Questions and Answers of Managerial Economics And Business Strategy

What is the significance of uncertainty for the goal of profit maximization?
If you operated a small restaurant, what factors might serve as constraints on profit maximization?
What is meant by maximizing?
What are the principal characteristics of the two major types of business firms?
Business firms perform what major functions?
What are some examples of firms operating in more than one industry?
Would you regard firms producing toasters, refrigerators, and air conditioners as constituting separate industries, or is each an element of the electrical appliance industry? Discuss.
As the term industry is usually used, does potato farming constitute an industry? Law practice? University teaching?
What is the difference between a firm and an industry? Between a firm and a plant?
Can a definition be "right" or "wrong"? Explain.
What aspects of the behavior of the pendulum of a grandfather clock would you mention if you were analyzing its static properties; that is, how would you describe the equilibrium posi-tion of the
Distinguish between partial and general equilibrium theory.
Should economists make policy recommendations? What if two economists offer different recommendations? How does one decide which economist, if either, should be trusted?
In economic analysis, an equilibrium position is often described as an "optimum." Do you see any danger in this association of ideas? Discuss.
Classical hydrodynamics deals with the properties of "ideal fluids" that are entirely lacking such properties as viscosity and friction. No such fluid exists in practice; even air is
"The generality of a theoretical model cannot be determined except in relation to another theoretical model that is similar in structure, or in relation to a particular set of phenomena that the
It has been suggested that the only difference between macro- and microeconomics is that the former deals with larger numbers. Does this seem to you a suitable basis for the distinction?Discuss.
Why is empirical work completely futile without some analytical framework?
In what sense can empirical studies show that a principle is not applicable in a particular case, yet never prove that a principle is applicable?
Discuss the statement: "Economic theory does not provide the answers to a particular question but rather serves as a guide to the facts necessary to obtain an answer."
If the results anticipated from the use of an economic principle in a particular case do not occur, what are likely to be the sources of the difficulty?
What are economic principles? What is an economic model?
What is the purpose of economic theory?
23. Moses Inc. is a small electric company that provides power to customers in a small rural area in the Southwest. The company is currently maximizing its profits by selling electricity to consumers
22. Evaluate this statement: “If the U.S. imposed a uniform excise tariff on all foreign imports, all U.S. businesses and workers would benefit. Consequently, if a bill to impose a uniform excise
21. Suppose that, prior to the passage of the Truth in Lending Simplification Act and Regulation Z, the demand for consumer loans was given by(in billions of dollars) and the supply of consumer loans
20. Canada’s forestry industry (composed mainly of those involved in the lumber industry) directly employs about 370,000 workers and indirectly employs an additional 510,000 people in support
19. The U.S. International Trade Commission’s committee in charge of the global safeguard investigation involving imports of steel has announced its recommendations to be forwarded to the
18. China’s entry into the World Trade Organization (WTO) is likely to create more competition between local and foreign firms, as well as provide China greater access to the market for exports.
17. Enrodes is a monopoly provider of residential electricity in a region of northern Michigan. Total demand by its 2 million households is Qd 1,000 P, and Enrodes can produce electricity at a
16. Section 16(a) of the Securities and Exchange Act of 1934, as amended in 1990, requires that the officers, directors, and principal shareholders of companies disclose the extent of their ownership
15. You are the manager of a paper mill and have been subpoenaed to appear before a joint session of the Senate Consumer Affairs and the Senate Environmental subcommittees. The Consumer Affairs
14. Awell-known conglomerate that manufactures a multitude of noncompeting consumer products instituted a corporatewide initiative to encourage the managers of its many divisions to share consumer
13. Social Dynamo Corporation earned profits last year of $49 million on sales of $500 million. During the same period, its major competitor—EIO Corp.—enjoyed sales of $490 million and earned
12. Between 1972 and 1981, Texaco sold gasoline to independent Texaco retailers at “retail tank wagon prices” but granted substantial discounts to distributors Gull and Dompier. Gull resold the
11. Attorneys for Eastman Kodak argued in front of the U.S. Supreme Court to defend the company against charges levied by several independent firms that provide service for machines sold by Eastman
10. Is “fairness” the economic basis for government laws and regulations designed to remedy market failures? If so, why; if not, what is the economic basis?
