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strategic management 5th
Strategic Management For Hospitality And Tourism 1st Edition Fevzi Okumus Levent Altinay Prakash Chathoth - Solutions
Education is a continuous variable, where eh is the years of schooling of a high-ability worker and el is the years of schooling of a low-ability worker.The cost per period of education for these types of workers is ch and cl , respectively, where cl 7 ch.The wages they receive if employers can
Suppose that you are given wh, wl, and θ in the education signaling model. For what value of c are both a pooling equilibrium and a separating equilibrium possible? For what value of c are both types of equilibria possible, and do high-ability workers have higher net earnings in a separating
Some firms are willing to hire only high school graduates. Based on past experience or statistical evidence, these companies believe that, on average, high school graduates perform better than nongraduates. How does this hiring behavior compare to statistical discrimination by employers on the
Some universities do not give letter grades. One rationale is that eliminating the letter-grade system reduces pressure on students, thus enabling them to learn more. Does this policy help or hurt students?(Hint: Consider the role grades play in educating and signaling.)
In the education signaling model, suppose that firms can pay c* to have a worker’s ability determined by a test. Does it pay for a firm to make this expenditure?
Sometimes a firm sells the same product under two brand names. For example, the Chevy Tahoe and the GMC Yukon are virtually twins (although the Yukon sells for $490 more than the Tahoe). Give an asymmetric information explanation as to why the firm might use pairs of brand names and why one product
In Solved Problem 18.3, if the vast majority of all consumers knows the true prices at all stores and only a few shoppers have to incur a search cost to learn the prices, would the equilibrium be singleprice at the monopoly level, pm?
Many wineries in the Napa Valley region of California enjoy strong reputations for producing highquality wines and want to protect those reputations.Fred T. Franzia, the owner of Bronco Wine Co., sold Napa-brand wines that do not contain Napa grapes (Flynn, Julia, “In Napa Valley, Winemaker’s
In the world of French haute cuisine, a three-star rating from the Michelin Red Guide is a widely accepted indicator of gastronomic excellence.French consumers consider Gault Milleau, another restaurant guide, to be less authoritative than the Michelin guide because Gault Milleau, unlike Michelin,
It costs $12 to produce a low-quality electric stapler and $16 to produce a high-quality stapler. Consumers cannot distinguish good staplers from poor staplers when they make their purchases. Four firms produce staplers. Consumers value staplers at their cost of production and are risk neutral.
Suppose that everyone in the used-car example in the text is risk neutral, potential car buyers value lemons at $2,000 and good used cars at $10,000, the reservation price of lemon owners is $1,500, and the reservation price of owners of high-quality used cars is $8,000. The share of current owners
Suppose that the buyers in Exercise 3.3 incur a transaction cost of $200 to purchase a car. This transaction cost is the value of their time to find a car. What is the equilibrium? Is it possible that no cars are sold? M
Many potential buyers value high-quality used cars at the full-information market price of p1 and lemons at p2. A limited number of potential sellers value high-quality cars at v1 … p1 and lemons at v2 … p2. Everyone is risk neutral. The share of lemons among all the used cars that might
Use Akerlof’s lemons model to explain why restaurants that cater to tourists are likely to serve lowquality meals. Tourists will not return to the area, and they have no information about the relative quality of the food at various restaurants, but they can determine the relative price by looking
If you buy a new car and try to sell it in the first year—indeed, in the first few days after you buy it—the price that you get is substantially less than the original price. Use your knowledge about signaling and Akerlof’s lemons model to explain this much-lower price.
According to Edelman (2011), the widely used online “trust” authorities issue certifications without adequate verification, giving rise to adverse selection. Edelman finds that TRUSTe certified sites are more than twice as likely to be untrustworthy as uncertified sites. Explain why.3. How
You want to determine whether there is a lemons problem in the market for single-engine airplanes.Can you use any of the following information to help answer this question? If so, how?a. Repair rates for original-owner planes versus planes that have been resold,b. The fraction of planes resold in
Some states prohibit insurance companies from using car owners’ home addresses to set auto insurance rates. Why do insurance companies use home addresses? What are the efficiency and equity implications of forbidding such practices?
