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Managerial Economics And Strategy 3rd Edition Jeffrey M. Perloff, James A. Brander - Solutions
Rental cars sold on the used car market receive lower prices than cars of the same model and year that were owned by individual owners. Does this price difference reflect adverse selection or moral hazard? Could car rental companies reduce this problem by carefully inspecting rental cars for damage
In 2018, Amazon received a pair of patents for a wristband that can locate warehouse employees and track their hand movements in real time and an inventory management system using trackers and receivers to monitor workers’ movements and breaks. Can Amazon use these innovations to address moral
Q&A 16.1 shows that a regulated price ceiling set below the optimal regulated price causes a loss in total surplus compared with optimal regulation. The diagram illustrates only a lower bound for the loss of surplus. Explain why the loss in consumer surplus is likely to be even greater than B +
In Question 1.3, could using tolls instead of taxes to finance the bridge yield a Pareto improvement?Question 1.3A town council is considering building a new bridge over a small river that runs through the town to reduce congestion on the existing bridge and decrease commuting times. Each of 1,000
Q&A 16.2 shows that a merger may increase total surplus if the merger reduces marginal cost. Give examples of how a merger could reduce marginal cost.Q&A 16.2 A1 Concrete and Apex Concrete are Cournot duopoly producers of ready-mix concrete. The market inverse demand function is p = a
In Q&A 16.2, under what conditions (if any) would a cost-reducing merger that converts a duopoly into a monopoly cause a Pareto improvement? Would a cost-reducing merger always increase total surplus? Explain briefly.Q&A 16.2 A1 Concrete and Apex Concrete are Cournot duopoly producers
The Mini-Case “Are Monopoly Mergers Harmful?” states that there are about 5,000 ready-mix concrete plants in the United States. With so many plants in operation, why should we worry that mergers may create monopoly power? Explain why the speed of entry is important in assessing the cost of
Aloha Coffee is a coffee roasting and blending company that supplies a unique coffee bean grown only in a very particular part of the Hawaiian island of Kauai to the only two coffee shops in a small town. The producer sells the coffee to the shops at the marginal cost of production, $9 per pound,
In the model in Question 4.8, what is the unregulated monopoly equilibrium? How would you optimally regulate the monopoly to maximize total surplus? What is the resulting equilibrium?Question 4.8Suppose that the inverse demand function for paper is p = 200 - Q, the private marginal cost
Aaron is traveling to Europe for vacation and is seated in a first-class airline seat holding his infant daughter in his arms. He values being in first class instead of coach at $600. Samantha, a CEO of a major multinational corporation, is sitting in the adjacent seat and is considering offering
Alyakoob and Rahman (2018) found that if activity on home-sharing platform Airbnb increases by 2%, restaurant employment in that neighborhood rises by 3%. This effect demonstrates which economic concept?
In 2018, the U.S. Centers for Disease Control and Prevention (CDC) is cutting 80% of its epidemic prevention activities overseas. The former chief of the CDC says that this decision “would significantly increase the chance an epidemic will spread without our knowledge and endanger lives in our
In Question 6.1, assume that the R&D cost is 150. Are consumers made better off by the action taken by Woz? Does total surplus rise?Question 6.1Woz Enterprises specializes in electrical components. The market for one particular component is perfectly competitive and in long-run equilibrium.
In Question 6.1 with an R&D cost of 150, suppose that the government waits until Woz works out the new process and then changes patent rules, requiring Woz to charge a price no greater than 12. Does Woz stay in business? What happens to consumer surplus and to total surplus? Why don’t
Explain why the innovation process may give rise to market failure.
Suppose that one euro can be exchanged for 1.2 U.S. dollars and that one U.S. dollar can be exchanged for 110 Japanese yen. If these currencies can be traded freely with low transaction costs, what exchange rate would you expect between euros and the Japanese yen? Describe the transactions that
In Question 2.4, suppose that Arvind is not worried about risk provided that he can cover his costs. If he thinks that the exchange rate will change to 50 INR in 90 days, explain how he could use a forward contract to hedge his risk. Would Arvind want to hedge if he thinks that the exchange rate
In August 2018, the world price for raw sugar, 11¢ per pound, was less than half of the U.S. price, 27¢ per pound, because of quotas and tariffs on sugar imports. As a consequence, a larger quantity of American-made corn sweeteners can be profitably sold domestically. Use graphs to show the
As a result of international trade agreements, many iconic “American” cars are not assembled in the United States. Explain why.
