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managerial economics
Managerial Economics and Organizational Architecture 5th edition James Brickley, Jerold Zimmerman, Clifford W. Smith Jr - Solutions
Assume that some firms within the same industry are observed to be multidivisional whereas others are functionally organized. Assume further that all firms are about the same size and have existed for a long period of time in their current organizational structures. Is this observation inconsistent
Prominent management consultants sometimes argue that decision making in teams is usually more productive than decision making by individuals (important synergies arise when teams operate that are absent when individuals work by themselves). These consultants suggest that most companies have long
How might the softer elements of corporate culture help increase productivity in an organization? Give some examples of how managers might foster these elements to implement des ired change in an organization.
What is a major difference between the architectures of markets and firms?
The Sonjan company currently purchases health insurance for all of its 1,000 employees. The company is considering adopting a flexible plan whereby employees either can have $2,000 in cash or purchase an insurance policy (which currently costs $1,000). Do you see any potential problems with the new
Which of the following examples is an adverse-selection problem and which is an incentive problem? Explain why. In each case, give one method that the restaurant might use to reduce the problem. a. A restaurant decides to offer an all-you-can-eat buffet that is sold for a fixed price. The
Schmidt Brewing Company is family-owned and -operated. The family wants to raise some capital by selling 30 percent of the common stock to outside shareholders. The company has been profitable and the family indicates that it expects to pay high dividends to shareholders. The family will maintain
How do reputational concerns aid in the enforcement of contracts?
Is it worthwhile for shareholders to seek to completely eliminate incentive problems with managers and directors through means such as monitoring? Why or why not?
What potential problems exist in agency relationships?
Name the two parties involved in an agency relationship.
What is asymmetric information? How can it limit contracts from solving incentive conflicts?
Give examples of incentive conflicts: a. Between shareholders and managers. b. Between coworkers on teams.
General Electric has frequently placed managers together to work on teams. Often the work assignment is only for a short period of time. General Electric makes sure that the quality of an employee’s performance on a given assignment is recorded and shared with future teams. Why do you think they
Some managers commit undetected fraud in producing financial statements. Presumably, if the auditors were really diligent and the penalties for fraud were high enough, there would be no fraud. Does this mean that the accounting firms are not doing a good enough job in auditing? Explain.
A labor leader has announced that her union will go on strike unless you grant the workers a significant pay raise. You realize that a strike will cost you more money than the pay raise. Should you concede to the wage increase? Explain.
Suppose you are one of two producers of tennis balls. Both you and your competitor have zero marginal costs. Total demand for tennis balls is P = 60 – Q Where Q = the sum of the outputs of you and your competitor. a. Suppose you are in this situation only once. You and your competitor have
You are considering placing a bid over the Internet in an eBay auction for a rare oriental rug. You are not a dealer in these rugs, and you do not have a precise estimate of its market value. You do not want to buy the rug for more than its market value. However, you would like to buy it if you can
Some foolish teenagers play “chicken” on Friday nights. Two teenagers drive their cars at each other at high speeds. The first to swerve to the side is the “chicken” and loses. If both swerve out of the way, they are both chickens and both lose. Neither of the drivers wants to get into an
In this chapter we gave an example of coordination problems in the market for HDTVs. Show the game in strategic form using hypothetical payoffs of your choice. Use the arrow technique to identify the equilibria.
What is the relation between a dominant strategy and a Nash equilibrium?
Suppose Microsoft can produce a new sophisticated software product. However, it wants to do so only if Intel produces high-speed microprocessors. Otherwise, the software will not sell. Intel, in turn, wants to produce high-speed microprocessors only if there is popular software on the market that
Some manufacturers that contract with the United States government have most favored nation clauses in their contracts. This provision makes the firm sell to the government at the lowest price it charges to any other customer. On the surface this provision seems to be advantageous to the government
The Strippling Drug Company has just obtained an important patent for a new drug that increases male virtility and cures male pattern baldness at the same time. Does this imply that Strippling has a competitive advantage in producing the drug? Explain.
Pepsi produces Fritos and Lays potato chips in addition to its basic soft-drink products. Discuss potential ways that this business combination might increase value.
