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business
managerial economics

Questions and Answers of Managerial Economics

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
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
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
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
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
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
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.
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
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
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.
Locust Hill Golf Club is a private country club. It charges an initiation fee of $23,000. When members quit the club, they receive no refund on their initiation fees. They simply lose their
The guide at the Washington Monument tells your 10-year-old nephew, "Enjoy the monument. As a citizen you are one of its owners." Your nephew asks you if that is true. What do you say?
In certain professional sports, team owners "own" the players. Owners can sell or trade players to another team. However, players are not free to negotiate with other team owners on their own behalf.
a. What are contracting costs? b. Give a few examples of contracting costs? c. What effect does the existence of contracting costs have on market economies?
Evaluate the following statement: Using free markets and the price system always results in a more efficient resource allocation than central planning. Just look at what happened in Eastern
What is the difference between general and specific knowledge? How can specific knowledge motivate the use of decentralized decision making?
a. What is an externality? b. Why might externalities lead a firm to discharge too much pollution into a river? c. Congress has passed a law that limits the level of cotton dust within
What do you think will happen to the price and quantity of DVD players if: a. The availability of good movies to play on DVD players increases? b. Personal income increases? c. The
Many economists favor free trade between nations. They argue that free trade will increase total world output and make people of trading nations better off. Discuss how this argument relates to
Twin brothers, Tom and Bill, constantly fight over toys. For instance, Tom will argue it his turn to play with a toy, while Bill argues it is his turn. Their parents frequently have to intervene in
What is a property right? What role do property rights play in a market economy?
What is Pareto efficiency? Why do economists use this criterion for comparing alternative economic systems?
Accounting problems at Enron ultimately led to the collapse of the large accounting firm Arthur Andersen. When the Enron scandal first became public, Andersen’s top management blamed one “rouge
Jenny is an investor in the stock market. She cares about both the expected value and standard deviation of her investment. Currently she is invested in a security that has an expected value of
Discuss the following statement: “Sunk costs matter. People who pay $20,000 to join a golf club play golf more frequently than people who play on public golf courses.”
Some states in the U.S. allow citizens to carry handguns. Citizens can protect themselves in the case of robberies by using these guns. Other states do not allow citizens to carry handguns.
The Japanese are very good at returning lost property to local police stations. If you lose a wallet filled with cash in Japan it is likely to be turned into the police. This is true even though the
People give to charity. a. Is this action consistent with the “economic view of behavior”? Explain. b. Suppose that there is a big drop in charitable giving. At the same time there has
Suppose that an investment can yield three possible cash flows: $5,000; $1,000; or $0. The probability of each outcome is 1/3. a. What is the expected value and standard deviation of the
If markets are so wonderful, why do firms exist?
Several school districts have attempted to increase teacher productivity by paying teachers based on the scores their students achieve on standardized tests (administered by outside testing
One of the main tenets of economic analysis is that people act in their own self interest. Why then do people leave tips in restaurants? If a study were to compare the size of tips earned by servers
Critically evaluate the following statement: “Risk-averse people never take gambles.”
One physician who worked for a large health maintenance organization was quoted as saying: One day I was listening to a patient's heart and realized there was an abnormal rhythm. My first
Insurance companies have to generate enough revenue to cover their costs and make a normal profit — otherwise, they will go out of business. This implies that the premiums charged for insurance
Employees in a plant in Minnesota are observed to be industrious and very productive. Employees in a similar plant in Southern California are observed to be lazy and unproductive. Discuss how
a. Briefly describe the five models of behavior presented in this chapter. b. What are the implications of these models for managers attempting to influence their employees' behavior?
Suppose that Bob’s indifference curves are perfectly L-shaped with the right angle occurring when Bob has equal amounts of both goods. What does this imply about Bob’s willingness to trade one
Suppose that Bob’s indifference curves are straight lines (as opposed to being convex to the origin). What does this imply about Bob’s willingness to trade one good for the other? Give examples
Suppose that you have $900 and what to invest the money for one year. There are three existing options. (a) The city of Rochester is selling bonds at $90 per unit. The bonds pay $100 at the end
The Solace Company has an inventory of steel that it originally purchased for $20,000. It currently has an offer to sell the steel for $30,000. Should Solace’s management agree to sell? Explain.
A noted economist was asked what he did with his “free time.” He responded by saying that “time is not free.” Explain this response.
Which costs are pertinent to economic decision making? Which costs are not relevant?
In the life insurance industry, we see two major ownership structures—common stock insurers and mutual insurers. In the common stock companies, the owners —its stockholders—are a separate
In the process of benchmarking, a colleague of yours notes that Lincoln Electric, a producer of electric arc welders, has much high er productivity than does your company. Unlike your firm, Lincoln
What are the three aspects of organizational architecture?

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