Managerial Economics 14th Revised Edition Mark Hirschey - Solutions

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6. Suppose you are a stock market analyst specializing in the stocks of theme parks, and you are examining Disneyland’s stock. The Wall Street Journal reports that tourism has slowed down in the United States. At Six Flags Magic Mountain in Valencia, California, a new Viper roller coaster is now
9. A new processing technology makes it economically feasible to turn natural gas into a liquid petroleum that yields superclean gasoline, diesel fuel, or any other product derived from crude oil. This discoverye. Can you think of an alternative policy to make plenty of housing available to
8. Construct a graph showing equilibrium in the market for movie tickets.Label both axes and denote the initial equilibrium price and quantity as P0 and Q0. For each of the following events, draw an appropriate new supply or demand curve for movies, and predict the impact of the event on the market
7. California voters, in an attempt to halt the rapid increase in the state’s automobile insurance rates, approved Proposition 103. The measure proposes to roll back auto insurance rates by 20 percent and freeze them for at least a year. Using a graph, show the impact of Proposition 103 on the
6. Suppose you are a stock market analyst specializing in the stocks of theme parks, and you are examining Disneyland’s stock. The Wall Street Journal reports that tourism has slowed down in the United States. At Six Flags Magic Mountain in Valencia, California, a new Viper roller coaster is now
5. The famous Swedish economist Assar Lindbeck remarked in his book on rent controls, “Rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”Rent controls place price ceilings on rents at levels below equilibrium rental rates for the
4. Rising jet fuel prices recently led most major U.S. airlines to raise fares by approximately 15 percent. Explain how this substantial increase in airfares would affect the following:a. The demand for air travel.b. The demand for hotels.c. The demand for rental cars.d. The supply of overnight
3. Evaluate the following statements using graphical analysis. Provide a brief narrative explanation of your graph to support your evaluation.Make sure the axes and curves in your graphs are properly labeled.a. “When demand for home heating oil increases, a shortage of heating oil will
2. Florida Citrus Mutual, an agricultural cooperative association for citrus growers in Florida, needs to predict what will happen to the price and output of Florida oranges under the conditions below. What are your predictions? For each part, sketch a graph showing the appropriate demand and
1. Suppose you are the manager of a California winery. How would you expect the following events to affect the price you receive for a bottle of wine?a. The price of comparable French wines decreases.b. One hundred new wineries open in California.c. The unemployment rate in the United States
9. Use the following graph to answer these questions.a. What are the equilibrium price and quantity?b. What is the effect of a ceiling price of $40?c. What is the effect of a floor price of $50? A floor price of $70?
8. In Technical Problem 12, suppose the city council decides rents are too high and imposes a rent ceiling of $400.a. The ceiling on rent causes a _______ of _______ apartments per month.b. How many more renters would have found an apartment in this city if the ceiling had not been imposed?Suppose
7. Suppose that the general demand function for good X is wherea. Is good X normal or inferior? Explain.b. Are goods X and R substitutes or complements? Explain.Suppose that M = $40,000 and PR = $20.c. What is the demand function for good X?Suppose the supply function isd. What are the equilibrium
6. Suppose that a pair of events from Technical Problem 15 occur simultaneously. For each of the pairs of events indicated below, perform a qualitative analysis to predict the direction of change in either the equilibrium price or the equilibrium quantity. Explain why the change in one of these two
5. Determine the effect upon equilibrium price and quantity sold if the following changes occur in a particular market:a. Consumers’ income increases and the good is normal.b. The price of a substitute good (in consumption) increases.c. The price of a substitute good (in production) increases.d.
4. Use the linear demand and supply curves shown below to answer the following questions:a. The market or equilibrium price is $_______.b. The economic value of the 2,000th unit is $_______, and the minimum price producers will accept to produce this unit is $_______.c. When 2,000 units are
3. Suppose that the demand and supply functions for good X area. What are the equilibrium price and quantity?b. What is the market outcome if price is $2.75? What do you expect to happen? Why?c. What is the market outcome if price is $4.25? What do you expect to happen? Why?d. What happens to
2. The following table presents the demand and supply schedules for apartments in a small U.S. city:
1. Other things remaining the same, what would happen to the supply of a particular commodity if the following changes occur?a. The price of the commodity decreases.b. A technological breakthrough enables the good to be produced at a significantly lower cost.174 page 82c. The prices of inputs used
9. The following general supply function shows the quantity of good X that producers offer for sale (Qs):where Px is the price of X, PI is the price of labor, T is an index measuring the level of technology, Pr is the price of a good R that is related in production, Pe is the expected future price
8. Suppose the supply curve for good X passes through the point P = $25, Qs = 500. Give two interpretations of this point on the supply curve.