While self-employed workers have the option to purchase private health insurance, many—especially younger—workers do not, due to adverse selection. Suppose that half the population is healthy and the other half is unhealthy. The cost of getting Exercises = exercise is available on MyEconLab; *
A grocery advertises a low price on its milk as a“loss leader” to induce customers to shop there. It finds that some people buy only milk there and do their other grocery shopping elsewhere. Is that an example of adverse selection or moral hazard?
A firm spends a great deal of money in advertising to inform consumers of the brand name of its mushrooms. Should consumers conclude that its mushrooms are likely to be of higher quality than unbranded mushrooms? Why or why not?
California set up its own earthquake insurance program for homeowners. The rates vary by zip code, depending on the proximity of the nearest fault line.However, critics claim that the people who set the rates ignored soil type. Some houses rest on bedrock; others sit on unstable soil. What are the
million U.S. consumers were victims of weight-loss fraud, ranging from a tea that promised to help people shed pounds to fraudulent clinical trials and fat-dissolving injections. Do these frauds illustrate adverse selection or moral hazard?
According to a 2007 study by the Federal Trade Commission,
In the Challenge Solution, where there is no pollution as in panel a of the figure, how do we know that winners from trade can compensate losers and still have enough left over to benefit themselves?
Redraw panel b of the Challenge Solution figure to show that it is possible for trade to increase welfare even when pollution is not taxed or otherwise regulated.
Anna and Bess are assigned to write a joint paper within a 24-hour period about the Pareto optimal provision of public goods. Let A denote the number of hours that Anna contributes to the project and B the number of hours that Bess contributes.The numeric grade that Anna and Bess earn is a
In the analysis of the optimal level of a public good, suppose that each person’s utility function is quasilinear: Ui(G) + Pi. Show that the optimal G is unique and independent of P1 and P2 if society has adequate resources. (Hint: See Solved Problem 17.3.) M
Two tenants of a mall are protected by the guard service, q. The number of guards per hour demanded by the electronics store is q1 = a1 + b1p, where p is the price of one hour of guard services. The icecream store’s demand is q2 = a2 + b2p. What is the social demand for this service? M
Guards patrolling a mall protect the mall’s two stores. The electronics store’s demand curve for guards is greater at all prices than that of the icecream parlor. The marginal cost of a guard is $10 per hour. Use a diagram to show the equilibrium, and compare that to the socially optimal
According to the “What’s Their Beef?” application, collective generic advertising produces $5.67 in additional marginal revenue for every dollar contributed by producers. Is the industry advertising optimally (see Chapter 12)? Explain.
Vaccinations help protect the unvaccinated from disease. Boulier et al. (2007) find that the marginal externality effect can be greater than one case of illness prevented among the unvaccinated. Is vaccination a public good? If so, what might the government do to protect society optimally?
Do publishers sell the optimal number of intermediate microeconomics textbooks? Discuss in terms of public goods, rivalry, and exclusion.
You and your roommate have a stack of dirty dishes in the sink. Either of you would wash the dishes if the decision were up to you; however, neither will do it, in the expectation (hope?) that the other will deal with the mess. Explain how this example illustrates the problem of public goods and
There are 240 automobile drivers per minute who are considering using the E-ZPass lanes of the Interstate 78 toll bridge over the Delaware River that connects Easton, Pennsylvania, and Phillipsburg, New Jersey. With that many autos, and a 5 mph speed restriction through the E-ZPass sensors, there
Are heavily used bridges, such as the Bay Bridge, Brooklyn Bridge, and Golden Gate Bridge, commons? If so, what can be done to mitigate externality problems?
because they are not strictly rivalrous or exclusive.
List three examples of goods that do not fit neatly into the categories in Table
To the dismay of business travelers, airlines discretely cater to families with young children who fly first class(Rosman, Katherine, “Frequent Criers,” Wall Street Journal, May 20, 2005, W1). Suppose a family’s value is $4,500 from traveling in first class and $1,500 from traveling in coach.
Analyze the following statement. Is garbage a positive or a negative externality? Why is a market solution practical here?Since the turn of the twentieth century, hog farmers in New Jersey fed Philadelphia garbage to their pigs. Philadelphia saved $3 million a year and reduced its garbage mound by
In the following, use the model in Exercise 3.7.a. What is the unregulated monopoly equilibrium?b. How could you optimally regulate the monopoly? What is the resulting (socially optimal)equilibrium? (Hint: See Solved Problem 17.2.) M 5. Allocating Property Rights to Reduce Externalities
Suppose that the only way to reduce pollution from paper production is to reduce output. The government imposes a tax on the monopoly producer that is equal to the marginal harm from the pollution.Show that the tax may raise welfare. (Hint: See Solved Problem 17.2.)