9. Explain, using precise economic terminology, the economic rationale for laws against insider trading.
8. The accompanying diagram depicts a monopolist whose price is regulated at$10 per unit. Use this figure to answer the questions that follow.a. What price will an unregulated monopoly charge?b. What
7. Suppose that the U.S. Congress passes legislation that imposes a one-time lump-sum tariff on the product that a foreign firm exports to the United States.a. What happens to the foreign firm’s
6. Consider a competitive market served by many domestic and foreign firms.The domestic demand for these firms’ product is Qd 500 1.5P. The supply function of the domestic firms is QSD = 50
5. As the manager of a monopoly, you face potential government regulation.Your inverse demand is P 25 Q, and your costs are C(Q) 5Q.a. Determine the monopoly price and output.b. Determine the
4. There are two workers. Each worker’s demand for a public good is P 20 Q.The marginal cost of providing the public good is $24. The accompanying graph summarizes the relevant information.a.
3. You are an industry analyst that specializes in an industry where the market inverse demand is P 100 5Q. The external marginal cost of producing the product is MCExternal 10Q, and the
2. Use the accompanying graph to answer the questions that follow.a. Suppose this monopolist is unregulated.(1) What price will the firm charge to maximize its profits?(2) What is the level of
1. You are the manager in a market composed of five firms, each of which has a 20 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius
23. Evaluate the following: “Since a rival’s profit-maximizing price and output depend on its marginal cost and not its fixed costs, a firm cannot profitably lessen competition by implementing a
22. The CEO of a regional airline recently learned that its only competitor is suffering from a significant cash-flow constraint. The CEO realizes that its competitor’s days are numbered, but has
21. By the end of 1995, Netscape’s share of the browser market grew to 90 percent by continually upgrading its product to include new features such as e-mail and video capabilities. Shortly
20. Bank 1 and Bank 2 are considering entering a compatibility agreement that would permit the users of each bank’s ATMs access to the other bank’s ATMs.Bank 1 has a network of branches and
19. You are the manager of 3D Designs—a large imaging company that does graphics and Web design work for companies. You and your only competitor are contemplating the purchase of a new 3-D imaging
18. Argyle is a large, vertically integrated firm that manufactures sweaters from a rare type of wool produced on its sheep farms. Argyle has adopted a strategy of selling wool to companies that
17. During the dot-com era, mergers among some brokerage houses resulted in the acquiring firm paying a premium on the order of $100 for each of the acquired firm’s customers. Is there a business
16. Barnacle Industries was awarded a patent over 15 years ago for a unique industrial strength cleaner that removes barnacles and other particles from the hulls of ships. Thanks to its monopoly
15. Anumber of professional associations, such as the American Medical Association and the American Bar Association, support regulations that make it more costly for their members (for example,
14. During the early days of the Internet, most dot-coms were driven by revenues rather than profits. Alarge number were even driven by “hits” to their site rather than revenues. This all changed
13. Suppose that, prior to other firms entering the market, the maker of a new smartphone (Way Cool, Inc.) earns $100 million per year. By reducing its price by 50 percent, Way Cool could discourage
12. Between 1995 and 1997, American Airlines competed in the Dallas/Ft Worth Airport against several other low-cost carriers. In response to these low-cost carriers, American Airlines reduced its
11. UNIX is a powerful multiuser operating system designed for use with servers.UNIX’s popularity has grown since it was developed by Bell Labs in 1969, as record numbers of users are logging onto
10. In the following game, determine the maximum amount you would be willing to pay for the privilege of moving (a) first, (b) second, or (c) third: There are three players, you and two rivals. The
9. You are the manager of an international firm headquartered in Antarctica. You are contemplating a business tactic that will permit your firm to raise prices and increase profits in the long run by
8. In this chapter’s Headline, we learned that Barkley Enterprises benefits by announcing well in advance of the trade show that its new marketing plan will target professionals. Suppose you are an
7. Two firms compete in a homogeneous product market where the inverse demand function is P 10 2Q (quantity is measured in millions). Firm 1 has been in business for one year, while firm 2 just
6. The market for taxi services in a Midwestern town is monopolized by firm 1.Currently, any taxi services firm must purchase a $40,000 “medallion” from the city in order to offer its services.
5. Two firms compete in a Cournot fashion. Firm 1 successfully engages in an activity that raises its rival’s marginal cost of production.a. Provide two examples of activities that might raise
4. A firm is considering building a two-way network that links 10 users. The cost of building the network is $6,000.a. How many potential connection services does this network provide?b. If each user
3. Consider the following simultaneous move game:a. What is the maximum amount player 1 should be willing to pay for the opportunity to move first instead of moving at the same time as player
2. A monopolist earns $40 million annually and will maintain that level of profit indefinitely, provided that no other firm enters the market. However, if another firm enters the market, the
1. A potential entrant can produce at the same cost as the monopolist illustrated in the figure on the next page. The monopolist’s demand curve is given by DM, and its average cost curve is AC.a.