7. Consider the general supply function:where Qs = quantity supplied, P = price of the commodity, PI = price of a key input in the production process, and F = number of firms producing the commodity.173 page 81a. Interpret the slope parameters on P, PI, and F.b. Derive the equation for the supply
6. What happens to demand when the following changes occur?a. The price of the commodity falls.b. Income increases and the commodity is normal.c. Income increases and the commodity is inferior.d. The price of a substitute good increases.e. The price of a substitute good decreases.f. The price of a
5. Using a graph, explain carefully the difference between a movement along a demand curve and a shift in the demand curve.
3. The demand curve for good X passes through the point P = $2 and Qd =35. Give two interpretations of this point on the demand curve.
2. Consider the general demand function:a. Derive the equation for the demand function when M = $30,000 and PR= $50.172b. Interpret the intercept and slope parameters of the demand function derived in part a.c. Sketch a graph of the demand function in parta. Where does the demand function intersect
1. The general demand function for good A is where Qd = quantity demanded of good A each month, PA = price of good A, M = average household income, PB = price of related good B, ????= a consumer taste index ranging in value from 0 to 10 (the highest rating), PE = price consumers expect to pay next
4. You are considering the purchase of a piece of land that can be leased to the government for 100 years. The annual lease payment is $20,000 and the appropriate discount rate for your situation is 4 percent. What is the(approximate) present value of this stream of constant lease payments?
3. Suppose that in their divorce settlement, Ashton Kutcher offers Demi Moore $10 million spread evenly over 10 years, but she instead demands$5 million now. If the appropriate discount rate is 8 percent, which alternative is better for Ashton and which for Demi? What if the discount rate is 20
2. What is the present value of a firm with a five-year life span that earns the following stream of expected profit? (Treat all profits as being received at year-end.) Use a risk-adjusted discount rate of 12 percent.Year Expected profit 1 $10,000 2 20,000 3 50,000 4 75,000 5 50,000
1. Using a discount rate of 6.5 percent, calculate the present value of a $1,000 profit payment to be received at the end ofa. One yearb. Two yearsc. Three years
Q 19.10 'Regulation is often proposed on the basis of equity considerations and opposed on the basis of efficiency considerations. As a result, the regulation versus deregulation controversy is not easily resolved.'Discuss this statement.
Q19.9 The former chairman of the Federal Communications Commission heralded Voice over Internet Protocol, or VoIP, as 'the most important shift in the entire history of modern communications since the invention of the telephone.' Using cheap computer software and the Internet, VoIP offers consumers
Q19.8 To measure public project desirability, positive and negative aspects of the project must be expressed in terms of a common monetary unit. Explain the importance of the present value concept in benefit/cost ratio calculations using a 5 per cent interest rate assumption and a 5-year project
Q19.7 In 1848, the idea of cost-benefit analysis originated with a French engineer by the name of Jules Dupuit. Economists argue that underlying calculations of costs and benefits must be based upon actual market behavior and not based upon consumer and producer surveys or 'informed estimates'. Why?
Q19.6 A pipeline break reduced the supply of gasoline to the Phoenix, Arizona, area in August 2003. Press reports indicated that some stations ran out of gasoline, consumers waited in line for hours, and some drivers started following gasoline tankers as they made their deliveries. Explain the
Q19.5 Does the fact that public decisions are sometimes made by self-interested politicians and bureaucrats undermine the efficiency of public-sector decision-making?
Q19.4 In the 1880s, cattlemen in the American West crowded more and more animals onto common grazing land to feed a growing nation. Cattlemen contended,'None of us knows anything about grass outside of the fact that there is lots of it, and we aim to get it while the getting is good.' Explain this
Q19.3 What is the essential difference between public and private goods? Give some examples of each and some examples of goods and services that involve elements of both.
Q19.2 What role does the price elasticity of demand play in determining the short-run effects of regulations that increase fixed costs? What if they lead to increased variable costs?
Q19.1 Air pollution costs the USA billions of dollars per year in worker absenteeism, health care, pain and suffering, and loss of life. Discuss some of the costs and benefits of a Pigou tax on air pollution.
PI 8.2 Agency Costs. Indicate whether each of the following transaction costs is explicit or implicit, and describe how it is a manifestation of a particular type of agency problem.A. A trader at an investment banking firm loses millions of corporate dollars through unsuccessful rank speculation.B.
PI 8.1 Organization Structure. Determine whether each of the following statements is true or false. Explain why.A. A vertical relation is a business connection between companies at the same point along the production-distribution chain.B. A work slowdown due to an unexpected strike by unionized
Q18.10 Describe four essential components of an effective decision management and control system.
Q18.9 Discuss important differences between centralized and decentralized allocations of decision authority within an organization. Are these methods of decision authority allocation mutually exclusive?
Q18.8 Describe three basic needs that must be met in the design of any organization.
