Questions and Answers of Managerial Economics

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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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 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?
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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

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