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managerial economics
Managerial Economics and Organizational Architecture 5th edition James Brickley, Jerold Zimmerman, Clifford W. Smith Jr - Solutions
The Roman Empire taxed many faraway provinces. Rome would auction the rights to tax collection to the highest bidder. The winning bidder was given the right to set the tax rate for the province and the right to collect (and keep) the taxes. In turn, the winner would pay the bid amount to the Roman
Evaluate the statement: “Investment banking is a demanding profession; investment banks want their employees to work as hard as possible.”
Formulate the following situation as an extensive form game (using a game tree) and solve it using backward induction. Bingo Corporation and Canal Corporation are the only competitors in the electronic organizer industry. Bingo Corporation is considering an R&D investment to improve its
Two basketball players, Barbara and Juanita, are the best offensive players on the school€™s team. They know if they €œcooperate€ and work together offensively€” feeding the ball to each other, providing screens for the other player etc.€”they can
Cellwave is a cellular phone company. Answer the following questions relating to its pricing policies: a. When Cellwave started out it sold to a group of homogenous retail customers. Each person€™s monthly demand for cell phone minutes was given by P = $2 - .02Q, where P = the price
The local space museum has hired you to assist them in setting admission prices. The museum’s managers recognize that there are two distinct demand curves for admission. One demand curve applies to people ages 12 to 64, whereas the other is for children and senior citizens. The two demand curves
Assume DurableTires Corp. faces the following demand curve, P = 250 – 0.1Q. If DurableTires’ marginal cost is constant at $35, how many tires should it produce in order to maximize its profits? What’s DurableTires’ profit in this case? Should the elasticity of demand be greater, equal, or
The accompanying chart presents data on the price of fuel oil, the quantity demanded of fuel oil, and the quantity demanded for insulation.a. Calculate the price elasticity (arc-elasticity) of demand for fuel oil as its price rises from 30 cents to 50 cents; from 50 cents to 70 cents. Calculate the
Assume the demand curve for gasoline is given by the following equation: P = 10 – 0.0005 Q, where P is the price per gallon and Q is the quantity of gasoline in gallons. Assume that the only supplier of gasoline in the region is General Gasoline Co. and that the marginal cost of production
As a result of strikes in Canada the world price of nickel rose by 20 percent in December. Over the same period, the quantity demanded of nickel decreased from 10,000,000 to 8,500,000 pounds worldwide. The world price of nickel was 70 cents per pound before the strikes. a. Show graphically the
Two successful firms are observed with quite different compensation plans for their salespeople. One firm pays its salespeople on a commission basis, whereas the other firm pays its salespeople fixed salaries. Do you think that one of the two companies is making a mistake? Explain.
Top executives of European firms are typically paid substantially less than the top executives of American firms. They are also paid differently. For example, stock options are much more common among American than European executives. Do these differences imply that (a) American executives are
Susan Jones is a salesperson at Radex Co. Her utility function can be represented by U = C 2 , where C is her compensation. a. The company is considering paying her a sales commission rather than a straight salary. The sales manager, however, is concerned that he will have to pay her a
A firm has a demand curve: P = 50 - Q. Its total costs are: TC = 110 + Q + 3Q2Prepare a table that computes the
The following quote is based on statements made by quality expert W. Edwards Deming: If by bad management the components of a company become competitive, the system is destroyed. ... A common example lies in the practice of ranking people, divisions, teams, comparing them, with reward at the
The United States Navy recently revamped its officer fitness report system. Under the old system, officers were ranked into one of four categories, where 4.0 was the highest grade. This old system had been used for 20 years and grade inflation had become rampant. Eighty percent of all
Evaluate the following statement: The overarching purpose of a measurement system should be to help a team, rather than senior managers, gauge its progress. A team’s measurement system should primarily be a tool for telling the team when it must take corrective action .
