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managerial economics and business strategy
Questions and Answers of
Managerial Economics And Business Strategy
6. Suppose demand and supply are given by Qd 50 P and Qs P 10.a. What are the equilibrium quantity and price in this market?b. Determine the quantity demanded, the quantity supplied, and the
5. The demand curve for product X is given by 460 4Px.a. Find the inverse demand curve.b. How much consumer surplus do consumers receive when Px $35?c. How much consumer surplus do consumers
4. The demand for good X is given byResearch shows that the prices of related goods are given by Py $5,900 and Pz $90, while the average income of individuals consuming this product is M
3. Suppose the supply function for product X is given by 50 + 0.5Px 5Pz.a. How much of product X is produced when Px $500 and Pz $30?b. How much of product X is produced when Px $50 and Pz
2. Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations:a. The price of input A increases.b. An excise tax
1. The X-Corporation produces a good (called X) that is a normal good. Its competitor, Y-Corp., makes a substitute good that it markets under the name “Y. ”Good Y is an inferior good.a. How will
33. Suppose you are the manager of a chain of computer stores. For obvious reasons you have been closely following developments in the computer industry, and you have just learned that Congress has
32. The manager of a fleet of cars currently rents them out at the market price of $49 per day, with renters paying for their own gasoline and oil. In a front-page newspaper article, the manager
31. One of the members of the Senate Foreign Relations Committee has studied your analysis of Chinese privatization (Demonstration Problems 2–4 and 2–5) but is worried that the freemarket price
30. Based on your answer to the Senate Foreign Relations Committee (Demonstration Problem 2–4), one of the senators raises a concern that the free market price might be too high for the typical
29. According to an article in China Daily, China recently accelerated its plan to privatize tens of thousands of state-owned firms. Imagine that you are an aide to a senator on the Foreign Relations
28. Your research department estimates that the supply function for television sets is given bywhere Px is the price of TV sets, Pr represents the price of a computer monitor, and Pw is the price of
27. A typical consumer’s demand for the Happy Beverage Company’s product looks like that in Figure 2–5(a). If the firm charges a price of $2 per liter, how much revenue will the firm earn and
26. An economic consultant for X Corp. recently provided the firm’s marketing manager with this estimate of the demand function for the firm’s product:where represents the amount consumed of good
25. Suppose B(Q) = 10Q - 2Q2 and C(Q) = 2 + Q2. What value of the managerial control variable, Q, maximizes net benefits?
24. Your instructor may assign additional problem-solving exercises (called memos)that require you to apply some of the tools you learned in this chapter to make a recommendation based on an actual
23. Two months ago, the owner of a car dealership (and a current football star) significantly changed his sales manager’s compensation plan. Under the old plan, the manager was paid a salary of
22. You are the manager of Local Electronics Shop (LES), a small brick-and-mortar retail camera and electronics store. One of your employees proposed a new online strategy whereby LES lists its
21. Brazil points to its shrimp-farming industry as an example of how it can compete in world markets. One decade ago, Brazil exported a meager 400 tons of shrimp. Today, Brazil exports more than
20. According to The Wall Street Journal, merger and acquisition activity in the first quarter rose to $5.3 billion. Approximately three-fourths of the 78 firstquarter deals occurred between
19. You are the manager in charge of global operations at BankGlobal—a large commercial bank that operates in a number of countries around the world.You must decide whether or not to launch a new
18. Suppose one of your clients is four years away from retirement and has only$1,500 in pretax income to devote to either a Roth or a traditional IRA. The traditional IRA permits investors to
17. The head of the accounting department at a major software manufacturer has asked you to put together a pro forma statement of the company’s value under several possible growth scenarios and the
16. As a marketing manager for one of the world’s largest automakers, you are responsible for the advertising campaign for a new energy-efficient sports utility vehicle. Your support team has
15. Approximately 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these addicts cost the U.S. economy $300 billion in medical expenses and lost
14. Tara is considering leaving her current job, which pays $56,000 per year, to start a new company that manufactures a line of special pens for personal digital assistants. Based on market
