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Questions and Answers of Economics

Consider an employee who does not receive employer-based health insurance and must divide her $700 per week in after-tax income between health insurance and “other goods.” Draw this worker’s
An internal study at Mimeo Corporation—a manufacturer of low-end photocopiers—revealed that each of its workers assembles three photocopiers per hour and is paid $3 for each assembled copier.
The Einstein Bagel Corp. offers a frequent buyer program whereby a consumer receives a stamp each time she purchases one dozen bagels for $5. After a consumer accrues 10 stamps, she receives one
A common marketing tactic among many liquor stores is to offer their clientele quantity (or volume) discounts. For instance, the second-leading brand of wine exported from Chile sells in the United
Suppose that a CEO’s goal is to increase profitability and output from her company by bolstering its sales force and that it is known that profits as a function of output are π = 25q – q2 (in
Suppose that the owner of Boyer Construction is feeling the pinch of increased premiums associated with workers’ compensation and has decided to cut the wages of its two employees (Albert and Sid)
A recent study by Web Mystery Shoppers International indicates that holiday gift cards are becoming increasingly popular at online retailers. Two years ago, online shoppers had to really hunt at most
Recently, an Internet service provider in the UK implemented a “no-strings US-style flat-rate plan” whereby its subscribers receive unlimited dial-up Internet access for a flat monthly fee of
1. Determine which, if any, of Properties 4??1 through 4??4 are violated by the indifference curves shown in the following diagram. 2. The average 15-year-old purchases 12 CDs and 15 cheese pizzas
A firm can manufacture a product according to the production functionQ = F(K, L) = K3/4 L 1/4a. Calculate the average product of labor, APL, when the level of capital is fixed at 16 units and the
A firm??s product sells for $2 per unit in a highly competitive market. The firm produces output using capital (which it rents at $75 per hour) and labor (which is paid a wage of $15 per hour under a
Explain the difference between the law of diminishing marginal returns and the law of diminishing marginal rate of technical substitution.
An economist estimated that the cost function of a single-product firm is C(Q) = 50 + 25Q + 30 Q2 + 5 Q3Based on this information, determine:a. The fixed cost of producing 10 units of output.b. The
A manager hires labor and rents capital equipment in a very competitive market. Currently the wage rate is $6 per hour and capital is rented at $12 per hour. If the marginal product of labor is 50
A firm??s fixed costs for 0 units of output and its average total cost of producing different output levels are summarized in the table below. Complete the table to find the fixed cost, variable
A multiproduct firm’s cost function was recently estimated asC(Q1, Q2) = 75 – 0.25 Q1 Q2 + 0.1Q21 + 0.2Q22a. Are there economies of scope in producing 10 units of product 1 and 10 units of
Explain the difference between fixed costs, sunk costs, and variable costs. Provide an example that illustrates that these costs are, in general, different.
A firm produces output according to a production function Q = F(K,L) = min {2K,4L}.a. How much output is produced when K = 2 and L = 3?b. If the wage rate is $30 per hour and the rental rate on
A firm produces output according to the production function Q = F(K,L) = 2K + 4L.a. How much output is produced when K = 2 and L = 3?b. If the wage rate is $30 per hour and the rental rate on capital
In an effort to stop the migration of many of the automobile manufacturing facilities from the Detroit area, Detroit’s city council is considering passing a statute that would give investment tax
You were recently hired to replace the manager of the Roller Division at a major conveyor-manufacturing firm, despite the manager’s strong external sales record. Roller manufacturing is relatively
You are a manager for Herman Miller—a major manufacturer of office furniture. You recently hired an economist to work with engineering and operations experts to estimate the production function for
Recently, the Boeing Commercial Airline Group (BCAG) recorded orders for more than 15,000 jetliners and delivered more than 13,000 airplanes. To maintain its output volume, this Boeing division
You are a manager at Glass Inc.??a mirror and window supplier. Recently, you conducted a study of the production process for your single-side encapsulated window. The results from the study are
A local restaurateur who had been running a profitable business for many years recently purchased a three-way liquor license. This license gives the owner the legal right to sell beer, wine, and
In the wake of the energy crisis in California, many electricity generating facilities across the nation are reassessing their projections of future demand and capacity for electricity in their
The A-1 Corporation supplies airplane manufacturers with preformed sheet metal panels that are used on the exterior of aircraft. Manufacturing these panels requires only five sheet metal??forming
According to The Wall Street Journal, Mitsubishi Motors recently announced a major restructuring plan in an attempt to reverse declining global sales. Suppose that as part of the restructuring plan
Hyundai Heavy Industries Co. is one of Korea’s largest industrial producers. According to an article in BusinessWeek Online, the company is not only the world’s largest shipbuilder but also
In the aftermath of a hurricane, an entrepreneur took a one-month leave of absence (without pay) from her $4,000 per month job in order to operate a kiosk that sold fresh drinking water. During the
You are the manager of a large but privately held online retailer that currently uses 17 unskilled workers and 6 semiskilled workers at its warehouse to box and ship the products it sells online.