Suppose that the government knows the marginal cost, MC, curve of reducing pollution but is uncertain about the marginal benefit, MB, curve. With equal probability, the government faces a relatively high or a relatively low MB curve, so its expected MB curve is the same as the one in Figure
If global warming occurs, output of three of the major U.S. cash crops could decline by as much as 80% according to Roberts and Schenkler (2010).Crop yields increase on days when the temperature rises above 50°, but fall precipitously on days when it is above 86°. Given this relationship between
Connecticut announced that commercial fleet operators would get a tax break if they converted vehicles from ozone-producing gasoline to what the state said were cleaner fuels such as natural gas and electricity. For every dollar spent on the conversion of their fleets or building alternative
Suppose that the inverse demand curve for paper is p = 200 - Q, the private marginal cost (unregulated competitive market supply) is MCp = 80 + Q, and the marginal harm from gunk is MCg = Q.a. What is the unregulated competitive equilibrium?b. What is the social optimum?c. What specific tax (per
In Figure 17.3, the government may optimally regulate the paper market by taxing output. Given that the output tax remains constant, what are the welfare implications of a technological change that drives down the private marginal cost of production?
In Figure 17.1, could the government use a price ceiling or a price floor to achieve the optimal level of production?
In the paper mill example in this chapter, what are the optimal emissions fee and the optimal tax on output (assuming that only one fee or tax is applied)?
In 1998, the National Highway Traffic Safety Administration distributed the film Without Helmet Laws, We All Pay the Price. Two reasons for this title are that some injured motorcyclists are treated at public expense (Medicaid) and that the dependents of those killed in accidents receive public
Markowitz (2012) found that limiting the number of liquor stores reduces crime. To maximize welfare taking into account the harms associated with alcohol sales, how should a regulatory agency set the number of liquor licenses? Should the profit maximizing owner of a liquor store lobby for or
Australia required that incandescent light bulbs be phased out by 2010 in favor of the more fuelefficient compact fluorescent bulbs. Ireland’s ban started in 2009, and the United States started phasing out incandescent bulbs in 2012. These restrictions were designed to reduce carbon and global
Applying the model in Exercise 2.3, use calculus to determine the optimal level of H. M 3. Regulating Externalities
Let H = G - G be the amount that gunk, G, is reduced from the competitive level, G. The benefit of reducing gunk is B(H) = AHα. The cost is C(H) = Hβ. If the benefit is increasing but at a diminishing rate as H increases, and the cost is rising at an increasing rate, what are the possible ranges
In Figure 17.1, explain why area D + E + H is the externality cost difference between the social optimum and the private equilibrium.
Why isn’t zero pollution the best solution for society?Can there be too little pollution? Why or why not?
According to the digital media company Captivate Network, employees viewing the 2012 Olympics instead of working caused a $1.38 billion loss in productivity for U.S. companies. Is this productivity loss an example of a negative externality?Explain.2. The Inefficiency of Competition with
Other sports teams benefit financially from playing a team with a superstar whom fans want to see.Do such positive externalities lower social welfare?If not, why not? If so, what could the teams do to solve that problem?
In 2009, when the world was worried about the danger of the H1N1 influenza virus (swine flu), Representative Rosa DeLauro and Senator Edward Kennedy proposed the Healthy Families Act in Exercises = exercise is available on MyEconLab; * = answer appears at the back of this book; M = mathematical
When Star Wars Episode III: Revenge of the Sith opened at 12:01 a.m., Thursday, May 19, 2005, the most fanatical Star Wars fans paid $50 million for tickets to stay up until 3:00 to 4:00 a.m. Businesses around the country, especially those tied to high-tech industries, suffered reduced productivity
According to a study in the New England Journal of Medicine, your friendships or “social networks” are more likely than your genes to make you obese (Jennifer Levitz, “Can Your Friends Make You Fat?”Wall Street Journal, July 26, 2007, D1). If it is true that people who have overweight
Using information in the Challenge Solution, show how to calculate the price of fair insurance if the probability of being in a crash were as high as the frequency in 2001, 0.00000077? Use a graph to illustrate why a risk-averse person might buy unfair insurance. Show on the graph the risk premium
Is someone who acts as described in prospect theory always more likely or less likely to take a gamble than someone who acts as described by expected utility theory? Why? Are there conditions (such as on the weights) where you can answer this question definitively?6. Flight Insurance
Evan is risk-seeking with respect to gains and riskaverse with respect to losses. Louisa is risk-seeking with respect to losses and risk-averse with respect to gains. Illustrate both utility functions. Which person’s attitudes toward risk are consistent with prospect theory?