Based on the Mini-Case “Profit Repatriation,” how would you expect the Tax Cuts and Jobs Act of 2017 to affect the stock of foreign-earned income held outside the United States by U.S. firms?Profit RepatriationUntil the Tax Cuts and Jobs Act of 2017 went into effect in 2018, a U.S. parent firm
The Tax Cuts and Jobs Act of 2017 reduced the standard U.S. federal corporate income tax rate from 35% to 21%. How would this change affect incentives for U.S. multinational firms to shift profits from the United States to other countries, using transfer pricing?
In Question 5.2, how much would the Indian currency (the rupee) have to rise in value (in percentage terms) for Hewlett-Packard to keep the service activity in the United States even after telephone time falls in price?Question 5.2Suppose Hewlett-Packard is considering outsourcing its
Set up by a former University of North Carolina (UNC) student, Morris Gelblum, the firm Sweeps uses UNC, Duke, North Carolina State, and other college students to perform a variety of short-term jobs, such as cleaning, yard work, painting, tech help, tutoring, and moving. A customer describes the
The 2017 report of the United Nations Food and Agriculture Organization (FAO) notes that the share of world population that is undernourished rose between 2014 and 2016, following a long period of decline. This increase occurred even though agricultural output per acre rose between 2014 and 2016.
In Q&A 13.4, suppose that A = 12 but that profits under the current wage and high output are 14 for Firm 1 and 11 for Firm 2. Which wage would Firm 1 choose?Q&A 13.4In a duopoly market, to produce a given amount of output, Firm 1 uses relatively more capital but less labor than does Firm 2.
It costs $18 to produce a low-quality stapler and $24 to produce a high-quality stapler. Consumers cannot distinguish good staplers from poor staplers when they make their purchases. Consumers value staplers at their cost of production and are risk neutral. The three firms in the market produce
The Mini-Case “Adverse Selection and Remanufactured Goods” reports that, for electronic goods sold on eBay, higher seller feedback scores reduce the price differential between new goods and remanufactured goods. Explain why this pattern is consistent with the theory of adverse selection. Would
The only variable input a janitorial service firm uses to clean offices is workers who are paid a wage, w, of $16 an hour. Each worker can clean four offices in an hour. Use math to determine the variable cost, the average variable cost, and the marginal cost of cleaning one more office. Draw a
Trader Joe’s sells very cheap and popular wine produced by Bronco Wine (Hayley Peterson, “The Real Reasons Trader Joe’s Wine Is So Cheap,” Business Insider, May 6, 2017). When asked why the wine is so cheap, Bronco winemaker Ed Moody emphasizes the volume of output, stating that it is
Using the information from the previous question, if Alexx and Spenser leave their investments in place for 30 years, with annual compounding of the interest, how much more will Alexx have than Spenser at the end of the 30-year period?Previous questionMany retirement funds charge an administrative
Based on the information in Question 7.2, determine the profit-maximizing uniform price. Does Paradise Cruises earn a higher profit under peak-load pricing or uniform pricing? Compare consumer surplus under these two pricing methods.Question 7.2Paradise Cruises has a monopoly in renting luxury
Uber makes the following statement on its website: “In . . . cases of very high demand, fares may increase to help ensure those who need a ride can get one. This system is called surge pricing, and it lets us continue to be a reliable choice.” Does surge pricing help “ensure that those who
A firm initially has a linear production function q = 10L + 12K. The firm undertakes an organizational innovation that doubles the marginal product of labor but does not affect the marginal product of capital. What is the new production function?
Ming lives in Seattle and recently bought a $375 ticket to attend a Seattle Seahawks game. He is a huge fan, so even though the ticket is pricey it is well below his willingness to pay of $600. However, as game day approaches, Ming receives an invitation from his friend, Cassandra, to spend the day
You won a ticket to a hockey playoff game by having your name drawn from a hat at a charity event. You were excited about going, but on the day of the game, a major snowstorm has hit and conditions are miserable. Would you be more likely to go if you had bought the ticket yourself instead of
A firm has a Cobb-Douglas production function, q = 2L0.5K0.5. If it faces factor prices of w = 20 and r = 40 and its capital is fixed at K = 100, what are its short-run average fixed cost, average variable cost, and marginal cost functions? Plot these curves.
Many pharmaceutical companies provide lowincome older people with a card guaranteeing them discounts on prescription medicines. As of 2017, such companies included GlaxsoSmithKline, Merck, Pfizer, and Roche, along with many others. Why would these firms provide discount drug cards?
Hertz and other car rental companies charge much more to rent luxury cars such as Ferraris and Bentleys than to rent compact cars such as the Toyota Yaris or Chevrolet Sonic. Is this price discrimination? Explain.