The Green Shoe Company is considering going to a piece-rate system, where manufacturing employees are paid based on their level of output. Discuss what factors the firm should consider in deciding whether or not this idea should be implemented. How should the initial piece rate be set? Under what
Your company currently has a bonus plan for its sales managers. If annual sales for a manager’s unit exceed $1 million, the manager receives a $10,000 bonus. In a typical year, about 5 of the 10 managers in the firm meet the target and receive the bonus. However, the number receiving the bonus
Communities are frequently concerned about whether police are vigilant in carrying out their responsibilities. Several communities have experimented with incentive compensation for police. In particular, some cities have paid members of the police force based on the number of arrests that they
A consultant does not like the fact that you use subjective performance measures in your firm. He argues that they are arbitrary and should be replaced with objective measures. He stresses that explicit measures provide a clear target for employees, but mentions none of the potential costs. What
Some firms have recently adopted 360-degree performance evaluations. Under this evaluation system the employee is evaluated not only by supervisors and peers but also by employees who report to the employee being evaluated. Discuss why a firm might want to adopt 360-degree reviews. What are the
Evaluate the following quote: Teams do not spring up by magic. Nor does personal chemistry matter as much as most people believe. Rather, we believe that ... most people can significantly enhance team performance. And focusing on performance — not chemistry or togetherness or good
A basic principle in accounting is that of “responsibility accounting.” Under this principle, it is inappropriate to base performance evaluation on measures that are beyond the control of the employee. Do you think that you should ever include variables in a worker’s compensation plan that
Once again, the Eastman Kodak Company has altered the determinants of pay raises for US employees. Whereas in the past pay increases for managers, professionals, and hourly workers had been automatic, starting in 1996 the company began determining the size of an annual bonus pool and then allocated
Agricultural workers are often paid piece rates. For example, pear pickers are paid a fixed amount for each box of pears they pick. Pear companies, however, pay tree thinners on an hourly basis. These thinners remove excess fruit from trees so that the remaining fruit can grow larger. (Each piece
Evaluate the following statement:“I am a manager at a governmental agency. I have no control over compensation policy. All workers are paid the same salary and I cannot fire them. Therefore, an understanding of the basic principles of organizational architecture will not help me be more effective
The JAB Gold Mining Company observes that some firms pay their CEOs based on performance relative to the S&P 500. Most firms, however, have stock prices that are positively correlated with the S&P 500. JAB has a negative beta ! (Its stock returns are negatively correlated with the index.)
Auto-fit is a multidivisional firm that produces auto parts. It has the capacity for annual production of 100 units of a particular part. The marginal cost of producing each unit is $10. These units can be sold internally to other divisions or to external customers. The external market price is
High Tech, Inc. has strong patent protection on a particular type of computer chip. High Tech uses the chip for the internal production of PCs. It also sells the chip to other manufacturers on the open market. Does High Tech necessarily want to charge the same price to both external and internal
In 360-degree performance review programs, personnel evaluations are collected anonymously from employees knowing the manager being evaluated (superiors, subordinates, and coworkers). These are tabulated and a consensus summary is provided to the manager. Each manager being evaluated also
Discuss some of the costs and benefits of 360-degree evaluation systems.
Toledo Chicken is a large chicken processor that raises, processes, and packs both fresh and frozen chicken parts. The firm has five plants located around the U.S. Factory employees have been paid a fixed salary, but recently Toledo switched to a piece-rate pay system. What affect, if any might you
Consider two successful sales companies. One company pays its salespeople a high commission, whereas the other pays its salespeople a straight salary. Assume that both companies are paying their salespeople in an optimal manner. Explain potential differences in the firms that might help to explain
How does the concept of a risk premium in incentive compensation relate to the concept of a compensating differential in compensation policy?
Prior to 2004, American accounting rules did not require firms to expense stock options on their accounting statements. Thus, firms were able to grant executive stock options without impacting “bottom-line performance.” Correspondingly, some people argued that the primary reason firms paid
The Zenvox Television Company faces a demand function for its products which can be expressed as Q = 4000 – P + 0.5I, where Q is the number of televisions, P is the price per television, and I is average monthly income. Average monthly income is currently equal to $2,000. Answer the following
Suppose the supply and demand for wheat is given by: Supply: Qs = 1800 + 240P Demand: Qd = 2550 + 10I – 266P, Where P = the price per bushel of wheat and I = income. The current value of I is 100. a. Find the current equilibrium price and quantity of wheat sold in the market
Suppose Juan’s utility function is given by U = FC, where F and C are the two goods available for purchase: food and clothing. a. Graph Juan’s indifference curves for the following levels of utility: 100, 200, and 300.b. Are these curves convex or concave to the origin? What does this
Suppose that the U.S. government caps the price of milk at $1.00/gallon. Prior to the cap milk sold for $1.00/gallon. Picture the effects of the price cap using a supply and demand graph. Explain how the cap affects consumers and producers. P Price Shortage
Assume that before the ice storm of 2003, the weekly demand and supply for ice in the Rochester Metro Area were given by the following equations: D pre : P = 100 – Q S pre : S = 5 + 0.5Q a. Draw a graph representing the Rochester ice market before the storm and label it carefully. What
a. Complete the above table. b. Graph TC, TFC, TVC, MC, AC, AFC, and AVC against Q. TC TFC TVC MC AC AFC AVC 80 500 60 3 4 60 75 95 120 150 185
Evaluate the following statement: “John is paid a straight salary with no bonus pay. Obviously, he has no incentives to do a good job.”