13. You are the human resources manager for a famous retailer, and you are trying to convince the president of the company to change the structure of employee compensation. Currently, the company’s
12. You are in the market for a new refrigerator for your company’s lounge, and you have narrowed the search down to two models. The energy efficient model sells for $500 and will save you $25 at
11. You’ve recently learned that the company where you work is being sold for$275,000. The company’s income statement indicates current profits of$10,000, which have yet to be paid out as
10. An owner can lease her building for $100,000 per year for three years. The explicit cost of maintaining the building is $35,000, and the implicit cost is$50,000. All revenues are received, and
9. Suppose the total benefit derived from a given decision, Q, is B(Q) 25Q Q2 and the corresponding total cost is C(Q) 5 Q2, so that MB(Q) 25 2Q and MC(Q) 2Q.a. What is total benefit
8. Jaynet spends $20,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm—one offer was for $100,000 per year, and the other was
7. It is estimated that over 90,000 students will apply to the top 30 M.B.A.programs in the United States this year.a. Using the concept of net present value and opportunity cost, explain when it is
6. Complete the following table and answer the accompanying questions.a. At what level of the control variable are net benefits maximized?b. What is the relation between marginal benefit and marginal
5. What is the value of a preferred stock that pays a perpetual dividend of $75 at the end of each year when the interest rate is 4 percent?
4. A firm’s current profits are $550,000. These profits are expected to grow indefinitely at a constant annual rate of 5 percent. If the firm’s opportunity cost of funds is 8 percent, determine
3. Suppose that the total benefit and total cost from an activity are, respectively, given by the following equations: B(Q) 150 28Q 5Q2 and C(Q) 100+ 8Q. (Note: MB(Q) 28 10Q and MC(Q)
2. What is the maximum amount you would pay for an asset that generates an income of $150,000 at the end of each of five years if the opportunity cost of using funds is 9 percent?
1. Levi Strauss & Co. paid $46,532 for a 110-year-old pair of Levi’s jeans—the oldest known pair of blue jeans—by outbidding several other bidders in an eBay Internet auction. Does this
LO4 Explain how differing auction rules and information structures impact the incentives in auctions, and determine the optimal bidding strategies in a variety of auctions with independent or
LO3 Explain why asymmetric information about “hidden actions” or “hidden characteristics”can lead to moral hazard and adverse selection, and identify strategies for mitigating these potential
LO2 Calculate the profit-maximizing output and price in an environment of uncertainty.
LO1 Identify strategies to manage risk and uncertainty, including diversification and optimal search strategies.
LO7 Explain why networks often lead to firstmover advantages, and how to use strategies such as penetration pricing to favorably change the strategic environment.
LO6 Identify examples of networks and network externalities, and determine the number of connections possible in a star network with n users.
LO5 Assess whether a firm’s profits can be enhanced by changing the timing of decisions or the order of strategic moves, and whether doing so creates first- or second-mover advantages.
LO4 Identify some of the adverse legal ramifications of business strategies designed to lessen competition.
LO3 Show how a manager can profitably lessen competition by raising rivals’ costs.
LO2 Explain the economic basis for predatory pricing.
LO1 Explain the economic basis for limit pricing, and identify the conditions under which a firm can profit from such a strategy.
LO7 Show how government policies in international markets, such as quotas and tariffs, impact the prices and quantities of domestic goods and services.
LO6 Explain why government attempts to solve market failures can lead to additional inefficiencies because of “rent-seeking” activities.
LO5 Explain why incomplete information compromises the efficiency of markets, and identify five government policies aimed at mitigating these problems.
LO4 Show why competitive markets fail to provide socially efficient levels of public goods; explain how the government can mitigate these inefficiencies.
LO3 Show why externalities can lead competitive markets to provide socially inefficient quantities of goods and services; explain how government policies, such as the Clean Air Act, can improve
LO2 Explain why market power reduces social welfare, and identify two types of government policies aimed at reducing deadweight loss.
LO1 Identify four sources of market failure.
LO7 Discuss four tools the manager can use to mitigate incentive problems in the workplace.
LO6 Describe the principal–agent problem as it relates to managers and workers.
LO5 Discuss three forces that owners can use to discipline managers.