Why are electronic textbooks likely to facilitate price discrimination by making it easier for textbook publishers to charge different prices in various countries?
Would it pay a seller to use group price discrimination and nonlinear price discrimination at the same time? Can you think of some examples?
Initially, Microsoft sold its programs Word and Excel separately. Now, it only sells them as a bundle. Assuming that Microsoft was always trying to maximize profit, what does this change in pricing suggest about how demand for the two products changed over time?
As in Q&A 10.4, a ski resort faces daily demand given by p = a - Q, where a varies from day to day. Over a three-day period, a takes on the values 80, 100, and 120. The marginal cost is zero. The fixed cost for the three-day period is $2,500. If the firm uses dynamic pricing, it changes its
Duopoly quantity-setting firms face the inverse market demand function p = 150 - q1 - q2. Each firm has a marginal cost of $60 per unit. What is the Nash-Cournot equilibrium?
In 2018, Chinese authorities announced continued efforts to reduce capacity in the cement industry, often forcing producers to close plants.17 As cement is costly to transport and has significant economies of scale in production, each urban area is a distinct oligopolistic market. If the Cournot
In 2018, Delta Air Lines said that it was increasing its fares by 4% because its fuel bill jumped by 33% from the previous year. Other airlines also announced fare increases. Assuming that these firms are oligopolistic and the outcome is a Nash-Cournot equilibrium, why did the prices rise less than
If the firms in a Cournot duopoly merge forming a monopoly, the effect on price, profit, and other variables depends on the trade-off between efficiency and market power. The firms produce identical products. Firm 1 has a constant marginal cost of 1, and Firm 2 has a constant marginal cost of 2.
One of the hottest trends in 2018 was rental scooters. San Francisco capped the number of scooter companies at six. Thus, a market that was going to be monopolistically competitive became, at least in the short run, an oligopoly. What effects does such a barrier to entry create on equilibrium
Given the demand and cost conditions of Question 5.1, suppose that the legal intervention imposed by the government leaves the marginal cost unchanged but imposes a fixed cost. What is the minimal fixed cost that will prevent entry?Question 5.1An incumbent firm, Firm 1, faces a potential entrant,
For the two examples of two-sided markets shown in Tables 12.4 and 12.5, would you expect a change in strategies if the two firms were to merge or collude?Tables 12.4Tables 12.5 eHarmony Balanced Unbalanced 7 6. Balanced 7 5 Match.com 4 Unbalanced 6. 4
As described in the Managerial Implication “Solving Coordination Problems,” standard setting organizations (SSOs) facilitate agreement over technical standards between the member companies. Incorporating a particular technical standard in a product is costly. By joining an SSO and adopting a
The Mini-Case “Nash Bargaining over Coffee” applies the generalized Nash product, NP = (R - dR)a (M - dM)1 - a, to bargaining between retailers and manufacturers over the price of coffee. Assume that dR = dM = 0, that a = 0.5, and that manufacturers and retailers divide up a potential combined
Suppose that Alpha Inc., Richardson Industries, and K-Tek are the only three firms interested in a plot of land on the outskirts of town. The lot is being auctioned by a second-price sealed-bid auction. Alpha values the lot at $1.3 million, Richardson at $1.05 million, and K-Tek at $950,000. Each
Ricardo owns a small gift shop on the pier in a popular summer vacation town. The owner of the pier approaches Ricardo with an offer that would grant him exclusive rights to operate a gift shop on the pier in exchange for $100,000. If entry does not occur, Ricardo would earn $240,000 in profit.
Suppose that the constituent game shown in Figure 13.3 is played exactly twice instead of many times. Would that change the behavior of the incumbent?Figure 13.3 Potential Rival's Incumbent's Profits Pay Decision Response (T,, T;) Accommodate (3, 3) Enter Incumbent Fight (-1, 1) Entrant Do not
Would a labor union gain any advantage related to raising rivals’ costs in bargaining over wages in an industry with two or three firms rather than bargaining with a monopoly producer?