Discuss the optimal method for procuring inputs that have well-defined and measurable quality specifications and require highly specialized investments. What are the primary advantages and
Discuss the optimal method for procuring a modest number of standardized inputs that are sold by many firms in the marketplace. What are the primary advantages and disadvantages of using this method
Identify whether each of the following transactions involves spot exchange, contract, or vertical integration.a. Barnacle, Inc., has a legal obligation to purchase 2 tons of structural steel per week
Explain why automobile manufacturers produce their own engines but purchase mirrors from independent suppliers.
Identify the type of specialized investment that each of the following situations requires.a. You hire an employee to operate a machine that only your company uses.b. An aerosol canning company
Describe how a manager who derives satisfaction from both income and shirking allocates a 10-hour day between these activities when paid an annual, fixed salary of $125,000. When this same manager is
Compare the advantages and disadvantages of using spot checks/hidden video cameras in the workplace and pay-for-performance pay schemes as means to influence worker performance.
Discuss the impact of the following factors on the optimal method of procuring an input.a. Benefits from specialization.b. Bureaucracy costs.c. Opportunism on either side of the transaction.d.
Suppose the marginal benefit of writing a contract is $50, independent of its length. Find the optimal contract length when the marginal cost of writing a contract of length L is:a. MC(L) = 10 +
Suppose the marginal cost of writing a contract of length L is MC(L) = 10 + 2L. Find the optimal contract length when the marginal benefit of writing a contract is:a. MB(L) = 100.b. MB(L) = 150.c.
The division of a large office services company that makes high-end copiers recently signed a five-year, $25 million contract for IT services from CGI Group, a Canadian information technology
The Wall Street Journal reported that Juniper Networks, Inc.—a maker of company network equipment—plans to offer its more than 1,000 employees the opportunity to reprice their stock options.
Teletronics reported record profits of $100,000 last year and is on track to exceed those profits this year. Teletronics competes in a very competitive market where many of the firms are merging in
A few years ago, the Boston Globe reported that the city of Boston planned to spend $14 million to convert the FleetCenter sports arena and entertainment center into an appropriate venue for the
According to BusinessWeek Online, worldwide spending on IT services and outsourcing are expected to modestly grow through the end of this decade. Growth in business-process outsourcing (BPO)—the
You are a management consultant for a 30-year old partner in a large law firm. In a meeting, your client says: “According to an article in the New York Times, 57 percent of large law firms have a
Automated Data Processing (ADP) provides computer software and services to a host of companies, including automobile dealerships. ADP charges dealerships a monthly lease for hardware, software, and
1. During the beginning of the 21st century, the growth in computer sales declined for the first time in almost two decades. As a result, PC makers dramatically reduced their orders of computer chips
1. Suppose that Honda is on the verge of signing a 15-year contract with TRW to supply airbags. The terms of the contract include providing Honda with 85 percent of the airbags used in new
1. EFI—a material handling company—pays each of its salespersons a base salary plus a percentage of revenues generated. To reduce overhead, EFI has switched from giving each salesperson a company
Ten firms compete in a market to sell product X. The total sales of all firms selling the product are $1 million. Ranking the firms’ sales from highest to lowest, we find the top four firms’
An industry consists of three firms with sales of $200,000, $500,000, and $400,000.a. Calculate the Herfindahl-Hirschman index (HHI).b. Calculate the four-firm concentration ratio (C4).c. Based on
Suppose the own price elasticity of market demand for retail gasoline is –0.9, the Rothschild index is 0.6, and a typical gasoline retailer enjoys sales of $1.2 million annually. What is the price
A firm has $1 million in sales, a Lerner index of 0.65, and a marginal cost of $35, and competes against 1,000 other firms in its relevant market.a. What price does this firm charge its customers?b.