Before reading the rest of this exercise, answer the following two questions about your preferences:a. You are given $5,000 and offered a choice between receiving an extra $2,500 with certainty or flipping a coin and getting $5,000 more if heads or $0 if tails. Which option do you prefer?b. You are
In Solved Problem 16.6, advertising increases the probability of high demand to 80%. What is the minimum probability of high demand resulting from advertising such that Gautam decides to invest and advertise? M 5. Behavioral Economics and Uncertainty
Robert Green repeatedly and painstakingly applied herbicides to kill weeds that would harm his beet crops in 2007. However, in 2008, he planted beets genetically engineered to withstand Monsanto’s Roundup herbicide. Roundup destroys weeds but leaves the crop unharmed, thereby saving a farmer
Use a decision tree to illustrate how a kidney patient would decide whether to have a transplant operation. The patient currently uses a dialysis machine, which lowers her utility. If the operation is successful, her utility will return to its level before the onset of her kidney disease. However,
Use a decision tree to illustrate how a risk-neutral plaintiff in a lawsuit decides whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 60%. If the plaintiff wins,
Andy and Kim live together. Andy may invest$10,000 (possibly by taking on an extra job to earn the additional money) in Kim’s MBA education this year. This investment will raise the current value of Kim’s earnings by $24,000. If they stay together, they will share the benefit from the
After Hurricane Katrina in 2005, the government offered subsidies to people whose houses were destroyed. How does the expectation that subsidies will be offered again for future major disasters affect the probability that risk-averse people will buy insurance and the amount they buy? Use a utility
An insurance agent (interviewed in Jonathan Clements, “Dare to Live Dangerously: Passing on Some Insurance Can Pay Off,”Wall Street Journal, July 23, 2005, D1) states, “On paper, it never makes sense to have a policy with low deductibles or carry collision on an old car.” But the agent
probability of a burglary, where she would lose jewelry worth $70,000. She can buy an insurance policy for $15,000 that would fully reimburse the$70,000. Her utility function is U(X) = 4X0.5.a. What is the actuarially fair price for the insurance policy?b. Should she buy this insurance policy?c.
Jill possesses $160,000 worth of valuables. She faces a
Helen, the owner of Dubrow Labs, worries about the firm being sued for botched results from blood tests. If it isn’t sued, the firm expects to earn a profit of 100, but if it is successfully sued, its profit will be 10. Helen believes that the probability of a successful suit is 5%. If fair
Lori, who is risk averse, has two pieces of jewelry, each worth $1,000. She plans to send them to her sister’s firm in Thailand to be sold there. She is concerned about the safety of shipping them. She believes that the probability that any box shipped will not reach its destination is θ. Is her
Carolyn and Sanjay are neighbors. Each owns a car valued at $10,000. Neither has comprehensive insurance (which covers losses due to theft). Carolyn’s wealth, including the value of her car is $80,000.Sanjay’s wealth, including the value of his car is$20,000. Carolyn and Sanjay have identical
Suppose that Irma’s utility function with respect to wealth is U(W) = 100 + 100W - W2. Show that for W 6 10, Irma’s Arrow-Pratt risk-aversion measure increases with her wealth. (Hint: See Solved Problem 16.4.) M
Joanna is considering three possible jobs. The following table shows the possible incomes she might get in each job.For each job, calculate the expected value, the variance and the standard deviation. If Joanna is averse to risk (as measured by variance), what can you predict about her job choice?
Lisa just inherited a vineyard from a distant relative.In good years (when there is no rain or frost during harvest season), she earns $100,000 from the sale of grapes from the vineyard. If the weather is poor, she loses $20,000. Lisa’s estimate of the probability of good weather is 60%.a.