One CEO justified the merger of his soft-drink company with a machine tool company in the following manner: “This is a great merger. First the products are unrelated. Thus our company’s earnings volatility is likely to decrease. Second, our management team has proved that we are better managers
The Long-Drive Golf Company manufactures a new line of golf clubs. The Cushion Bag Company makes a special golf bag that protects the delicate shifts on these clubs. The respective prices are Pc and Pb for the clubs and bags. The marginal cost for producing either product is 100. Demand
Evaluate the following statement: “Business is war. Never consort with the enemy.”
Sun Resorts has a hotel on a Caribbean Island. It recently spent money to lobby the government to build a better airport and expand air service. Why did they do this? Do you think that Sun Resorts cares about how many airlines will serve the island? Explain.
What are team capabilities? Give examples of firms that appear to have them.
The Watts Brewing Company owns valuable water rights that allow it to produce better beer than competitors. The company sells its beer at a premium and reports a large profit each year. Is this firm necessarily making economic profits? Explain.
Airbus and Boeing are two major producers of jumbo jets. Are these firms guaranteed to make high profits since there are only two large firms in the industry? Explain.
Consider three firms: a shoe store at the mall, an automobile dealership, a house painting firm. a. Which firm would you expect to engage in the most price discrimination? Why? b. How has the internet changed the pricing policies of these businesses?
Some tennis clubs charge an up-front fee to join and a per-hour charge for court time. Others do not charge a membership fee but charge a higher per-hour fee for court time. Consider clubs in two different locations. One is located in a suburban area where the residents tend to be of similar age,
Xerox sells both copiers and a toner for their copiers. While customers are not required to buy Xerox toner, most do because specified machines use toner only for that machine. The Xerox toner and machines are closely designed and non-Xerox toner in Xerox machines produces inferior copies. Evaluate
All consumers have identical demand for a product. Each person's demand curve is P = 30 – 2Q. The marginal cost of production is $2. Devise a two-part tariff that will exhaust all consumer surplus.
The Snow City Ski Resort caters to both out-of-town skiers and local skiers. The demand for ski tickets for each market segment is independent of the other market segments. The marginal cost of servicing a skier of either type is $10. Suppose the demand curves for the two market segments
Why do companies grant discounts to senior citizens and students?
You own a theater with 200 seats. The demand for seats is Q = 300 – 100P. You are charging $1.25 per ticket and selling tickets to 175 people. Your costs are fixed and do not depend on the number of people attending. Should you cut your price to fill the theater? Explain. What other pricing
In the example in this chapter, the linear approximation method produced the profit-maximizing price, whereas the markup pricing rule did not. Does this imply that the linear rule is always better than the markup rule? Explain.
Explain why perfect personalized pricing is typically more profitable than menu pricing. Why then do companies use menu pricing?
Will a monopolist ever choose to produce on the i nelastic portion of its demand curve? Explain.
Suppose in Table 7.2 (Product Bundling) that the professional user values Expedia Streets at $15 rather than $30. Keep all other valuations the same. Discuss how this change affects the optimal pricing strategy.
Textbook publishers have traditionally produced both United States and international editions of most leading textbooks. The United States version typically sells at a higher price than the international edition. (a) Discuss why publishers use this pricing plan. (b) Discuss how the
Macrosoft is a new producer of word processing software. Recently it announced it is giving away its product to the first 100,000 customers. Using the concepts from this chapter, explain why this might be an optimal policy.
Candak Corporation produces professional quality digital cameras. The market for professional digital cameras is monopolistically competitive. Assume that the inverse demand curve faced by Candak (given its competitors’ prices) can be expressed as P = 5,000 - .2Q and Candak’s total costs can be
Compare the industry output and price in a Cournot versus a competitive equilibrium. Do firms earn economic profits in the Cournot model? Does economic theory predict that firms always earn economic profits in oligopolistic industries? Explain. What does the empirical evidence indicate?
In 1981, the United States negotiated an agreement with the Japanese. The agreement called for Japanese auto firms to limit exports to the United States. The Japanese government was charged with helping make sure the agreement was met by Japanese firms. Were the Japanese firms necessarily hurt by
The Suji Corporation has a monopoly in a particular chemical market. The industry demand curve is P = 1,000 – 5Q. Marginal cost is 3Q. What is Suji's profit-maximizing output and price? Calculate the corresponding profits.
The Johnson Oil Company has just hired the best manager in the industry. Should the owners of the company anticipate economic profits? Explain.