Under what conditions might the Justice Department approve a merger between two companies that operate in an industry with a premerger Herfindahl-Hirschman index of 2,900 if the postmerger index is
Based only on the knowledge that the premerger market share of two firms proposing to merge was 20 percent each, an economist working for the Justice Department was able to determine that, if
Consider a firm that operates in a market that competes aggressively in prices. Due to the high fixed cost of obtaining the technology associated with entering this market, only a limited number of
Based on the information given, indicate whether the following industry is best characterized by the model of perfect competition, monopoly, monopolistic competition, or oligopoly.a. Industry A has a
1. The four-firm concentration ratios for industries X and Y are 89 percent and 62 percent, respectively, while the corresponding Herfindahl-Hirschman indexes are 2,600 and 1,200. The Dansby-Willig
You work at a firm on Wall Street that specializes in mergers, and you are the team leader in charge of getting approval for a merger between two major beer manufacturers in the United States. While
Forey, Inc., competes against many other firms in a highly competitive industry. Over the last decade, several firms have entered this industry and, as a consequence, Forey is earning a return on
Firms like Papa John’s, Domino’s, and Pizza Hut sell pizza and other products that are differentiated in nature. While numerous pizza chains exist in most locations, the differentiated nature of
Which of the following would most likely be scrutinized under the FTC and DOJ Horizontal Merger Guidelines?a. Two automakers steeped in tradition—Daimler-Benz AG and Chrysler Corporation—merge.b.
Nationwide Bank has approached Hometown Bank with a proposal to merge. The following table lists the sales of the banks in the area. Use this information to calculate the four-firm concentration
Suppose Fiat recently entered into an Agreement and Plan of Merger with Case for $4.3 billion. Prior to the merger, the market for four-wheel-drive tractors consisted of five firms. The market was
Use the estimated elastic-cities in Table 7??4 to calculate the Rothschild index for each industry. Based on these calculations, which industry most closely resembles perfect competition? Which
Several years ago, Pfizer and Warner-Lambert agreed to a $90 billion merger, thus creating one of the world’s largest pharmaceutical companies. Pharmaceutical companies tend to spend a greater
Many MBAs who ventured into the ??dot-com?? world of the late 1990s found themselves unemployed by 2001 as many firms in that industry ceased to exist. However, during their tenure with these
A decade ago, five firms supplied amateur color film in the United States: Kodak, Fuji, Konica, Agfa, and 3M. From a technical viewpoint, there was little difference in the quality of color film
Del Monte has a long and rich tradition in the American food processing industry. It is perhaps best known for packaging canned fruits and vegetables. Part of its success has involved acquiring other
In January 2007, XM enjoyed about 58 percent of satellite radio subscribers, and Sirius had the remaining 42 percent. Both firms were suffering losses, despite their dominance in the satellite radio
Recently, the Federal Communications Commission (FCC) implemented “local number portability” rules allowing cellular phone consumers to switch cellular providers within the same geographic area
The accompanying graph (top of next page) summarizes the demand and costs for a firm that operates in a perfectly competitive market.a. What level of output should this firm produce in the short
A firm sells its product in a perfectly competitive market where other firms charge a price of $80 per unit. The firm??s total costs are C(Q) = 40 + 8Q + 2Q2.a. How much output should the firm
The accompanying graph (bottom of this page) summarizes the demand and costs for a firm that operates in a monopolistically competitive market.a. What is the firm??s optimal output?b. What is the
You are the manager of a monopoly, and your demand and cost functions are given by P = 200 – 2Q and C(Q) = 2,000 + 3Q2, respectively.a. What price–quantity combination maximizes your firm’s
