb. Rent controls in New Yorkc. Both a and bd. None of the above
Which of these actions creates value?a. Buying a struggling firm and selling off its assets for more than the purchase priceb. A baseball slugger drawing paying fans into the ballparkc. A student increasing his decision-making ability with an MBAd. All of the above
Wealth-creating transactions are more likely to occura. With private property rights.b. With strong contract enforcement.c. With black markets.d. All of the above.
The biggest advantage of capitalism is thata. It allows the market to self-regulate.b. It allows a person to follow his self-interest.c. It allows voluntary transactions, which create wealth.d. All of the above.
Why might a supermarket advertise low prices on certain high-profile items and sell them at a loss?a. It is a way for companies to be charitable.b. The store will sell other groceries to the same customers, often at a markup.c. It would not.d. This reduces the incentives of trade.
What might happen if a car dealership is awarded a bonus by the manufacturer for selling a certain number of its cars monthly, but the dealership is just short of that quota near the end of the month?a. It may sell the remaining cars at huge discounts to hit the quota.b. It creates an incentive to
Why might a “bonus cap” for executives be a bad policy for the company?a. It isn’t. Executives shouldn’t make more than a certain amount.b. It would sow discontent.c. It would encourage shirking after the executives reached the cap.d. The cap could be set too high, so executives may work
Why might welfare for low-income households reduce the propensity to work?a. It will not.b. It reduces the incentive to work.c. It is unfair.d. It encourages jealousy.
In 2008, the Labour Party in Britain promised that patients would have to wait for no more than four hours to be seen in an emergency room. The National Health Service started rewarding hospitals that met this goal. What do you think happened?
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