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Questions and Answers of Economics

The OPEC cartel is trying to determine the total amount of oil to sell on the world market. It estimates world demand for oil to be QW = 103.33 - P/6, where QW denotes the quantity of oil (in
Firm A is the dominant firm in a market where industry demand is given by QD = 48 - 4P. There are four “follower” firms, each with long-run marginal cost given by MC = 6 - QF. Firm A’s long-run
Two firms serve a market where demand is described by P = 120 - 5(Q1 + Q2). Each firm’s marginal cost is 60.a. Suppose each firm maximizes its own profit, treating the other’s quantity as
Firms M and N compete for a market and must independently decide how much to advertise. Each can spend either $10 million or $20 million on advertising. If the firms spend equal amounts, they split
In each of the following cases, provide a brief explanation of whether a prisoner’s dilemma is present. If so, suggest ways the dilemma can be overcome.a. When there is a bumper crop (a large
Economists Orley Ashenfelter and David Bloom studied disputes that were brought to arbitration between management and workers€™ unions. They found that being represented by a lawyer
Two firms produce differentiated products. Firm 1 faces the demand curve Q1 = 75 - P1 + .5P2. (A lower competing price robs the firm of some, but not all, sales. Thus, price competition is not as
Suppose instead that the firms in Problem 9 compete by setting quantities rather than prices. All other facts are the same. It is possible to rewrite the original demand equations as P1 = [150 -
Suppose four firms engage in price competition in a Bertrand setting where the lowest-price firm will capture the entire market. The firms differ with respect to their costs. Firm A’s marginal cost
In Problem 9, suppose that firm 2 acts as a price leader and can commit in advance to setting its price once and for all. In turn, firm 1 will react to firm 2’s price, according to the
Firm Z faces the price equation P = 50 + A.5 - Q, and the cost function C = 20Q + A, where A denotes advertising spending.a. Other things (price) held constant, does an increase in advertising
a. Using the marginal condition in Equation, show that an equivalent condition for the optimal level of advertising is (P = MC)Q/A = 1/EA, where EA = (∂Q/Q)/(∂A/A) is the elasticity of demand
Give a careful explanation of a Nash equilibrium. How is it different from a dominant-strategy equilibrium?
Is it ever an advantage to move first in a zero-sum game? When is it an advantage to have the first move in a non–zero-sum game? Provide an example in which it is advantageous to have the second
Consider the accompanying zero-sum payoff table.a. Does either player have a dominant strategy? Does either have a dominated strategy? Explain.b. Once you have eliminated one dominated strategy, see
a. Identify the equilibrium outcome(s) in each of the three payoff tables.b. In each table, predict the exact outcome that will occur and explain your reasoning.c. In Table III, suppose the column
Firms J and K produce compact-disc players and compete against one another. Each firm can develop either an economy player (E) or a deluxe player (D). According to the best available market research,
In mid-2010, Saudi Arabia and Venezuela (both members of OPEC) produced an average of 8 million and 3 million barrels of oil a day, respectively. Production costs were about $20 per barrel, and the
Two firms dominate the market for surgical sutures and compete aggressively with respect to research and development. The following payoff table depicts the profit implications of their different R&D
The neighboring towns of Arlington and Belmont are trying to decide in which locality to site a new waste incinerator. The towns will share the benefits of the facility and also share the costs. Each
Two superpowers are involved in a nuclear arms race. As shown in the payoff table below, each can choose to continue to build its weapons stock or alternatively to stop the escalation. The entries
The following payoff table depicts service competition between two hospitals in a southeastern city. (Each payoff represents profit in millions of dollars.)a. Does either hospital have a dominant
Consider the following zero-sum game.a. Does either player have a dominant strategy? Does either have a dominated strategy? Explain.b. Find the players€™ equilibriumstrategies.