23. You manage a company that competes in an industry that is comprised of five equal-sized firms that produce similar products. A recent industry report indicates that the market is fairly
22. An analyst for FoodMax estimates that the demand for its “Brand X” potato chips is given by ln ln PX + 4PY + 1.5 ln AX, where QX and PX are the respective quantity and price of a four-ounce
21. Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists’ definition of the relevant market,
20. BAA is a private company that operates some of the largest airports in the United Kingdom, including Heathrow and Gatwick. Suppose that BAA recently commissioned your consulting team to prepare a
19. Many home improvement retailers like Home Depot and Lowes have lowprice guarantee policies. At a minimum, these guarantees promise to match a rival’s price, and some promise to beat the lowest
18. As a manager of a chain of movie theaters that are monopolies in their respective markets, you have noticed much higher demand on weekends than during the week. You therefore conducted a study
17. Blue Skies Aviation is a manufacturer of small single-engine airplanes. The company is relatively small and prides itself on being the only manufacturer of customized airplanes. The company’s
16. You own a franchise of rental car agencies in Florida. You recently read a report indicating that about 80 percent of all tourists visit Florida during the winter months in any given year, and
15. The American Baker’s Association reports that annual sales of bakery goods last year rose 15 percent, driven by a 50 percent increase in the demand for bran muffins. Most of the increase was
14. According to the Cahner’s In-Stat Group, the number of worldwide wireless phone subscribers will soon reach the 1 billion mark. In the United States alone, the number of wireless subscribers is
13. You are the manager of a local sporting goods store and recently purchased a shipment of 60 sets of skis and ski bindings at a total cost of $30,000 (your wholesale supplier would not let you
12. You are a pricing analyst for QuantCrunch Corporation, a company that recently spent $10,000 to develop a statistical software package. To date, you only have one client. A recent internal study
11. You are the owner of a local Honda dealership. Unlike other dealerships in the area, you take pride in your “No Haggle” sales policy. Last year, your dealership earned record profits of $1.5
10. Does the presence of online auction sites, such as eBay, make it easier or harder for traditional retailers and wholesalers to engage in profitable price discrimination? Explain.
9. According to some translations, Nobel Laureate Albert Einstein once said,“God does not play dice with the universe.” Does this mean that a profitmaximizing firm would never use something like
8. A large firm has two divisions: an upstream division that is a monopoly supplier of an input whose only market is the downstream division that produces the final output. To produce one unit of the
7. You are the manager of a firm that produces products X and Y at zero cost. You know that different types of consumers value your two products differently, but you are unable to identify these
6. A monopoly is considering selling several units of a homogeneous product as a single package. A typical consumer’s demand for the product is Qd 50 .25P, and the marginal cost of production is
5. You are the manager of a monopoly. A typical consumer’s inverse demand function for your firm’s product is P 100 20Q, and your cost function is C(Q) 20Q.a. Determine the optimal two-part
4. You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1’s elasticity of demand is 2, while group 2’s is 6. Your marginal
3. You are the manager of a firm that charges customers $16 per unit for the first unit purchased, and $12 per unit for each additional unit purchased in excess of one unit. The accompanying graph
2. Based on the following graph (which summarizes the demand, marginal revenue, and relevant costs for your product), determine your firm’s optimal price, output, and the resulting profits for each
1. Based on the best available econometric estimates, the market elasticity of demand for your firm’s product is 1.50. The marginal cost of producing the product is constant at $75, while average
23. You manage a company that competes in an industry that is comprised of five equal-sized firms. A recent industry report indicates that a tariff on foreign imports would boost industry profits by
22. An office manager is concerned with declining productivity. Despite the fact that she regularly monitors her clerical staff four times each day—at 9:00 AM, 11:00 AM, 1:00 PM, and again at 3:00
21. Japanese officials are considering a new tariff on imported pork products from the United States in an attempt to reduce Japan’s reliance on U.S. pork. Due to political pressure, the U.S.
20. Suppose that U.S.-based Qualcomm and European-based T-Mobile are contemplating infrastructure investments in a developing mobile telephone market.Qualcomm presently uses a code-division multiple
19. You are the manager of GearNet and must decide how many Internet hubs to produce to maximize your firm’s profit. GearNet and its only rival (Net-Works) sell dual-speed Internet hubs that are
18. You are a pricing manager at Argyle Inc.—a medium-sized firm that recently introduced a new product into the market. Argyle’s only competitor is Baker Company, which is significantly smaller
17. At a time when demand for ready-to-eat cereal was stagnant, a spokesperson for the cereal maker Kellogg’s was quoted as saying, “ . . . for the past several years, our individual company
16. You are the manager of a firm that manufactures front and rear windshields for the automobile industry. Due to economies of scale in the industry, entry by new firms is not profitable. Toyota has

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