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managerial economics
Managerial Economics and Organizational Architecture 5th edition James Brickley, Jerold Zimmerman, Clifford W. Smith Jr - Solutions
Assume that the demand curve for sporting guns is described by QD =100 − 2 p and the supply is described by QS =−20+ p (QD & QS are in millions, p is in $) a. Compute the competitive equilibrium price and quantity. Draw a graph of supply and demand
Suppose there has been a storm in Nebraska that has destroyed part of the corn crop in the field. The demand curve for corn has not changed. As a result, the market clearing prices and quantities before and after the storm are: Pb = 50, Qb = 2000; Pa = 100, Qa = 1500. (The subscripts a and b refer
According to an article in Forbes (March 2001) teen cigarette smoking declined significantly between 1975 and 2000. The most dramatic decline occurred in the years 1975–1981. Since then teen smoking has increased in some years and declined in others. Between 1975 and 1981 there was a slight
In an article appearing in the Dow Jones News Service on February 5th, 2004, the agency cites Saudi Arabia’s concern about the production of oil by the OPEC cartel. Assume the current daily demand for OPEC’s oil is given by the following equation: P = 50 – 0.001Q where P is the
A company chairman was given a ticket for a performance of Schubert’s Unfinished Symphony. Since he was unable to go, he passed the invitation to the company’s quality assurance manager. The next morning the chairman asked him how he enjoyed it and, instead of a few plausible observations, he
LDS Hospital in Salt Lake City has a computer system that records all procedures performed on patients and all drugs administered. The computer system can track which surgeons are the best and which ones are the worst in terms of length of patient stays, complications, and death rates. They found
According to a New York Times article, LDS Hospital in Salt Lake City installed a computer in every hospital room in the mid-1980s. These computers replaced paper charts so everything the doctor or nurses did was entered into a database as it happened. A small number of patients get infections
Guest Watches is a division of Guest Fashions, a large, international fashion designer. Guest Watches manufactures highly stylish watches for young adults (18€“30) who are fashion conscious. It is a profit center and its senior management€™s compensation is tied closely to the
“Hewlett-Packard now treats TQM like any other investment: If a particular total-quality initiative doesn’t show a quick return in terms of higher sales, lower costs, or happier customers, it is redesigned or scrapped.” Critically evaluate HewlettPackard’s policy.
Eastman Kodak charged that the Fuji Film Corporation of Japan was illegally dumping film in US markets. It asked the US government to investigate and impose sanctions on Fuji for its unfair practices. But the world film market is dominated by Kodak and Fuji . If the government agrees to sanction
The Body Shop started its business by developing an extensive network of franchisees. Recently, franchisees have complained about the company’s competing with their franchises through direct catalog sales and over the Internet. How does an expansion of Internet and direct catalogue selling affect
The Body Shop has been widely noted for its ethical stands in its business: natural cosmetics, “Products for People Tested by People,” and First World wages for Third World products. Recently, Jon Entine published an analysis of the Body Shop in Business Ethics, alleging false advertising and
Ben and Jerry’s Homemade Inc. has received much favorable press for its Rainforest Crunch ice cream. It uses official rain forest nuts and berries and all natural ingredients; it also sends a percentage of profits to charities. However, another flavor, Cherry Garcia, contains sulfur dioxide
Passing through Louisiana you notice billboards proclaiming “ Louisiana ’s Shame — the only state that does not license chiropractors.” Who do you expect finances these billboards? If licensing were adopted, who would be affected and how?
Dubliners often complain that there are too few pubs in their city. At night pubs can be quite crowded and prospective customers often are turned away. Some Dubliners blame this pub “shortage” on the English who originally enacted laws restricting pubs centuries ago when they ruled Ireland . Is
Various politicians have proposed an Internet tax. One proposal would be to tax both outgoing e-mail and every web page downloa ded. What groups are likely to support such a tax and what groups would oppose it?
What are the benefits of government regulation of air pollution from automobiles? What are the costs of this regulation?