You are the manager of a firm that produces a product according to the cost function C(qi) = 100 + 50qi – 4qi2 + qi3. Determine the short-run supply function if:a. You operate a perfectly
The accompanying diagram shows the demand, marginal revenue, and marginal cost of a monopolist.a. Determine the profit-maximizing output and price.b. What price and output would prevail if this
You are the manager of a monopolistically competitive firm, and your demand and cost functions are given by Q = 20 – 2P and C(Q) = 104 – 14Q + Q2.a. Find the inverse demand function for your
The elasticity of demand for a firm’s product is –2 and its advertising elasticity of demand is 0.1.a. Determine the firm’s optimal advertising-to-sales ratio.b. If the firm’s revenues are
A monopolist’s inverse demand function is P = 100 – Q. The company produces output at two facilities; the marginal cost of producing at facility 1 isMC1(Q1) = 4Q1, and the marginal cost of
The manager of a local monopoly estimates that the elasticity of demand for its product is constant and equal to –4. The firm’s marginal cost is constant at $10 per unit.a. Express the firm’s
You are the manager of a small U.S. firm that sells nails in a competitive U.S. market (the nails you sell are a standardized commodity; stores view your nails as identical to those available from
You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($125 million last year) and a low marginal cost of producing the
The second largest public utility in the nation is the sole provider of electricity in 32 counties of southern Florida. To meet the monthly demand for electricity in these counties, which is given by
You are the manager of College Computers, a manufacturer of customized computers that meet the specifications required by the local university. Over 90 percent of your clientele consists of college
You are the general manager of a firm that manufactures personal computers. Due to a soft economy, demand for PCs has dropped 50 percent from the previous year. The sales manager of your company has
You are a manager at Spacely Sprockets??a small firm that manufactures Type A and Type B bolts. The accounting and marketing departments have provided you with the following information about the
In a statement to Gillette’s shareholders, Chairman and CEO James Kilts indicated, “Despite several new product launches, Gillette’s advertising-to-sales declined dramatically . . . to 6.5
According to the American Metal Markets Magazine, the spot market price of U.S. hot rolled steel recently reached $580 per ton. Less than a year ago this same ton of steel was only $260. A number of
The French government announced plans to convert state-owned power firms EDF and GDF into separate limited companies that operate in geographically distinct markets. BBC News reported that France’s
The owner of an Italian restaurant has just been notified by her landlord that the monthly lease on the building in which the restaurant operates will increase by 20 percent at the beginning of the
Last month you assumed the position of manager for a large car dealership. The distinguishing feature of this dealership is its “no hassle” pricing strategy; prices (usually well below the
When the first Pizza Hut opened its doors back in 1958, it offered consumers one style of pizza: its Original Thin Crust Pizza. Since its modest beginnings, Pizza Hut has established itself as the
The graph that accompanies this question illustrates two demand curves for a firm operating in a differentiated product oligopoly. Initially, the firm charges a price of $60 and produces 10 units of
The inverse market demand in a homogeneous-product Cournot duopoly is P = 100 – 2(Q1 + Q2) and costs are C1(Q1) = 12Q1 and C2(Q2) = 20Q2.a. Determine the reaction function for each firm.b.
The following diagram illustrates the reaction functions and isoprofit curves for a homogeneous-product duopoly in which each firm produces at constant marginal cost.a. If your rival produces 50
The inverse demand for a homogeneous-product Stackelberg duopoly is P = 20,000 –5Q. The cost structures for the leader and the follower, respectively, are CL(QL) = 3,000QL and CF (QF) = 4,000QF.a.
Consider a Bertrand oligopoly consisting of four firms that produce an identical product at a marginal cost of $100. The inverse market demand for this product is P = 500 – 2Q.a. Determine the

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