Based on the Mini-Case “Venezuelan Nationalization,” if Venezuela ultimately pays nothing to Exxon in direct compensation, would that mean that Venezuela’s partial expropriation of Exxon assets was a success? Explain.Venezuelan NationalizationIn the 1990s, private oil companies were permitted
In an ultimatum game, the Proposer moves first, making an offer to the Responder. Once the offer is made, the Responder decides to accept or reject the offer. The total amount available is $100 if the players reach an agreement, but both players get $0 if the responder rejects the offer. The
The EZ Construction Company is offered a $40,000 contract to build a new deck for a house. The company’s profit if it does not have to sink piers (vertical supports) down to bedrock will be $9,000. However, if it does have to sink the piers, it will lose $2,000. The probability it will have to
Based on the information in the Mini-Case “Gambling,” provide at least three reasons why many risk averse people gamble in casinos.GamblingMost people say that they don’t like bearing risk. Consistent with such statements, most consumers purchase insurance such as car insurance, homeowner’s
Using the information in the preceding question, show that both Joachim and Cindy are risk averse. Explain why they favor different projects even though they are both risk averse.Preceding questionJoachim’s utility function is U(W) = ln (W), where ln (W) is the natural logarithm of W. Cindy’s
Joachim’s utility function is U(W) = ln (W), where ln (W) is the natural logarithm of W. Cindy’s utility function is U(W) = W0.5 (the square root function). Which of the projects described in Q&A 14.3 would be chosen by Joachim? Show that Cindy would favor a different project.Q&A
A risk-neutral plaintiff in a lawsuit must decide whether to settle a claim or go to trial. The defendants offer $140,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 70%. If the plaintiff wins, the amount awarded to the
R&D investments are a major source of business uncertainty. Do all risk-averse managers fail to invest in R&D? Why or why not?
Conner runs a rafting company on a local river. He runs two kinds of trips – a wild whitewater experience and a more mellow wildlife tour. If he spends the day only doing whitewater trips, he can do 3 trips per day; if he spends the day only doing wildlife trips, he can do 4 trips. If he does
The Mini-Case “Trends in Social Responsibility” lists several themes related to social responsibility in business that have generated recent attention. Is it possible that efforts made by managers to address some of these themes would increase profits? Explain briefly.Trends in Social
A local pizzeria buys a used car to make pizza deliveries. It pays $2,000 down and $2,000 a year for two more years. What is the present value of these payments at a 5% interest rate?
You work for a large mineral exploration company and propose buying new state-of-the-art equipment. The equipment is expensive and so is training employees to use it, but it will increase the yield of exploration activities in the future. The CEO of the company says that because your plan has high
Q&A 9.4 shows that a concert’s profit-maximizing price may exceed the price that allows the concert to sell out. Redraw the figure if the concert requires a large fixed cost (lighting, the stage’s appearance, and so forth). Indicate the profit areas if Ms. Swift sets a price such
Nicholas owned no green sweaters, so his Aunt Fern gave him one for his 21st birthday. However, the market price of the sweater was higher than his willingness to pay for it. Draw a diagram showing Nicholas’s demand curve for green sweaters and identify and explain the deadweight loss.
Access to Twitter is free, but Brynjolfsson et al. (2018) found that many Twitter users would be willing to pay for access. Draw a demand curve for Twitter. Show the consumer surplus at the current price of zero.
Would an increase in interest rates make the Shipping With Amazon (SWA) option more attractive or less attractive to Amazon? Show formally using an equation involving interest rates to explain your answer.
As described in the Mini-Case “The Gig Economy,” has the gig economy increased or decreased the extent of vertical integration? Explain briefly. What is the role of technological progress and what is the role of government policy in the growth of the gig economy?The Gig EconomyTraditionally,
Based on the Mini-Case “NetFlix,” did NetFlix undertake backward or forward integration? What were the primary benefits from the integration strategy that it chose?NetFlixNetflix, a movie and television show distributor, disrupted the television industry. It currently has about 118 million
According to stakeholder theory, what are the social responsibilities of managers?
The development of mini-mills was a disruptive innovation in the steel industry. Before mini-mills, steel production had substantial economies of scale and steel companies had to be very large to take full advantage of those economies. Mini-mills eliminated the advantage of large size in steel
According to Bustle.com, San Francisco has the most coffee shops of any American city (as of April 2016) with 2,613, with new shops opening regularly as the population grows. Suppose the city decides to stop issuing new business licenses for coffee shops so that the industry is capped at its
Economists often use the model of perfect competition to analyze the effect of economic shocks in particular industries. Which of the following industries is best approximated by perfect competition: agriculture, aircraft manufacturing, and social media (such as Facebook and Twitter)? Explain
A firm claims on its website that it has been in the same location for over 50 years and has lower overhead than other firms because it bought the land 50 years ago when it was inexpensive. It also claims that it charges lower prices than competitors because of its lower overhead. Discuss the logic
What is the effect on the short-run equilibrium of a specific subsidy of s per unit that is given to all n firms in a market?