What are the benefits and costs of government regulation of air quality within cotton mills — for instance, specifying maximum levels of cotton dust (prolonged exposure leads to “white lung” disease)?
What would be the impact of raising the federal minimum wage?
In 1997 Canadian 2 × 4 lumber studs with two holes drilled in them (so that electricians could run wires) were categorized by customs agents as Category $4418 and free of any tariffs. If they had been categorized as #4407, they would have fallen under a quota system whereby only the first 14.7
At a city council meeting, the Taxi Cab Owners Association argued for a far increase. They note that the market price to buy or rent taxi medallions has been rising, and with these higher costs, profitability is reduced. Evaluate this argument.
Adam Smith often is quoted as saying, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contivance to raise prices.” If Smith is right, does this justify a role for government?
“When I bought this land, it was zoned only for farming. But the longer I live here, the more I resent the wealth transfer I’m paying to other landowners without such restrictions.” Comment.
The analysis in this appendix suggests that a leader can sometimes motivate desired change by making a strong commitment to a particular action. Do you think it is always in the leader’s interest to make this type of commitment? Explain.
Poorly performing employees in Japanese firms are sometimes punished by being sent to remote locations or placed at desks away from their colleagues. Discuss the effects that such a penalty will have on the leadership effectiveness of the punished employees.
Alex Cohen is the general manager of the textile division in a large diversified company. Recently, Alex argued strongly to the CEO that an expansion request by the drug division be approved. On the surface, Alex’s actions seem strange, given that Alex is not affected by this decision (it does
The TRF Company has not fared well with recent increases in foreign competition. Management indicates that it must substantially cut costs to survive. Cost cutting entails dramatic change for the company. TRF had been an all equity firm. Recently, the company borrowed nearly 90 percent of its value
The PPP Company recently purchased a large chain of supermarkets (over 1,000 stores). Following this acquisition, PPP's management announced its plan to cut labor costs dramatically so that the stores could remain competitive. Labor unions responded by saying that they would not agree to large wage
What is organizational power, and where does it come from?
What does leadership have to do with organizational architecture?
It is frequently claimed that meaningful change is difficult to achieve in large companies. Why do you think this might be the case?
What is leadership?
Koji Incorporated produces high-end cameras. Its typical camera comes with an array of options. The company has a good brand name. a. Koji distributes its cameras through independent dealers who are given exclusive distribution rights for their respective market areas. Discuss why it might
The Hanson Clinic is a well-regarded medical center located in a semirural area in the Midwest . One of its specialty areas is treating rare forms of cancer. To support this activity Hanson wants to construct a new lab. The lab will require very specialized equipment, a specially designed building,
The Boswell Medical Center is the only hospital in a rural community. It requires significant janitorial services to clean its buildings and equipment. It also requires a relatively large lab for conducting tests of various types (for example, MRIs, blood tests, ultrasound tests). Do you think that
You are at a cocktail party, where you meet a CEO of a pharmaceutical company who has been thinking recently about her overseas distributors who have exclusive sales territories. She can't quite figure out what is troubling her, but she is dissatisfied with these distributors. You describe the
Most of the McDonald’s restaurants in the Rochester area are owned by one individual. Discuss why this ownership pattern makes economic sense.
BQT Manufacturing produces electric lamps. To produce these lamps, BQT must either make or acquire bases for the lamps. Currently, the company outsources the production of the bases for their lamps to the ACE Lamp Company. BQT maintains ownership of the machinery that is used to produce the bases.