Mary’s utility function is U(W) = W0.33, where W is wealth. Is she risk averse? Mary has an initial wealth of $27,000. How much of a risk premium would she require to participate in a gamble that has a 50% probability of raising her wealth to $29,791 and a 50% probability of lowering her wealth
Hugo has a concave utility function of U(W) = W0.5. His only asset is shares in an Internet start-up company. Tomorrow he will learn the stock’s value. He believes that it is worth $144 with probability 2 3 and $225 with probability 1 3. What is his expected utility? What risk premium would he
In Solved Problem 16.3, what is Jen’s risk premium if her utility function were ln(W)? M
Given the information in Solved Problem 16.2, Irma prefers to buy the stock. Show graphically how high her certain wealth would have to be for her to choose not to buy the stock.
Suppose that an individual is risk averse and has to choose between $100 with certainty and a risky option with two equally likely outcomes: $100 - x and $100 + x. Use a graph (or math) to show that this person’s risk premium is smaller, the smaller x is (the less variable the gamble is).
Jen, in Exercise 2.2, may buy Stock A or Stock B.Stock A has a 50% chance of being worth $100 and 50% of being worth $200. Stock B’s value is $50 with a change of a half or $250 with a probability of 50%. Show that the two stocks have an equal expected value but different variances. Show that Jen
Jen’s utility function with respect to wealth is U(W) = 2W. Plot her utility function. Use your figure and calculus to show that Jen is risk averse.(Hint: You can also use calculus to see if she is risk averse by determining the sign of the second derivative of the utility function.) M
Guojun offers to bet Kristin that if a six-sided die comes up with one or two dots showing, he will pay her $3, but if it comes up with any other number of dots, she’ll owe him $2. Is that a fair bet for Kristin? M
Suppose that most people will not speed if the expected fine is at least $500. The actual fine for speeding is $800. How high must the probability of being caught and convicted be to discourage speeding? M 2. Attitudes Toward Risk
To discourage people from breaking the traffic laws, society can increase the probability that someone exceeding the speed limit will be caught and punished, or it can increase the size of the fine for speeding. Explain why either method can be used to discourage speeding. Which approach is a
What is the difference—if any—between an individual gambling at a casino and gambling by buying a stock? What is the difference for society?
The EZ Construction Company is offered a$20,000 contract to build a new deck for a house.The company’s profit if they do not have to sink piers (vertical supports) down to bedrock will be$4,000. However, if they have to sink the piers, they Exercises = exercise is available on MyEconLab; * =
By next year, your stock has a 25% chance of being worth $400 and a 75% probability of being worth$200. What are the expected value and the variance?
Asa buys a painting. There is a 20% probability that the artist will become famous and the painting will be worth $1,000. There is a 10% probability that the painting will be destroyed by fire or another disaster and become worthless. If the painting is not destroyed and the artist does not become
In a neighborhood with 1,000 houses, 5 catch fire(but are not damaged by high winds), 7 are damaged by high winds (but do not catch fire), and the rest are unharmed during a one-year period. What is the probability that a house is harmed by fire or high winds? M
In 2012, the Clarkson Community Schools in Clarkson, Michigan paid its starting teachers $38,087 employees with a bachelor’s degree and $41,802 with a master’s degree. (For simplicity, assume that these salaries stay constant and do not increase with experience.) Suppose you know that you want
Which is worth more to you: (a) a $10,000 payment today or (b) a $1,000-per-year higher salary for as long as you work? At what interest rate would (a)be worth more to you than (b)? Does your answer depend on how many years you expect to work?
At current interest rates, it pays for Bob to go to college if he graduates in four years. If it takes an extra year to graduate from college, does going to college still pay? Show how the figure in the Challenge Solution changes. Illustrate how the present value calculation changes using a formula
If the interest rate is near zero, should an individual go to college, given the information in the figure in the Challenge Solution? State a simple rule for determining whether this individual should go to college in terms of the areas labeled “Benefit” and“Cost” in the figure.
Trees, wine, and cattle become more valuable over time and then possibly decrease in value. Draw a figure with present value on the vertical axis and years (age) on the horizontal axis and show this relationship. Show in what year the owner should “harvest” such a good assuming that there is no
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