Questions and Answers of Managerial Economics And Strategy

2. What properties does neo-classical consumer the- ory predict for an individual's demand functions?
1. Draw the indifference curve diagram for the case where one of the goods is a Giffen good. PTea 1, Psim To 0.90, A 10,000, and Plea1, Psim-Tea GDP = 100, calculate the own price, cross-price,
4. Set up the optimal economic life problem ana- lysed in Example 7.6 as an EXCEL spreadsheet, i.e. explore how optimal economic life varies with the discount rate (set up a table in which the value
3. Consider the following problem of capital rationing. Assume that projects can be reduced in scale (in which case their outlays and future cash flows are Table 7.6 Problem of capital rationing
2. The asset pricing approach to project appraisal suggests that only systematic risk really matters, and that the discount rate should be adjusted to reflect this. (a) How might you try to assess
1. Reproduce the sensitivity analysis of the project discussed in examples 7.2 and 7.3 using EXCEL. Further to this, tabulate NPV for alternative values of project life and interest rates, and pro-
5. The patent holder of a new invention, the Robovac (a robot vacuum cleaner), has offered to sell you the patent. The patent lasts 5 years, and you expect that tooling up for production will cost 20
4. You have won a prize in a lottery-but there is a choice. You can choose to take the hamper of foodstuffs delivered this Christmas, and every following Christmas for 10 years (11 in all) or you can
3. Calculate the payback period, net present value, benefit-cost ratio, and internal rate of return for the following cash flow profile (use a discount rate of 10% where necessary). Time 0 1 2 3 4
2. It is possible to correct the defects in the internal rate of return as a decision-making tool. Hence why is it so often argued that net present value is a superior criterion? Is it? Discuss.
1. Academics often castigate the Payback Period but it continues to be widely used in practice. Why is this?
4. Find the optimal mixed strategies and expected payoffs for players A and B in the following game (which uses standard notation).Table 5.4 Identifying the optimal mixed strategy B1 B2 80; 120 40:
3. Identify pure-strategy Nash equilibria, if any, in the following games (using the standard notation): Table 5.1 Identifying pure-strategy Nash equilibria (i) B1 B2 83 14.6 A1 10, 10 20, 0 Az 6.14
2. In the original prisoners' dilemma game, with payoffs as in Figure 5.1, when one prisoner con- fesses and 'grasses' on his accomplice, the 'grass' gets off with no jail sentence at all. Consider
1. What is meant by a Nash equilibrium?
4. Swan-Turkey are considering building a new shipyard (set-up cost 0.9m). This is a risky busi- ness; suppose orders will either be high (with net operating profit 3m) or low (with net operating
3. What is the point of including an analysis of the expected utility model in a text on managerial economics, given that it is rarely used by busi- nessmen for decision analysis?
2. Consider the VNM utility function depicted in Figure 4.7; what does this imply about the indi- vidual's attitude to risk? (Consider gambling on the lottery, insuring the house, small-stake, small
1. What is an actuarially fair gamble?
5. Use the EXCEL SOLVER function to verify the numerical solutions to the problems posed in Examples 3.3 to 3.8.
4. Linear programming: With the information provided in Table 3.1 below, determine the output combination that will maximize daily total profits.Table 3.1 Profits and Processing Requirements for
3. Inequality-constrained optimization: (a) Find the values for x, x2 which minimize the function f(x) = x - x subject to the constraints x 0, x 0, x + x 1. (Hint: recall that to minimize f(x), it
2. Equality-constrained optimization: Find the values for x1, x2, and x, which maximize the function f(x)=1-xx-x subject to the constraint that g(x)=x+x-1=0.
1. Unconstrained optimization: (a) Find the values for x1, x2, x3 which maximize the function f(x)=1+x12x-x-3x3. (b) If a monopolistic firm has a linear inverse demand function of the form p = 100-q
7.3 Consider the market for paint as described in Question
7.2 The domestic demand and supply functions for a particular type of latex paint are Qd = 14 - 0.5p and Qs = -4 + p, respectively. The price is measured in dollars per gallon and the quantities are
7.1 Suppose the demand function for U.S. dollars by holders of Japanese yen is Qd1 = 1000 - 5x, where Q is the amount of U.S. dollars per day and x is the exchange rate (yen per dollar). The supply
6.1 Chanel perfume is sold in France and in the United States. Assume initially that one euro is worth $1.30 and that a 100 ml bottle of perfume sells for $80 in the United States. If Chanel does not
5.2 Suppose Hewlett-Packard is considering outsourcing its telephone-based support functions for its printers to India. The hourly cost of a tech support person in the United States is $20 per hour.
5.1 Outsourcing of services by American firms has contributed significantly to wage growth in India.Explain why using a graph of the Indian labor market.