Firm A and firm B are battling for market share in two separate markets. Market I is worth $30 million in revenue; market II is worth $18 million. Firm A must decide how to allocate its three
One way to lower the rate of auto accidents is strict enforcement of motor vehicle laws (speeding, drunk driving, and so on). However, maximum enforcement is very costly. The following payoff table
In the following game tree, players A and B alternate moves. At each turn, a player can terminate the game or pass the move to the next player. By passing, the player increases the rival€™s
The following payoff table lists the profits of a buyer and a seller. The seller acts first by choosing a sale price ($9, $8, or $6). The buyer then decides the quantity of the good to purchase (two
Suppose Coca-Cola and Pepsi announced plans to merge into a single global soft-drink company. What would be the possible effects on soft-drink consumers? What kind of regulatory scrutiny should the
Two firms in a city compete as duopolists and face the industry demand curve: P = 120 - .2Q, where Q denotes total output (in thousands of units). For each firm, LAC = LMC = $60 per unit. In
A state in the northwestern United States faces a number of problems concerning the production of its paper products. The wood pulp industry (from which paper is made) is a monopoly that generates a
In each of the following situations, explain whether an externality is present.a. Mine safety has improved in recent years. Nonetheless, mining accidents result in 50 to 100 deaths per year and
Consider the market for studded snow tires. Industry demand is given by P = 170 - 5Q, where Q is the number of tires in thousands and P is the price per tire in dollars. Studded tires are supplied in
Explain whether you agree or disagree with each of the following statements. In each case, indicate whether your position is based (implicitly or explicitly) on benefit-cost analysis or on some other
Two large manufacturing firms are major sources of airborne pollutants in a metropolitan area. Currently, each firm generates about 15 million units of pollution per year. The firms’ costs of
Three blocs of nations are beginning negotiations aimed at reducing the emissions of greenhouse gases (GHGs). The blocs are the United States, the European Community, and a coalition of developing
Real World Enterprises (RWE) provides a variety of “backroom” business services to other companies. It operates eight different facilities that employ large numbers of workers undertaking
a. A commonly used benefit-cost rule is to undertake a program if and only if its ratio of benefits to cost (both in present-value terms) is greater than 1 (B/C > 1). Does this rule make sense?b.
A city must decide whether to build a downtown parking garage (for up to 750 cars) and what rate to charge. It is considering two rates: a flat $1.50-per-hour rate or an all-day rate averaging $1 per
An industrial state has been generating increasing amounts of hazardous waste and is considering construction of a waste treatment facility. The key question is where to site it. The attitude of most
A state highway safety agency must allocate its budget for the next fiscal year. A total funding of $32 million has been granted for reducing fatalities and property damage due to automobile
a. Average back the decision tree below, supplying expected monetary values for points A through E.b. One of your fellow managers is worried that there are no probabilities given for the branches
In 1976, the parents of a seven-year-old boy sued a New York hospital for $3.5 million. The boy was blinded shortly after he was born two weeks premature. His parents claimed that hospital doctors
For five years, a firm has successfully marketed a package of multitask software. Recently, sales have begun to slip because the software is incompatible with a number of popular application
A European consortium has spent a considerable amount of time and money developing a new supersonic aircraft. The aircraft gets high marks on all performance measures except noise. In fact, because
A firm faces uncertain revenues and uncertain costs. Its revenues may be $120,000, $160,000, or $175,000, with probabilities .2, .3, and .5, respectively. Its costs are $150,000 or $170,000 with
Global Studios is thinking of producing a megafilm, Aqua World, which could be a megahit or a megaflop. Profit is uncertain for two reasons:(1) The cost of producing the film may be low or high,
As noted in the text, top management of BP adopted a “lax” approach to safety in its aggressive pursuit of oil discovery. Consider two alternative safety stances it could have adopted. Emulating
Firm A is facing a possible lawsuit by legal firm B. Firm B represents the family of Mr. Smith, who was killed in a motel fire (allegedly caused by faulty wiring). Firm A was the builder of the
In 1996, McDonald’s (MD) launched Campaign 55, reducing the prices of its “flagship” sandwiches with the objective of regaining market share. Before the launch, suppose MD’s management
As CEO of firm A, you and your management team face the decision of whether to undertake a $200 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a
Filene’s Basement, a Boston-based department store, has a policy of marking down the price of sale items each week that they go unsold. You covet an expensive brand of winter coat that is on sale