A Michigan Court ruled in the 1990s that General Motors did not have the right to close a particular Michigan plant and lay people off. Do you think this ruling benefited the people of Michigan? Explain.
Should a company ever produce an output if the managers know it will lose money over the period? Explain.
What are economic profits? Does a firm in a competitive industry earn long-run economic profits? Explain.
The short-run marginal cost of the Ohio Bag Company is 2Q. Price is $100. The company operates in a competitive industry. Currently, the company is producing 40 units per period. What is the optimal short-run output? Calculate the profits that Ohio Bag is losing through suboptimal output.
What four basic conditions characterize a competitive market?
Answer the following questions, continuing to assume the production function for DurableTires Corp. is Q=L1/3K1/2, where Q is the quantity of tires produced, L is the number of workers employed, and K is the number of machines rented. Moreover, assume the wage per unit of labor (wL) is $50 and the
For simplicity, throughout this problem, assume labor (L), capital (K), and quantity produced (Q) can be infinitely divided – that is, it is fine to hire 3.3 workers, rent 4.7 machines, and/or produce 134.2 units. Answer the following questions, assuming the production function for DurableTires
Assume Kodak’s production function for digital cameras is given by Q = 100(L0.7 K0.3), where L and K are the number of workers and machines employed in a month, respectively, and Q is the monthly output. Moreover, assume the monthly wage per worker is $3,000 and the monthly rental rate per
Suppose the production function of PowerGuns Co. is given byQ = 25 LK where Q is the quantity of guns produced in the month, L is the number of workers employed, and K is the number of machines used in the production. The monthly wage rate is $3,000 per worker and the monthly rental rate for a
Suppose the Jones Manufacturing Company produces a single product. At its current input mix the marginal product of labor is 10 and the marginal product of capital is 20. The per unit price of labor and capital are $5 and $10, respectively. Is the Jones Company using an optimal mix of labor and
The Workerbee Company employs 100 high school graduates and 50 college graduates at respective wages of $10 and $20. The total product for high school graduates is 1000 + 100QH, whereas the total product for college graduates is 5000 + 50QC . QH = the number of high school graduates, while QC = the
Mountain Springs Water Company produces bottled water. Internal consultants estimate the company’s production function to be Q = 300L 2 K, where Q is the number of bottles of water produced each week, L is the hours of labor per week, and K is the number of machine hours per week. Each machine
The AFL-CIO has been a steadfast proponent o f increasing the minimum wage. Offer at least two reasons why they might lobby for such increases.
Semiconductor chips are used to store information in electronic products, such as personal computers. One of the early leaders in the production of these chips was Texas Instruments (TI). During the early period in the development of this industry, TI made the decision to price its semiconductors
Suppose your company produces one product an d that you are currently at an output level where your price elasticity is 0.5. Are y ou at the optimal output level for profit maximization? How can you tell?
Textbook writers typically receive a simple percentage of total revenue generated from book sales. The publisher bears all the production costs and chooses the output level. Suppose the retail price of a book is fixed at $50. The author receives $10 per copy, and the firm receives $40 per copy. The
Discuss two problems that arise in estimating cost curves.
Suppose that the marginal product of labor is: MP = 100 – L, where L is the number of workers hired. You can sell the product in the marketplace for $50 per unit and the wage rate for labor is $100. How many workers should you hire?
Suppose that average cost is minimized at 50 units and equals $1. What is marginal cost at this output level?
Suppose that you can sell as much of a product as you want at $100 per unit. Your marginal cost is: MC = 2Q. Your fixed cost is $50. What is the optimal output level? What is the optimal output, if your fixed cost is $60?
You want to estimate the cost of materials used to produce a particular product. According to accounting reports, you initially paid $50 for the materials that are necessary to produce each unit. Is $50 a good estimate of your current production costs? Explain.
Is the "long-run" the same calendar time for all firms? Explain.
Your company currently uses steel and aluminum in a p roduction process. Steel costs $.50 per pound, and aluminum costs $1.00 per pound. Suppose that inflation doubles the price of both inputs. What affect will this have on your optimal input mix? Show using isoquants and isocost lines.
Your company currently uses steel and aluminum in a production process. Steel costs $.50 per pound, and aluminum cost s $1.00 per pound. Suppose the government imposes a tax of $.25 per pound on all metals. What affect will this have on your optimal input mix? Show using isoquants and isocost lines.
Distinguish between returns to scale and returns to a factor.