4.5 In 2015, two U.S. senators proposed a temporary reduction on repatriated profits from 35% to 6.5%.Based on the Mini-Case, “Profit Repatriation,”would such a tax holiday cause a substantial
4.4 In Question 4.2, suppose that the Philippines has a lower corporate tax rate than the United States.How would that lower tax rate affect the transfer price that maximizes the overall profit of
4.3 In Question 4.2, what transfer price would maximize the profit of TMX Philippines? (Hint: For any given transfer price, the Timex Group USA will demand some quantity of watches. This relationship
*4.2 The Timex Group, a large multinational watchmaker, has its headquarters in the Netherlands.It has subsidiaries in many countries, including the Timex Group USA and TMX Philippines, Inc.One
4.1 As a result of the North American Free Trade Agreement, many iconic “American” cars are not assembled in the United States. Explain why. Provide some examples of U.S. cars that are assembled
3.10 Why do antidumping policies limit the ability of firms to carry out international price discrimination?(Hint: See the Mini-Case, “Dumping and Countervailing Duties for Solar Panels.”)
*3.9 In Table 17.3, suppose that the payoff if both firms enter is positive, 5 rather than -5, while the other payoffs remain the same. Now, what is the effect of a subsidy of 10 to Novartis?
3.8 A government is considering a quota and a tariff, both of which will reduce imports by the same amount. Why might the government prefer one of these policies to the other?
3.7 During the Napoleonic Wars, Britain blockaded North America, seizing U.S. vessels and cargo and impressing sailors. At President Thomas Jefferson’s request, Congress imposed a nearly
3.6 After Mexico signed the North American Free Trade Agreement (NAFTA) in 1994, corn imports from the United States doubled within a year, and today U.S.imports make up nearly one-third of the corn
3.5 If the world supply curve is horizontal at the world price for a particular good, can a subsidy on imports raise welfare in the importing country? Explain your answer.
3.4 Canada has 20% of the world’s known freshwater resources, yet many Canadians believe that the country has little or none to spare. Over the years, U.S. and Canadian firms have struck deals to
3.3 How would the shape of the total supply curve in Q&A 17.2 change if the U.S. domestic supply curve hit the vertical axis at a price above p?
3.2 In mid-2015, the world price for raw sugar, 12¢per pound, was about half of the U.S. price, 25¢per pound, because of quotas and tariffs on sugar imports. As a consequence, American-made corn
3.1 Based on the Mini-Case, “Russian Food Ban,” who were the main winners and losers from the ban imposed by Russia on imports of agricultural products from the United States, the European Union,
2.4 Javed runs a small electronics company in India and has just sold some equipment to a U.S. company for$2 million, to be paid in 60 days. His cost in Indian rupees ( ) is 100 million. The current
2.3 Explain why gray markets reduce the ability of multinational firms to price discriminate. (Hint: See Managerial Implication, “Limiting Arbitrage and Gray Markets.”)
*2.2 Figure 17.1 shows the effect on the exchange rate(U.S. dollars per euro) of the demand for euros by U.S. residents. What would happen if the U.S. government tried to establish a fixed exchange
2.1 Suppose that one euro can be exchanged for 1.2 U.S.dollars and that one U.S. dollar can be exchange for 110 Japanese yen. If these currencies can be traded freely with low transaction costs, what
1.6 Has international trade had an effect on the size of Barbie doll collections? (Hint: See the Mini-Case,“Barbie Doll Varieties.”)
1.5 Celery Patch Dolls, a small Malaysian doll producer, is considering producing a new doll variety. Production of this doll type requires an initial setup cost, followed by constant variable cost.
1.4 Paul Allen co-founded Microsoft with Bill Gates.In the early years he spent his time programming, but as time went on he became more involved in management and stopped programming. Suppose Allen
1.3 ABC Software, a small software producer, decides to renovate its premises. Instead of hiring an outside contractor and tradespeople, the firm decides to use its employees—secretaries,
1.2 Trade between North and South Korea was legalized in 1988, but is currently very limited. Assume, however, that Hyundai has 200 workers in a plant in North Korea just across the boundary with
*1.1 Suppose that auto workers in South Korea can produce components used to make cars at the rate of six sets of components per worker per day and can assemble cars at the rate of four cars per
5. Discuss why firms outsource production to foreign firms, and evaluate the criticisms of outsourcing.
4. Show how multinational enterprises take advantage of international tax rate differences to raise profits.
3. Describe the effects of tariffs, quotas, and subsidies on international markets.
2. Characterize the effects of a change in the exchange rate on trade between countries.
1. Use the concept of comparative advantage to explain why countries trade.
8.3 In a perfectly competitive market, the inverse demand function is p = 50 - Q. Market supply, Qs, is perfectly elastic at a price of 40, because each firm has a constant marginal cost MC = 40.a.
8.2 A competitive fertilizer market has many small firms. The inverse demand function for fertilizer is p = 40 - 2Q, where Q is a ton of fertilizer and p is the price per ton of fertilizer. The
8.1 A monopolist’s inverse demand function is p = 100 - 2Q, so its marginal revenue is MR = 100 - 4Q. Its cost function is C = 25 +4Q + 2Q2 and its marginal cost is therefore MC = 4 + 4Q.a. Create
7.1 In the Managerial Solution example, who benefits and who loses from the invention? Does the innovating firm capture the full value of its innovation?