Consider once again the dilemma facing Consolidated Edison’s system operator. To keep things simple, we focus on one of the decisions before him: to shed or not to shed load. Suppose his choices
Consider once again the R&D strategies of the pharmaceutical company. Suppose the company€™s management is risk averse and has assessed the following utility values for the set of possible
In attempting to quantify its attitude toward risk, top management of the pharmaceutical company has reported certainty equivalent values for a variety of 50–50 risks. These are summarized in the
Put yourself in the yacht dealer’s shoes. You currently are considering other order quantities in addition to 50 and 100. Find the optimal order quantity, that is, the exact quantity that maximizes
It is time to buy a new car, and you have done a considerable amount of research on the matter over the past weeks. From consumer magazines and various online sources, you have reviewed an impressive
Just prior to baseball’s spring training season, you are asked to assess the probability that a particular baseball team will win the coming World Series. a. How would you go about making this
A health club has sent promotional material to a mailing list consisting of local college students, area doctors, and lawyers. The following table shows the record of individuals taking up the
The following table (compiled from police reports) shows the record of automobile accidents for three age groups over the last year in a five-county region.a. An analyst points out that of 57,051
Consider once again the decision to redesign an aircraft.a. Find the expected value of perfect information about the redesign program. Calculate separately the expected value of perfect information
Consider the following simplified version of the television game show Let’s Make a Deal. There is a grand prize behind one of three curtains; the other two curtains are empty. As a contestant, you
Opening a multimillion dollar musical on Broadway is the ultimate financial gamble. Hits such as The Phantom of the Opera can earn millions in profit. Disasters too numerous to name have meant
Recall the earlier example of assessing the risk of loan defaults. Suppose the bank€™s top managers are divided on whether to adopt the scoring system permanently. A number of top officers
Firm B is considering whether to pursue an R&D effort to develop a powerful new microchip. One concern with the design is that the chip might generate too much heat operating at high speeds.
A government agency suspects that one of the firms it has hired under a cost-plus contract is padding its bills to the government. If padding is going on and if the agency can prove its case in
On behalf of your company, you are preparing a price bid to supply a fixed quantity of a good to a potential buyer. You are aware that a number of competitors also are eager to obtain the contract.
A firm is looking for the best (i.e., lowest) price from one of two sellers. It can approach each seller only once (and at no cost). Seller X’s price is distributed uniformly between $30 and $40.
A firm anticipates an R&D program requiring as many as three stages. A successful program (sooner or later) will earn the firm a commercial profit of $20 million. The investment costs for the
Suppose you will be shown three prizes in order. You know absolutely nothing about how valuable the prizes might be; only after viewing all three can you determine which one you like best. You are
Carmakers acknowledge that a small percentage of new automobiles are “lemons.” In the early 1980s, Chrysler Corporation succeeded in winning back lost market share by offering buyers the chance
In the early 1990s, lawsuits charged Sears with massive fraud in its auto repair centers, alleging that mechanics were convincing customers that they needed expensive repairs when, in fact, they were
Suppose prospective clerical workers fall into one of two categories in equal numbers: high productivity (HP) and low productivity (LP). An HP worker’s value to the firm is $30,000 per year; an LP
As a benefit to employees, many universities offer their clerical and administrative employees free tuition for themselves and their families. Why might universities prefer this to simply offering
Five couples are having dinner at a fancy French restaurant. They expect that the total dinner bill will be split evenly five ways. How might this prior knowledge affect the diners’ menu
Each year, almost 200,000 men are diagnosed with prostate cancer. Decision making is complicated because there are up to five potential treatments, ranging from aggressive surgery to radiation to
Firm X has promised to deliver an order of industrial parts to firm Y. However, there is a small chance that firm X will have so many orders from customers that it cannot fulfill them all. If its
When a corporation offers shares of stock or other securities to the public, it hires an underwriter to conduct the sale. (The underwriter is an investment bank such as Morgan Stanley or Goldman
Since the mid-1980s, baseball teams have bid vigorously for free agents— players with six or more years of service who are free to sign with a new team. After signing a five-year contract with a
Many companies give out perquisites (the corner office, company cars, etc.) strictly on the basis of seniority. Likewise, companies frequently allocate tasks based on seniority. For example, many
Team decision making frequently mitigates information and coordination problems. What are some of the costs of teams?