Some school districts have compensated teachers based on the performance of students on standardized tests. Do you think this is a good idea? Explain.
Evaluate the statement: “Profit-sharing plans are good; they encourage teamwork.”
Explain why an investor is usually better off if she holds a diversified portfolio rather than investing all her resources in the stock of one company.
Some companies reward salespeople based on their performance relative to other salespeople in the company. Why would a company want to do this?
Discuss trade-offs between efficient risk bearing and incentives in compensation plans.
Two employees are assigned to work overseas for a 2-year period. One person sells his house in the United States , whereas the other leases it for 2 years to another family. Which house do you think will be in better condition after the 2 years? Explain.
Building on the discussion in Chapter 3 on minimum wage laws, how would you expect a large increase in the minimum wage to affect the pay package (mix between salary and benefits) offered by employers?
Some companies base promotions solely on seniority. Discuss the negative and positive aspects of such a policy.
Consider two states that are nearly identical in terms of income, climate, and population. There are public universities in both states. One state has a law which specifies that all professors of a given rank (assistant, associate and full professor) have to be paid the same. Thus an assistant
A recent study found that CEOs in Europe are paid substantially less than CEOs in America, even after controlling for a firm’s size and industry. Does this necessarily imply that American CEOs are overpaid? Explain.
Marks & Spencer is a large, established British retailer of apparel, house wares and food products. The company has a large workforce. As part of the company's benefits package, employees receive a discount of 30 percent off all purchases of apparel. a. What are the advantages and
People buying disability insurance on an individual basis are often required to take physical exams. Physical exams are typically not required when employees acquire disability insurance through a company-sponsored plan (which covers all employees in the firm). Provide an economic rationale for the
Public accounting firms have traditionally paid low starting salaries to new employees. Nevertheless, these firms have been able to hire and retain qualified employees (even though these employees could obtain higher salaries elsewhere). Is this observation inconsistent with economic theory?
The Good Beer Brewing Company currently purchases health insurance for its 10,000 employees. The company is considering a flexible plan where employees can have either $2,000 in cash or insurance coverage (the insurance costs $2,000). The company figures it will expend the same amount of money
Companies can often gain if they listen to employees about what they prefer in the way of a fringe benefit package — a more preferred package serves to attract and retain employees at a lower cost. Nevertheless, many firms have shunned “menu plans” where each employee would be completely free
Payments under some retirement plans are based on the average earnings in the last few years of employment. Discuss the potential incentive effects of this policy.
The University of Medford pays the full tuition for the children of faculty members at any university in the world. Recently, this policy has received bad publicity. The argument has been made that people in other occupations have to pay the tuition costs for their children and so should college
The University of Rochester used to pay all faculty a 10 percent bonus as a substitute for a retirement plan. Individuals could either place this money in a retirement fund or keep the cash. Placing money in the fund deferred taxes on the income until the point of withdrawal. Changes in the United
A recent study concluded that many employees fake sickness to avoid going to work. The authors argue that through unwarranted sick leave, employees “steal” about $150 billion a year from firms. This amount is three times larger than the estimated loss from shoplifting. One proposal is for
The Brown Tool Company is a multidivisional firm with offices throughout the country. The company sets the salaries of most of its positions at the central level. For example, secretaries are paid $8 per hour throughout the company. Discuss two important reasons why the firm might adopt such a
President Clinton proposed eliminating the tax deduction for all compensation over $1 million for CEOs unless the pay is tied to company performance. Proponents argue that this proposal will benefit shareholders. “Everyone knows that CEOs are overpaid and that their pay is not appropriately tied
How do influence costs affect pay within internal labor markets?
Present an economic argument to explain why firms often have mandatory retirement (where allowed by law).
Evaluate the following statement: "Firms are free to set salaries in any manner they want in an internal labor market."
Why do firms form internal labor markets?
In the basic competitive model, why do employees pay for general training and firms pay for specific training?
Explain the following quotation: "My employer doesn't determine my salary, he determines where I work."
Professors Brickley and Smith are writing two chapters for a new book. Two primary tasks are involved. First, someone has to write each of the chapters. Second, someone has to copyedit the chapters. The second step involves making sure that the writing is good, that there are no typographical
Stable Inc. is in a relatively stable environment in terms of technology, competition, and regulation. Variance Inc. is in a relatively unstable environment with more frequent changes in technology, competition, and regulation. Both produce the same number of products. Which firm is more likely to
Evaluate the following statement: “It is usually best to organize as a matrix organization. Matrix organizations combine the best of both worlds, functional excellence and product focus.”