6.4 For trade secrets to effectively protect intellectual property, it is important that the innovation cannot be easily reverse engineered, a process by which a firm can take a rival’s product and
6.3 In Question 6.1 with an R&D cost of 150, suppose that the government waits until Woz works out the new process and then changes patent rules, requiring Woz to charge a price no greater than 12.
*6.2 In Question 6.1, assume that the R&D cost is 150.Are consumers made better off by the action taken by Woz? Does total surplus rise?
6.1 Woz Enterprises specializes in electrical components.The market for one particular component is perfectly competitive and in long-run equilibrium.Marginal cost is constant at 30. Woz can develop
5.11 Under federal laws, firms in many agricultural industries can force all industry members to contribute to collective activities such as industry advertising if the majority agrees. Under the
5.10 On a particular busy bridge, congestion occurs if 400 vehicles cross it per minute. We can divide the drivers of these cars into four groups: A, B, C, and D. Each group has 100 drivers. Each
5.9 You and your roommate have a stack of dirty dishes in the sink. Either of you would wash the dishes if you were the only one who could wash the dishes;however, neither will do it in the
5.8 Receiving flu shots provides private benefits to recipients. However, pandemic influenza spreads between cities through the international airline network and between cities and rural areas
5.7 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 Congress
5.6 Guards patrolling a mall protect the mall’s two stores. The television store’s demand curve for guards is strictly greater at all prices than that of the ice-cream parlor. The marginal cost
5.5 Do publishers sell the socially optimal number of managerial economics textbooks? Discuss in terms of public goods, rivalry, and exclusion.
*5.4 Consider busy highways where drivers do not have to pay any toll and toll roads where drivers have to pay a toll based on the type of vehicle and the distance traveled. Can these two goods be
5.3 Spam imposes significant negative externalities on e-mail users (see the Mini-Case, “Spam”). If a small charge were applied to every e-mail message, would the extent and impact of this
5.2 To prevent overfishing, could regulators set a tax on fish or on boats? Explain and illustrate with a graph.
5.1 Are heavily used bridges, such as the Kingston Bridge in Scotland or the George Washington Bridge in the United States, commons? If so, what can a government do to mitigate congestion problems?
4.12 Governments often use licensing or taxes to control the sales of certain products. Under the licensing system, sellers are required to obtain licenses, and the number of licenses is limited to a
4.11 Anil, a college student, loves to throw parties over the weekends, where he invites his friends and listens to loud music until 2AM in the morning. Sunil lives with his wife Neera in the
4.10 Suppose that the only way to reduce pollution from paper production is to reduce output. The government imposes a tax equal to the marginal harm from the pollution on the monopoly producer. Show
4.9 In the model in Question 4.8, what is the unregulated monopoly equilibrium? How would you optimally regulate the monopoly to maximize total surplus? What is the resulting equilibrium? C
*4.8 Suppose that the inverse demand function for paper is p = 300 - 2Q, and the marginal external harm from emissions is MCp = 60 + Q, and the marginal external harm from emissions is MCx = Q.
4.7 In the model in Question 4.6, use calculus to determine the optimal level of H. C
4.6 Let H = E - E be the amount that emissions, E, are reduced from the competitive level, E. The benefit of reducing emissions is B(H) = AH. The cost is C(H) = H. If the benefit is increasing but
4.5 Home heating and hot water systems account for about one-third of the consumption of energy in Germany.Installation of efficient fuel-cell heating systems can save energy use and reduce CO2
4.4 A number of countries have either banned incandescent light bulbs already or have begun phasing out such lighting in favor of more fuel-efficient compact fluorescent bulbs. These restrictions are
*4.3 Why is zero pollution not the best solution for society?Can we have too little pollution? Why or why not?
4.2 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.
4.1. 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 overweight(Jennifer Levitz, “Can Your Friends
3.5 The Mini-Case “Are Monopoly Mergers Harmful?”states that there are about 5,000 ready-mix concrete plants in the United States. With so many plants in operation, why is there concern about
3.4 Why would an upstream producer of some product ever refuse to sell to downstream buyers who wish to buy the product at the going price?
3.3 A maker of specialty soaps supplies a unique soap made from a cactus extract to the only two retailers in a small town. The producer sells the soap to the retailers at the marginal cost of
3.2 Modify Question 3.1 so that each firm has a fixed cost, F, of 200. Merging would imply that the monopoly firm would pay fixed costs of 300. How would your answer change?
*3.1 Suppose that the only two firms in an industry face the market (inverse) demand curve p = 150 - Q.Each has constant marginal cost equal to 30 and no fixed cost. Initially, the two firms compete
2.4 Using the figure in the Mini-Case, “Natural Gas Regulation,” show how much consumer surplus increases if regulators require the producer to change from average cost pricing to marginal cost
2.3 A retailer buys cakes from a wholesaler at $2 per unit and sells it to its customers in a retail market where the market demand is given by p = 10 - Q.Show that if the wholesale price falls by
*2.2 A monopoly drug company produces a lifesaving medicine at a constant cost of $5 per dose. The demand for this medicine is perfectly elastic at prices less than or equal to the $200 (per day)
2.1 Illustrate and describe the effects on output and welfare if the government regulates a monopoly so that it may not charge a price above p, which lies between the unregulated monopoly price and

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