Questions and Answers of Managerial Economics And Strategy

4.5 In the Mini-Case “Botox,” consumer surplus, triangle A, equals the deadweight loss, triangle C. Show that this equality is a result of the linear demand and constant marginal cost assumptions.
4.4 Once the copyright runs out on a book or a piece of music, it can legally be placed on the Internet for anyone to download. In 1998 the U.S. Congress extended the copyright law to 95 years after
4.3 Figure 9.6 shows that two firms producing 6 units each have a higher total cost than one firm producing 12 units. Given the cost function underlying Figure 9.6, would two firms each producing
*4.2 Can a firm operating in the upward-sloping portion of its average cost curve be a natural monopoly?Explain. (Hint: See Q&A 9.4.)
4.1 Can a firm be a natural monopoly if it has a U-shaped average cost curve? Why or why not? (Hint: See Q&A 9.4.)
3.6 Figure 9.4 illustrates the effect of imposing a specific tax of $8 per unit of a monopoly’s output. Suppose that instead of charging a specific tax, the government charges a profit tax of 10%.
*3.5 Show mathematically that a monopoly may raise the price to consumers by more than a specific tax imposed on it. (Hint: Consider a monopoly facing a constant-elasticity demand curve and a
3.4 If the inverse demand function is p = 150 - 2Q and the marginal cost is constant at 30, how does charging the monopoly a specific tax of t = 20 per unit affect price and quantity and the surplus
3.3 What is the effect of a lump-sum tax (which is like an additional fixed cost) on a monopoly? (Hint:Consider the possibility that the firm may shut down, and see Q&A 9.3.)
3.2 A monopoly has an inverse demand function given by p = 150 - 2Q and a constant marginal cost of 30. Calculate the deadweight loss if the monopoly charges the profit-maximizing price.
3.1 A monopoly has a constant marginal cost of production of $1 per unit and a fixed cost of $10.Draw the firm’s MC, AVC, and AC curves. Add a downward-sloping demand curve, and show the
2.8 Xerox, the U.S. Postal Service, and McDonald’s have enjoyed significant market power in the past. List and explain three major factors that have eroded this market power.
2.7 When Apple introduced its first portable media player, the iPod, its constant marginal cost of producing the top-of-the-line model was $200 (iSuppli), its fixed cost was approximately $736
*2.6 In 2009, the price of Amazon’s Kindle 2 was $359, while iSuppli estimated that its marginal cost was$159. What was Amazon’s Lerner Index? What elasticity of demand did it face if it was
2.5 In 2015, Apple introduced the Apple Watch. According to HIS, the cost of producing the 38mm Apple Watch Sport was $84. The price was $349. What was Apple’s price/marginal cost ratio? What was
2.4 According to the California Nurses Association, Tenet Healthcare hospitals marked up drugs substantially.At Tenet’s Sierra Vista Regional Medical Center, drug prices were 1,840.80% of the
2.3 The U.S. Postal Service (USPS) has a constitutionally guaranteed monopoly on first-class mail. In 2015, it charged 49¢ for a stamp, which was not the profit-maximizing price—the USPS’s goal,
2.2 When will a monopoly set its price equal to its marginal cost?
2.1 Why is the ratio of the monopoly’s price to its marginal cost, p/MC, larger if the demand curve is less elastic at the optimum quantity? Can the demand curve be inelastic at that quantity?
1.12 Show that after a shift in the demand curve, a monopoly’s price may remain constant but its output may rise.
1.11 The inverse demand function a monopoly faces is p = 40Q-0.5 (Hint: See Question 1.2). The firm’s cost curve is C(Q) = 2Q. What is the profit-maximizing solution? C
*1.10 The inverse demand function a monopoly faces is p = 200 - 3Q. The firm’s cost curve is C(Q) =50 + 20Q. What is the profit-maximizing solution?How does your answer change if C(Q) = 200 + 20Q?
1.9 AT&T Inc., the large U.S. phone company and the one-time monopoly, left the payphone business at the beginning of 2009 because people were switching to wireless phones. U.S. consumers owning
1.8 Why might a monopoly operate in any part (downward sloping, flat, upward sloping) of its long-run average cost curve, but a competitive firm will operate only at the bottom or in the
1.7 Using a graph, show under what condition the monopoly operates—does not shut down—in the long run. Discuss your result in terms of the demand curve and the average cost curve at the
1.6 Are professional football clubs, such as FC Barcelona, profit-maximizing monopolies? Some observers of this market have contended that football club owners want to maximize attendance or
1.5 For the monopoly in Figure 9.3, at what quantity is its revenue maximized? (Hint: At the quantity where the revenue function reaches its peak, the slope of the revenue function is zero. That is,
1.4 Is a monopoly’s profit affected if it chooses price or quantity (assuming it chooses them optimally)? Why can’t a monopoly choose both price and quantity?
*1.3 If the inverse demand function is p = 200 - 5Q, what is the elasticity of demand and revenue at Q = 20?
1.2 If the inverse demand function a monopoly faces is p = 40Q- 0.5, what is the firm’s marginal revenue function? C (Hint: See Q&A 9.1.)