Jimmy’s Stereo Company manufactures stereo equipment. Its business strategy is to provide retail customers high-quality equipment, along with good service and warranty protection. It currently distributes its products through licensed dealers who have exclusive territories. Discuss: (1) Why
Advanced Interconnect Manufacturing Inc. (AIM) is an independent company. It is located in the Elmgrove plant at Kodak. It was formerly owned by Kodak, but was purchased by five managers (with the help of outside investors). AIM assembles wire harnesses for use in machines such as copiers and X-ray
The Hidden Dog Fence company sells invisible electric fences to contain dogs within yards. For a half-acre lot, the cost is $2,000 for the system and installation. The market for invisible dog fencing is competitive: Several companies sell similar products at about the same price. In each case, the
Cable television companies lay cables to individual households in the communities they serve to carry the television signal. How specific is this investment? What kind of arrangements would you expect the cable companies to make with local communities about the pricing and taxation of cable
In explaining the recent acquisition of a supplier, an executive made the following argument: “We purchased the supplier so that we could keep the profit rather than pay it to some other firm.” Evaluate this argument.
Evaluate the following quote: The major advantage to outsourcing is that it reduces a company's capital costs, freeing the company to use scarce capital for other purposes.
The Black Diamond Company mines coal. It would like to build a processing plant right next to its major mine. The location of this mine is relatively remote and is not near other coal mines. Tax considerations, as well as government regulations, dictate that the processing plant be owned and
Discuss the pros and cons of the policy described in the following quote from Fortune : According to the new thinking, any kind of work to which a company can't bring a special set of skills should be spun off, outsourced or eliminated. Thus AT&T, GE, IBM, and Shell Oil are in the process of
Why is a large accounting firm more likely to organize as a partnership than a large industrial company?
Some firms have increased their values by “going private” (converting from publicly traded to closely held). What are the potential sources of these gains? Should all publicly traded firms convert to closely held? Explain.
Firms sometimes change their legal form of organization. Why?
Which of the following businesses is more likely to incorporate: a small retail clothing store or a small exercise facility/health club? Explain.
A number of hospitals have converted from nonprofit to for-profit organizations. Provide an economic justification for these conversions. Why have some communities acted to block or regulate these conversions?
Typically the residual-claim holders in an organization also have significant decision control rights. Provide an economic rationale for this observation.
From an efficient risk-bearing standpoint it makes sense for investors to hold diversified claims in all firms. Yet we observe partnerships and closely held corporations, which have concentrated ownership positions. Explain why.
Leone, Van Horn, and Wassley is a law firm with over 60 partners. Its partners share equally in the annual profits of the organization. Ryall, Misra, a nd Marx is a law firm of about the same size. The Leone firm has encountered significantly more free-riding among partners than has the Ryall firm.
For-profit forms of organization vary in at least four important dimensions. Name them.
The City Museum is a large nonprofit metropolitan art museum. Over the past five years, City Museum has made a significant profit because its admission fees exceed the museum’s operating costs. Does the museum’s profitability imply that it should lose its nonprofit status?
Is the likelihood of CEO turnover is related to firm performance? Give several examples to support your position.
Describe the “passing the baton” approach to CEO succession. What other methods are used?
Discuss why CEO succession planning is an important activity for the board of directors.
What is a proxy fight? What potential effects do proxy fights have on managerial incentives?
What are the benefits and costs of corporate voting over the Internet? Do you think this type of voting will increase in the future?
What is meant by cumulative voting, classified board, and voting by proxy?
Have shareholder proposals been an important governance mechanism over the past 20 years? Do you see any changes occurring in today’s environment?
What changes have been taking place in shareholder activism since the recent business scandals?
Have institutional investors been very active in the corporate governance process over the past 20 years? Which institutional investors have been the most active? Why?
Are stock options to blame for the earnings management scandals?
What does it mean to “overpay” a CEO? Do you think that some CEOs are overpaid? What about the “typical” CEO?
What role does the SEC play in corporate governance in the U.S. ?
Briefly discuss the effects and motives for recent changes and trends in corporate governance in Europe and Japan .
Compare and contrast the key features of the traditional corporate governance systems found in the U.S. , Japan , and Germany .
What external parties monitor managers? Access how these parties performed their roles in the 1990s. Discuss the current pressures on these parties.
What is the Sarbanes-Oxley Act of 2002 (SOX)? List its major provisions. Discuss the costs and benefits of the SOX and evidence on whether the net benefits have been positive or negative.
Discuss how “market forces” help to reinforce internal governance systems.