Q18.7 What are agency costs? Describe some agency costs common among US corporations.
Q18.6 Executive stock options are often seen as a simple and effective solution to the 'other people's money' problem that can occur when managers with little ownership interest mismanage firm investment opportunities. Can you foresee any advantages and/or potential pitfalls to the use of executive
Q18.5 In a typical corporation, who are the'principals' and who are the 'agents'? What is the firm's agency problem?
Q18.4 What is the Coase Theorem, and why is it important in managerial economics?
Q18.3 Cite three important categories oftransaction costs encountered within the firm, and give some examples.
Q18.2 The personal computer has evolved from a tool for computation to an Internet-centered communications device. Is this likely to change corporate structures by increasing the efficiency of smaller, more nimble corporations?
Q18.1 Describe the difference between vertical and horizontal business relationships.
P17.10 Cost of Capital. Eureka Membership Warehouse, Inc., is a rapidly growing chain of retail outlets offering brand-name merchandise at discount prices. A security analyst's report issued by a national brokerage firm indicates that debt yielding 13 per cent composes 25 per cent of Eureka's
Suppose that Dunder-Mifflin's primary business is quite cyclical, improving, and declining with the economy, but that job A is expected to be countercyclical. Might this have any bearing on your decision?
What is the net present value of each project? On which project, if any, should the company bid?
What is the expected net cash flow each year? (Hint: Cash flow equals net profit after taxes plus depreciation and amortization charges.)
PI 7.9 Cash Flow Analysis. Dunder-Mifflin, Inc., is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Revenue:?
PI 7.8 Cash Flow Estimation. Cunningham's Drug Store, a medium-size drugstore located in Milwaukee, Wisconsin, is owned and operated by Richard Cunningham. Cunningham's sells pharmaceuticals, cosmetics, toiletries, magazines, and various novelties. Cunningham's most recent annual netincome
PI 7.7 Investment Project Choice. Toby Amberville's Manhattan Cafe, Inc., is considering investment in two alternative capital budgeting projects. Project A is an investment of $75000 to replace working but obsolete refrigeration equipment. Project B is an investment of$150000 to expand dining room
PI 7.6 NPV and PI. Louisiana Drilling and Exploration, Inc., (LD&E) has the funds necessary to complete one of two risky oil and gas drilling projects. The first, Permian Basin 1, involves the recovery of a well that was plugged and abandoned 5 years ago but that may now be profitable, given
PI 7.5 NPV and PI. Suppose the Pacific Princess luxury cruise line is contemplating leasing an additional cruise ship to expand service from the Hawaiian Islands to Long Beach or San Diego.A financial analysis by staff personnel resulted in the following projections for a 5-year planning horizon;
PI 7.4 Present Value. New York City licenses taxicabs in two classes: (1) for operation by companies with fleets and (2) for operation by independent driver-owners having only one cab. Strict limits are imposed on the number of taxicabs by restricting the number of licenses, or medallions, that are
PI 7.3 Cost of Capital. Indicate whether each of the following would increase or decrease the cost of capital that should be used by the firm in investment project evaluation. Explain.A. Interest rates rise because the Federal Reserve System tightens the money supply.B. The stock market suffers a
PI 7.2 Decision Rule Criteria. The net present value (NPV), profitability index (PI), and internal rate of return (IRR) methods are often employed in project valuation. Identify each of the following statements as true or false, and explain your answers.A. The IRR method can tend to understate the
PI 7.1 Cost of Capital. Identify each of the following statements as true or false, and explain your answers.A. Information costs both increase the marginal cost of capital and reduce the internal rate of return on investment projects.B. Depreciation expenses involve no direct cash outlay and can
ST17.1 NPV and Payback Period Analysis. Suppose that your college roommate has approached you with an opportunity to lend $25000 to her fledgling home health care business.The business, called Home Health Care, Inc., plans to offer home infusion therapy and monitored in-the-home health care
Q17.10 Risky projects are accepted for investment on the basis of favorable expectations concerning profitability. In the postaudit process, they must not be unfairly criticized for failing to meet those expectations.' Discuss this statement.
Q17.9 Research in financial economics concludes that stockholders of target firms in takeover battles'win' (earn abnormal returns) and that stockholders of successful bidders do not lose subsequent to takeovers, even though takeovers usually occur at substantial premiums over prebid market
Q17.8 Suppose that Black & Decker's interest rate on newly issued debt is 7.5 per cent and the firm's marginal federal-plus-state income tax rate is 40 per cent. This implies a 4.5 per cent after-tax component cost of debt. Also assume that the firm has decided to finance next year's projects by
Q17.7 An efficient firm employs inputs in such proportions that the marginal product/price ratios for all inputs are equal. In terms of capital budgeting, this implies that the marginal cost of debt should equal the marginal cost of equity in the optimal capital structure.In practice, firms often
Q17.6 How is a crossover discount rate calculated, and how does it affect capital budgeting decisions?