LO4 Describe the principal–agent problem as it relates to owners and managers.
LO3 Explain the optimal manner of procuring different types of inputs.
LO2 Identify four types of specialized investments, and explain how each can lead to costly bargaining, underinvestment, and/or a “hold-up problem.”
LO1 Discuss the economic trade-offs associated with obtaining inputs through spot exchange, contract, or vertical integration.
LO5 Identify whether an industry is best described as perfectly competitive, a monopoly, monopolistically competitive, or an oligopoly.
LO4 Describe the structure-conduct-performance paradigm, the feedback critique, and their relation to the five-forces framework.
LO3 Explain the relevance of the Herfindahl-Hirschman index for antitrust policy under the horizontal merger guidelines.
LO2 Describe examples of vertical, horizontal, and conglomerate mergers, and explain the economic basis for each type of merger.
LO1 Calculate alternative measures of industry structure, conduct, and performance, and discuss their limitations.
LO8 Calculate the optimal output of a firm that operates two plants and the optimal level of advertising for a firm that enjoys market power.
LO7 Illustrate the relationship between marginal cost, a competitive firm’s short-run supply curve, and the competitive industry supply; explain why supply curves do not exist for firms that have
LO6 Decide whether a firm making short-run losses should continue to operate or shut down its operations.
LO5 Explain how long-run adjustments impact perfectly competitive, monopoly, and monopolistically competitive firms; discuss the ramifications of each of these market structures on social welfare.
LO4 Show the relationship between the elasticity of demand for a firm’s product and its marginal revenue.
LO3 Apply the marginal principle to determine the profit-maximizing price and output.
LO2 Identify sources of (and strategies for obtaining) monopoly power.
LO1 Identify the conditions under which a firm operates as perfectly competitive, monopolistically competitive, or a monopoly.
LO4 Identify the conditions for a contestable market, and explain the ramifications for market power and the sustainability of long-run profits.
LO3 Apply reaction (or best-response) functions to identify optimal decisions and likely competitor responses in oligopoly settings.
LO2 Identify the conditions under which a firm operates in a Sweezy, Cournot, Stackelberg, or Bertrand oligopoly, and the ramifications of each type of oligopoly for optimal pricing decisions, output
LO1 Explain how beliefs and strategic interaction shape optimal decisions in oligopoly environments.
LO3 Identify whether cooperative (collusive)outcomes may be supported as a Nash equilibrium in a repeated game, and explain the roles of trigger strategies, the interest rate, and the presence of an
LO2 Distinguish among dominant, secure, Nash, mixed, and subgame perfect equilibrium strategies, and identify such strategies in various games.
LO1 Apply normal form and extensive form representations of games to formulate decisions in strategic environments that include pricing, advertising, coordination, bargaining, innovation, product
LO6 Apply supply and demand analysis as a qualitative forecasting tool to see the “big picture” in competitive markets.
LO5 Explain and illustrate how excise taxes, ad valorem taxes, price floors, and price ceilings impact the functioning of a market.
LO4 Explain price determination in a competitive market, and show how equilibrium changes in response to changes in determinants of demand and supply.
LO2 Calculate consumer surplus and producer surplus, and describe what they mean.
LO1 Explain the laws of demand and supply, and identify factors that cause demand and supply to shift.
LO6 Explain how regression analysis may be used to estimate demand functions, and how to interpret and use the output of a regression.
LO5 Show how to determine elasticities from linear and log-linear demand functions.
LO4 Explain the relationship between marginal revenue and the own price elasticity of demand.
LO3 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic.
LO2 Illustrate the relationship between the elasticity of demand and total revenues.
LO1 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues, prices, and/or units sold.
LO7 Apply the income–leisure choice framework to illustrate the opportunities, incentives, and choices of workers and managers.
LO6 Illustrate how “buy one, get one free”deals and gift certificates impact a consumer’s purchase decisions.
LO5 Show how to derive an individual’s demand curve from indifference curve analysis and market demand from a group of individuals’ demands.
LO4 Separate the impact of a price change into substitution and income effects.
LO3 Illustrate a consumer’s equilibrium choice and how it changes in response to changes in prices and income.
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