Many companies are making increased use of telecommuting, which consists of employees working out of their homes, linked to the central office by telephone, computer, and fax machine. Discuss the benefits and costs of telecommuting. What types of occupations are likely to be best suited for
AutoMart Repair Shop is currently organized as follows: a repair manager meets with the customer to discuss the problems with the car. A repair order is completed. The mechanics specialize in particular types of repairs (for example, air conditioning, body work, etc.). Typically, a car in the shop
Assume the industry demand for a product is: P = 1,000 - 20Q. Assume that the marginal cost of product is $10 per unit. a. What price and output will occur under pure competition? What price and output will occur under pure monopoly (assume one price is charged to all customers)? b. Draw
Discuss the positive and negative effects of a university rule that would not allow professors to change a grade once recorded.
Johnson & Johnson (J&J) is one of the largest medical products companies in the world. In 1994, it had 33 major lines of business, with 168 operating companies in 53 countries. Decision rights in J&J were quite decentralized. For instance, in 1993 the baby oil manager in Italy ran his
In the early 1990s, Chrysler Corporation placed nearly all decisions about the development of a new vehicle in the hands of a single, cross functional product team. In contrast, General Motors used an approach that placed a stronger emphasis on functional specialties. Small teams were established
Why do you think many US firms have reorganized their international divisions from a country focus to matrix organizations focusing on both country and product?
Discuss the pluses and minuses of matrix organizations.
Discuss the circumstances under which you think functional organizations will work best.
Define the following: functional organizations, product organization, geographic organization, matrix organization, and network organization.
Discuss the costs and benefits of specialized task assignment relative to broad task assignment. What variables are likely to be particularly important in determining the optimal choice between these two alternatives?
Suppose the managers in the example in this appendix do not necessarily vote according to their preferences in each round of the voting. Rather, they might vote for a less preferred option in the first round to obtain a preferred outcome in the final round. Suppose that Patrick has agenda control.
What factors should a manager consider when deciding on the composition of a team charged with making an important decision?
Blue Cross Blue Shield of Rochester is Rochester’s largest health insurance provider. In exchange for the insurance premiums they pay, families insured by BCBS receive all their health care needs from a group of approximately 500 doctors approved by BCBS. (Families must choose their doctors from
Microsoft’s Encarta is a multimedia encyclopedia on CD-ROM. It has nine different editions. Examples include editions in British English, American, German and Italian. The North American Version alone has 40 million words and 45,000 articles. Microsoft has delegated major editorial decisions to
Recently a number of companies have adopted what is known as open-book management. Under this concept lower-level employees are given training to help them understand the company’s financial statements and how their individual actions affect financial performance. They are given access to
The Colorado Symphony Orchestra (CSO) was formed after the Denver Symphony was no longer financially viable. CSOs corporate charter requires that it cannot have an operating deficit in any year. Revenues, donations, grants, and other income must equal or exceed operating expenses. CSO balances its
An organizational consultant evaluates your division. She indicates that she does not like the divisional manager's top-down management style. She recommends setting up a board that consists of the divisional manager and his top 10 department managers. The consultant suggests that all major policy
Several Fortune 100 companies have nominated members of the clergy to be members of their boards of directors. Discuss the advantages and disadvantages of such a proposal.
It is sometimes argued that empowerment can be successful only if managers learn to live with decisions made by lower level employees. Managers are to set clear boundaries within which employees can make decisions (for example, allowing a salesperson to set prices between $15,000 and $20,000).
A leading business school currently uses study teams in the MBA program. Each team has five members. Some of the work in the first year is assigned to study teams and graded on a group basis. Discuss the trade-offs involved with enlarging student study groups in the MBA program from five people to
Many companies have been experimenting with organizing their manufacturing around teams of employees. The employees are given decision rights on such things as how to organize the work and employee schedules. Often the employees are paid based on team output. Sometimes, this organizational
Define the terms decision management and decision control. Under what circumstances might it be optimal to make one individual responsible for both decision management and decision control? What do you expect the ownership of common stock to look like in such a firm? Explain.
Mark Wilson, chief of personnel, has been instructed to increase the hiring of women at the Morton Cement Company. Mark will be evaluated by company president Josh Cohen on his success or failure in meeting this goal. Mark does not evaluate the performance of any of the division chiefs and each
Discuss the costs and benefits of decentralized decision making relative to centralized decision making.
Some of the electric generating plants of the Tennessee Valley Authority are powered by coal. Coal is purchased by a separate procurement division and is transferred to the plants for use. Plant managers often complain that the coal is below grade and causes problems with plant maintenance and
Evaluate the following argument: “Management fads make no sense. One day its TQM. The next it is empowerment or business-process reengineering. There is no economic justification for these fads. Management are just like sheep following each other to the slaughter.”
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