Q17.5 Level 3 Communications, Inc., like many emerging telecom carriers, has only limited and infrequent access to domestic debt and equity markets.Explain the attractiveness of a 'benefit/cost ratio'approach in capital budgeting for Level 3, and illustrate why the NPV, PI, and 1RR capital
Q17.4 Toyota Motor Corp., like most major multinational corporations, enjoys easy access to world financial markets. Explain why the NPV approach is the most appropriate tool for Toyota's investment project selection process.
Q17.3 OIBDA is an abbreviation for 'operating income before depreciation and amortization.' Like its predecessor EBITDA ('earnings before interest, taxes, depreciation, and amortization'), OIBDA is used to analyze profitability before noncash charges tied to plant and equipment investments. Can you
Q17.2 What major steps are involved in the capital budgeting process?
Q17.1 'The decision to start your own firm and go into business can be thought of as a capital budgeting decision.You only go ahead if projected returns look attractive on a personal and financial basis.' Discuss this statement.
Q16.10 What is the value of decision trees in managerial decision-making?
Q16.9 'Market estimates of investors' reactions to risk cannot be measured precisely, so it is impossible to set risk-adjusted discount rates for various classes of investment with a high degree of precision.' Discuss this statement.
Q16.8 If the expected net present value of returns from an investment project is $50 000, what is the maximum price that a risk-neutral investor would pay for it? Explain.
Q16.7 When the basic valuation model is adjusted using the risk-free rate, i, what economic factor is being explicitly accounted for?
Q16.6 Graph the relation between money and its utility for an individual who buys both household fire insurance and state-run lottery tickets.
Q16.5 State-run lotteries commonly pay out 50 per cent of total lottery-ticket sales in the form of jackpots and prizes. Use the certainty equivalent concept to quantify the minimum value placed on each risky dollar of expected return by lottery-ticket buyers. Why are such lotteries so popular?
Q16.4 Confronted with a choice between $50 today or $100 1 year from now, economic experiments suggest that the vast majority of people will take the $50 today.At the same time, economic experiments show that most people will opt to take $100 in 10 years over $50 in 9 years. Is such behavior
Q16.3 The standard deviation measure of risk implicitly gives equal weight to variations on both sides of the expected value. Can you see any potential limitations of this treatment?
Q16.2 Domestic investors sometimes miss out on better investment opportunities available to global investors. At the same time, global investors face special risks. Discuss some of the special risks faced by global investors.
Q16.1 In economic terms, what is the difference between risk and uncertainty?
ST15.2 Optimal Mark-Up on Price. TLC Lawncare, Inc., provides fertilizer and weed control lawn services to residential customers. Its seasonal service package, regularly priced at$250, includes several chemical spray treatments. As part of an effort to expand its customer base, TLC offered $50 off
ST15.1 George Constanza is a project coordinator at Kramer-Seinfeld & Associates, Ltd., a large Brooklyn-based painting contractor. Constanza has asked you to complete an analysis of profit margins earned on a number of recent projects. Unfortunately, your predecessor on this project got an abrupt
Q15.10 Why is it possible to determine the marginal costs ofjoint products produced in variable proportions but not those of joint products produced in fixed proportions?
Q15.9 Discuss the role of common costs in pricing practice.
Q15.8 What conditions are necessary before price discrimination is both possible and profitable? Why does price discrimination result in higher profits?
Q15.7 What is price discrimination?
Q15.6 'Marginal cost pricing, as well as the use of incremental analysis, is looked upon with favor by economists, especially those on the staffs of regulatory agencies. With this encouragement, regulated industries do indeed employ these rational techniques quite frequently. Unregulated firms, on
Q15.5 'One of the least practical suggestions that economists have offered to managers is that they set marginal revenues equal to marginal costs.' Discuss this statement.
Q1 5.4 Why does The Wall Street Journal offer bargain rates to students but not to business executives?
Q15.3 Discuss how seasonal factors influence supply and demand, and why mark-ups on fresh fruits and vegetable are at their highest during the peak ofseason.
Q15.2 Explain why successful firms that employ mark-up pricing use fully allocated costs under normal conditions, but typically offer price discounts or accept lower margins during off-peak periods when excess capacity is available.
Q1 5.1 Express the mark-up on cost formula in terms of the mark-up on price, and use this relation to explain why a 100 per cent mark-up implies a 50 per cent markup on price.
PI 4.10 Variability of Business Profits. Near the checkout stand, grocery stores and convenience stores prominently display low-price impulse items like candy, gum, and soda that customers crave. Despite low prices, such products generate enviable profit margins for retailers and for the companies

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Managerial Economics 14th Revised Edition Mark Hirschey - Solutions

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