Japan has 4,350 miles of expressway – all toll roads. In fact, the tolls are so high that many drivers avoid using expressways. A typical 3 hour expressway trip can cost $47. A new $12 billion bridge over Tokyo Bay that takes 10 minutes and costs $25 rarely is busy. One driver prefers snaking
Assume that demand for product A can be expressed as QA = 500 – 5PA + 3PB and demand for product B can be expressed as QB = 300 – 2PB + PA . Currently, market prices and quantities for these goods are PA = 5, PB = 2, QA = 481, and QB = 301. a. Suppose the price of product B increases
Southwest Airlines estimates the short-run price elasticity of business fares to be 2 and the long-run elasticity to be 5. Is ticket demand more elastic in the short-run or long-run? Does this seem reasonable? Explain.
Gasoline prices increased substantially in 2004 and 2005. What adjustments did people make to minimize the long-term effects of this price increase?
Seven teenagers, four boys and three girls, were given $200 each to go on a shopping spree. An advertising agency, which specializes in youth markets, gave the teens the money. An account executive accompanied the teens while they were shopping. Not only did the agency want to learn what they
In 1991, Rochester, New York, had a serious ice storm. Electric power was out in houses for days. The demand for power generators increased dramatically. Yet the local merchants did not increase their prices, even though they could have sold the units for substantially higher prices. Why do you
Define marginal revenue. Explain why marginal revenue is less than price when demand curves slope downward.
Prior to a price increase, the price and quantity demanded for a product were $10 and 100, respectively. After the price increase, they were $12 and 90. a. Calculate the arc elasticity of demand b. Is the demand elastic or inelastic over this region? c. What happened to total revenue?
Studies indicate that the income elasticity of demand for servants in the United States exceeds 1. Nevertheless, the number of servants has been decreasing during the last 75 years, while incomes have risen significantly. How can these facts be reconciled?
Alexander Machine Tool faces the demand curve: P = $70 – 0.001Q. What price and quantity maximize total revenue? What is the price elasticity at this point?
Maria Tejada, a civil engineer uses data on population trends to forecast the use of a particular highway. Her forecasts indicate severe road congestion by the year 2010. She suggests building a new road. Comment on this approach.
Vijay Bhattacharya is interested in estimating the industry demand curve for a particular product. He has gathered data on historical prices and quantities sold in the industry. He knows that the industry supply curve has been stable over the entire period. He is considering estimating a regression
The cross elasticity between product A and product B is 10. Do you think that product A is likely to face an elastic or inelastic demand curve? Explain.
For three years in a row, income among consumers has increased. Alexander Machine Tool has had sales increases in each of these three years. Does Alexander Machine Tool produce inferior or normal goods? Forecasts predict that income will continue to rise in the future. Should Alexander Machine Tool
The Alexander Machine Tool Company faces a linear demand curve. Currently, it is selling at a price and quantity where its demand elasticity is 1.5. Consultants have suggested that the company expand output because it is facing an elastic demand curve. Do you agree with this recommendation?
Suppose the price of heating oil increases significantly. Discuss the likely short-run and long-run effects.
How can cross elasticities be used to help define the relevant firms in an industry?
Suppose that the price of Product A falls from $20 to $15. In response, the quantity demanded of A increases from 100 to 120 units. The quantity demanded for Product B increases from 200 to 300. Calculate the arc cross elasticity between Product B and Product A. Is B a substitute or complement for
Is it true that a normal good must have an income elasticity that is more than one? Explain.
What sign are the cross elasticities for substitute products? Explain.
If the demand for a product is inelastic, what will happen to total revenue if price is increased? Explain.
How will each of the following affect the position of the demand curve for videocassette recorders (VCRs)? a. An increase in the price of VCR tapes. b. A decrease in the price of VCRs. c. An increase in per capita income. d. A decrease in the price of movie tickets.
What is the difference between a demand function and a demand curve?
Title-loan firms offer high-interest loans (the interest rate can exceed 200 percent per year) to high-risk customers. The title of a car is often used as collateral. If the borrower defaults on the loan, the company can repossess the car. Recently, the financial press has reported stories of poor
Critically evaluate the advice of the Providence Consulting Group, which recommended to your company: “That you analyze all the business divisions in your company. Rank them on growth potential. Sell all the low-growth units and invest the money in the high-growth units. Make sure not to sell the
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