For planning purposes, company headquarters seeks to obtain accurate information about the productive capacity of one of its plants. The plant manager knows that the facility’s capacity is Q =
A plaintiff is suing a defendant for $100,000. The cost of going to court is $15,000 for each side.a. The parties agree there is a 50 percent chance of the plaintiff’s winning the case. What is the
In labor negotiations, failure to reach a contract agreement frequently results in a labor strike or work slowdown. In each of the following situations, identify which side—labor or management—is
The developer of a new shopping mall is negotiating the terms of a store lease with a sporting goods firm. The developer is pressing the store for an increase in monthly rent. The store offers to pay
Firm S supplies inputs to firm B. Because producing the input is quite complicated, some defects are inevitable. Firm S can reduce the rate of defects at a cost. In turn, defective parts lower firm
An upstream paper mill releases moderate amounts of pollutants into a waterway. A downstream fishery suffers an economic cost from this pollution of $100,000 annually. This cost burden would fall to
The United Mine Workers (UMW) and the Association of Coal Producers are attempting to negotiate a new contract in which the issues at stake are a wage increase, the introduction of a right-to-strike
Firm B and firm S are in the process of negotiating a contract whereby S will synthesize a hormone for B. Besides the payment from B to S, three issues are involved:(1) Whether the hormone will be 95
Firm A seeks to acquire (privately owned) firm T whose ultimate dollar value is uncertain because of its possible liability for the past production of hazardous waste. The table shows A€™s
In the quantity-price contract example in Figure, we noted that the order quantity, Q = 20, is efficient. We can demonstrate that seemingly reasonable contracting methods can lead to inefficient
Firms A and B are negotiating to conclude a business deal worth $200,000 in total value to the parties. At issue is how this total value will be split. Firm A knows B will agree to a 50–50 split,
A buyer has value vb for a potential acquisition and believes the seller’s reservation price has the cumulative probability distribution F(v). The buyer chooses P to maximize its expected profit:
In December 2005, Time Warner (TW) was the subject of two different news stories. Its AOL division was pursuing an online advertising alliance with Microsoft, while continuing to have discussions
Firm A is attempting to acquire firm T but is uncertain about T’s value. It judges that the firm’s value under current management (call this vT) is in the range of $60 to $80 per share, with all
Firm X can produce a necessary component in-house at a cost of 10 or purchase it from one of three suppliers (A, B, or C) whose costs are 8, 7, and 5, respectively. X can approach the firms in any
In a second-bid auction, buyers submit sealed bids, and the highest bidder obtains the item for sale but pays the seller an amount equal to the second highest bid.a. Suppose buyers hold different
On a fateful week before Christmas, Paramount Pictures was praying for box-office success for the costliest film it had ever produced. Before opening, the film’s publicity had been all bad,
The Internal Revenue Service has organized a sealed-bid auction to sell an office building whose owners have failed to pay back taxes.a. As a real-estate developer, you estimate the value of the
Private companies frequently approach your consulting firm to undertake special projects and provide advice to management. As a senior consultant, one of your jobs is to quote a price for these
When a consumer searches on Google, related advertisements (so-called sponsored links) appear next to the results. Firms bid for top placement on the page for their links. In a Google ad auction, the

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