Using the information in panel a of Figure 8.8, determine what happens to David’s quantity demanded and consumer surplus if price falls to p = $1.Figure 8.8 (a) David's Consumer Surplus (b) Steven's Consumer Surplus a Cs, = $2 CS, = $1 !3! 3 Price = $3 Consumer surplus, CS E, = $3 E,= $3 E= $3
Using a graph similar to Figure 8.11, show that increasing output beyond the competitive level decreases total surplus because the cost of producing this extra output exceeds the value consumers place on it.Figure 8.11 A Supply P2 B MC, = P, E Demand D MC- Q, Q, Units per year Competitive Output,
Is a monopoly’s profit affected by whether it chooses price or quantity (assuming it chooses them optimally)? Why can’t a monopoly choose both price and quantity?
AT&T Inc., the large U.S. phone company and the one-time monopoly, left the payphone business at the beginning of 2009 because people were switching to wireless phones. U.S. consumers owning cellphones reached 80% by 2007 and 95% by 2018 according to the Pew Research Center. Consequently, the
Using the coffee demand function, Q = 8.56 - p - 0.3ps + 0.1Y, show that sugar is a complement for coffee. You can use a numerical example, algebra, or calculus.
The demand function is Q = 5,000 - 10p, and the supply function is Q = 200 + 6p. Determine the equilibrium price and quantity.
Using the demand function Q = 8.56 - p - 0.3ps + 0.1Y and supply function Q = 9.6 + 0.5p - 0.2pc, determine the amount of any excess demand or excess supply at a price of $4 and explain the mechanism that would cause the equilibrium price to be reached.
The estimated monthly U.S. demand function for avocados is Q = 144 - 40p + 20pt where p is the price of avocados and pt is the price of tomatoes, a substitute for avocados. The estimated supply function is given in Question 2.1, where the price of fertilizer, pf, is $0.40, so the supply function
Ethanol, a fuel, is made from corn. Ethanol production in 2014 was approximately 17 times what it was in 1990 (www.ethanolrfa.org, June 2015). What effect did this increased use of corn for producing ethanol have on the price of corn and the consumption of corn as food? Illustrate using a supply
For years, Chinese parents bought imported baby formula because of their concerns about the safety of domestic formula. However, in 2013, a major foreign producer announced that its concentrate might contain botulism. In 2014, the Chinese government yanked production permits for a third of the
Bentonite clay, which consists of ancient volcanic ash, has many uses, including manufacturing kitty litter and clarifying wine. A major use is for drilling mud, a material pumped down oil and gas wells during drilling to keep the drilling bit cool. When oil drilling decreases, less bentonite is
New York City has licensed street vendors for more than a century. It currently provides only a small number of general vending licenses. The waiting list is very long and, aside from military veterans, someone trying to get a license today has no chance. One popular item for street vendors is
In 2012, voters in the state of Washington approved a ballot measure legalizing the recreational use of marijuana. The measure required that consumers pay a 37% tax on sales of recreational marijuana. For what slopes of the supply or demand curves will this tax substantially reduce the equilibrium
Since 2014, Quebec, Canada, has offered a per-child subsidy (which is a negative tax) on day care for young children that lowers the price to $7 per child. a. What is the effect of this subsidy on the equilibrium price and quantity?b. Show the incidence of the subsidy on day care providers and
Which section of a straight-line demand curve is elastic? Which section is inelastic?
Purdue University provides monthly data on Florida electricity consumption online (https://engineering. purdue.edu/LASCI/research-data/energy). We can use these data to estimate monthly residential electricity demand as a function of price and the average monthly temperature. Using a linear
In Figure 3.5 two estimated demand curves are shown. These demand curves result from regression equations in which Mai estimates quantity demanded as a function of price and no other variables. However, Mai recognized that other variables, such as sunshine or temperature, may affect the demand for
Using the data in Table 3.1, estimate the cod demand function if we use only the first seven observations.Data from Table 3.1Price, dollars per pound .......................... Quantity, thousand pounds per day1.90
A medical clinic that surveys patients with a history of heavy drinking is likely to find that patients who have started to experience serious liver problems are more likely to cut back their drinking than others with a history of heavy drinking. An enthusiastic doctor uses data from this
Recessions (when consumers’ incomes fall) strongly affect FedEx’s revenue, but have less of an effect on Heinz’s revenue. Both firms’ revenues vary seasonally. What regression specifications would you suggest using to forecast revenue for FedEx and for Heinz? Why might these specifications
Here are annual revenue data in billions of dollars for the 10-year period 2008–2017 for two wellknown retailers:Amazon: 19.1; 24.5; 32.4; 48.1; 61.1; 74.5; 89.0; 107.9; 136.0; 177.9.Walmart: 402.2; 406.1; 420.0; 445.0; 467.2; 474.5; 483.5; 480.0; 482.2; 496.8.a. For each company, use linear
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