Questions and Answers of Managerial Economics

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
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
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
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
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
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
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:
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
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
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
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
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
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
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
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
Two basketball players, Barbara and Juanita, are the best offensive players on the school€™s team. They know if they €œcooperate€ and work together
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
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
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?
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
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
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
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
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
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
A firm has a demand curve: P = 50 - Q. Its total costs are:
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
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
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
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
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
Communities are frequently concerned about whether police are vigilant in carrying out their responsibilities. Several communities have experimented with incentive compensation for police. In
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
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
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
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
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
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.
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
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
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
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
In 360-degree performance review programs, personnel evaluations are collected anonymously from employees knowing the manager being evaluated (superiors, subordinates, and coworkers). These are
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
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
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
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
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
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
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
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 +
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
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
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
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
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
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
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
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
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.
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
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
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.
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
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
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.
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,
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
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
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
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
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
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.

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