What incentives if any do board members and management have to work in the interests of shareholders and the corporation?
What characteristics do you think are important in evaluating the quality of a corporate board?
Are the stock exchanges’ new rules relating to corporate Boards of Directors the answer to existing governance concerns in the United States ?
Why is important to separate decision management and control in publicly traded corporations? Discuss how a well designed governance system achieves this objective.
What are the primary sources of decision rights at the top of publicly traded corporations? Discuss the allocation of decision rights at the top of the typical U.S. corporation.
What are the major costs and benefits of organizing as a publicly traded corporation?
What is the “business judgment rule”? Discuss the economic logic for this legal precedent.
What are the three key objectives of corporate governance?
Do recent corporate scandals suggest that there are serious governance problems in most large corporations?
Is it optimal to completely eliminate incentive conflicts in corporations through extensive monitoring and bonding activities? For example, is the optimal amount of corporate fraud zero?
What costs do incentive conflicts in corporations generate?
What mechanisms are used to address the incentive conflicts in corporations?
What incentive conflicts exist in corporations?
What is a corporation? Describe the major characteristics of a large publicly-traded corporation.
The Jameson C ompany has recently formed a subsidiary, Bright Ideas, to manufacture and sell household appliances. a. What is the difference between an investment center and a profit center? b. What factors should Jameson consider in deciding whether to evaluate Bright Ideas as a profit
You are the owner and CEO of a large divisionalized firm, with operations in a number of diverse industries. Reporting to you are a number of division managers. Division managers have considerable decision-making responsibility with respect to the day-to-day operations of their divisions, but you
Do you agree with the following statement? Explain. Obviously the correct transfer price is the opportunity cost of the resource. Any firm that uses full cost (which includes an allocation of corporate overhead) is doing it wrong.
Speed Company sells printers. It is divided into a manufacturing unit and a sales unit. The marginal cost of producing a printer is $200. External demand is given by P = 1000 - .01 Q . Selling and distribution costs total $150 per unit. a. What is the profit maximizing retail price and
Biotech Inc. is a new company that invests in technologies relating to the use of plants in drugs. The stock market perceives that the company has the potential to generate large profits once it develops a line of products. To date, however, the company has not reported positive profits and does
Geriatrics Inc. has a patent on a new type of hospital bed. The marginal cost of producing the beds is $400. The company has significant production capacity. Geriatrics sells the beds to customers on the open market and also uses them internally throughout its nursing home chain. The external
Xerdak Inc. has a corporate jet, which it uses to fly managers from Rochester to Chicago . The associated costs (monthly) of maintaining and flying the jet are as follows:Pilot: ................................ $10,000Depreciation: ................. 10,000Overhead:
Below is a suggestion from a leading economics text on how to set optimal transfer prices. In this context, both the manufacturing and distribution divisions are profit centers. Do you think it would work? Explain. The manufacturing division could be supplied data on the net marginal revenue curve
An organizational consultant does not like the way your company compensates profit center managers (currently a large part of their pay is based on the center’s profits). He argues that you should compensate the managers based on whether or not they made “reasonable decisions” and not based
Suppose a firm has two different accounting systems. For example, suppose it uses EVA to measure and reward management performance. To calculate EVA, annual spending on research and development is recorded as an asset and then depreciated in calculating earnings. In reporting earnings to
The Xtrac Computer Company is organized into regional sales offices and a manufacturing division. The sales offices forecast sales for the upcoming year in their territories. These figures are then used to set the manufacturing schedules for the year. Prices of the computers are determined by
In 1995, Philip Morris Company ratified a new labor pact that gave employees stock in lieu of pay increases. The agreement covered 7,800 employees, with each employee being given 94 shares (1994 value of about $60 per share). Employees cannot sell the stock for at least a year and forfeit the stock
There has been an increased emphasis on compensating employees through incentive pay. High incentive pay, however, is not likely to be productive in all settings. Discuss the factors that are likely to favor paying high incentive pay to employees.
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