1.1 If the inverse demand function is p = 100 - 2Q, what is the marginal revenue function? Draw the demand and marginal revenue curves. At what quantities do the demand and marginal revenue curves
6. Describe how a monopoly may take advantage of behavioral network effects to increase its profit.
5. Explain how a monopoly uses advertising to increase its profit.
4. Identify the causes of monopoly.
3. Show how monopoly causes a market failure.
2. Define and measure the extent of a monopoly’s market power.
1. Describe how a monopoly chooses an output level to maximize its profit.
6.3 In a competitive market, the market demand curve is Q = 28 - 2p and the market supply curve is Qs = -8 + 2p. Use a spreadsheet to answer the following questions.a. Determine the quantity demanded
6.2 The long run average cost curve for a competitive firm is AC = 35 - 10q + q2.a. Use the Excel Solver tool to find the cost-minimizing quantity. Enter the labels q and AC in cells A1 and B1. Enter
6.1 A competitive firm’s cost of producing q units of output is C = 18 + 4q + q2. Its corresponding marginal cost is MC = 4 + 2q.a. The firm faces a market price p = +24. Create a spreadsheet with
5.4 In a perfectly competitive market, all firms are identical, firms can freely enter and exit, and the market has an unlimited number of potential entrants.Now, the government starts collecting a
5.3 Give an answer to the Managerial Problem for the short run rather than for the long run. (Hint: The answer depends on where the demand curve intersects the original short-run supply curve.)
5.2 In the Managerial Solution, would it make a difference to the analysis whether the government collects lump-sum costs such as registration fees annually or only once when the firm starts
5.1 The North American Free Trade Agreement provides for two-way, long-haul trucking across the U.S.–Mexican border. U.S. truckers have objected, arguing that the Mexican trucks don’t have to
4.8 Suppose that the demand curve for wheat is Q = 100 - 2p and the supply curve is Q = -20 + p.The government imposes a price ceiling of p = 30.(Hint: See Q&A 8.5.)a. Describe how the equilibrium
4.7 The government sets a minimum wage above the current equilibrium wage. What effect does the minimum wage have on the market equilibrium?What are its effects on consumer surplus, producer surplus,
4.6 Nicholas owned no green sweaters so his Aunt Fern gave him one for his 21st birthday. However, the market price of the sweater was higher than his willingness to pay for it. Draw a diagram
4.5 If the supply function is Q = -20 + 0.5p, what is the producer surplus if the price is 60? (Hint: See Q&A 8.4.)
*4.4 Using a graph similar to Figure 8.12, show that increasing output beyond the competitive level decreases total surplus because the cost of producing this extra output exceeds the value consumers
4.3 For a firm, how does the concept of producer surplus differ from that of profit if it has no fixed costs? (Hint:See Q&A 8.3.)
*4.2 If the inverse demand function for electric irons is p = 100 - 2Q, what is the consumer surplus when the price is 60?
4.1 Using the information in panel a of Figure 8.9, determine what happens to David’s quantity demanded and consumer surplus if price falls to p = +1.
3.8 A typical firm in long-run equilibrium in an industry with identical firms has a cost function given by C = 576 + q2. What is the equilibrium price? (Hint:See Q&A 8.2.)
3.7 Agriculture contributes to 33% of Kenya’s gross domestic product. Over 75% of Kenya’s agricultural output comes from small-scale farmers. Suppose atax is imposed on all farms, regardless of
3.6 In late 2004 and early 2005, the price of raw coffee beans jumped as much as 50% from the previous year. In response, the price of roasted coffee rose about 14%. Similarly, in late 2014 and early
3.5 After a series of powerful earthquakes devastated towns and villages across central Italy in 2016, the Italian government promised to rebuild “everything, 100 percent”
3.4 Chinese art factories are flooding the world’s generic art market (Keith Bradsher, “Own Original Chinese Copies of Real Western Art!” New York Times, July 15, 2005). The value of bulk
3.3 The Mini-Case “An Upward-Sloping Long-Run Supply Curve for Cotton” shows a supply curve for cotton. Discuss the equilibrium if the world demand curve crosses this supply curve in either(a) a
*3.2 What are the short-run and long-run effects on firm and market equilibrium of a law in Belgium that requires large businesses to give its workers a notice of 60 days before a plant can be shut
3.1 Since October 2015, large stores in England have been charging shoppers £0.05 per plastic bag. Does such a charge affect the marginal cost of any particular good? If so, by how much? Is this fee
2.12 What is the effect on the short-run equilibrium of a specific subsidy of s per unit that is given to all n firms in a market?
2.11 The Internet is affecting holiday shipping. In years past, the busiest shipping period was Thanksgiving week. Now, as people have become comfortable with e-commerce, they purchase later in the
2.10 Fierce storms in October 2004 caused TomatoFest Organic Heirlooms Farm to end its tomato harvest two weeks early. According to Gary Ibsen, a partner in this small business (Carolyn Said,
2.9 In 2015, the average variable cost of producing wheat in Canada was close to $5.00 per bushel. Suppose that technological progress reduces the average variable cost to $4.00 per bushel. Use a
2.8 If a specific subsidy (negative tax) of s is given to only one competitive firm, how should that firm change its output level to maximize its profit, and how does its maximum profit change? Use a
2.7 If the pre-tax cost function for Ekow’s television repair company is C(q) = 100 + 100q - 10q2 + 13 q3, and it faces a specific tax of t = 20, what is its profitmaximizing condition if the
2.6 Smell Good soap company’s cost function is C(q) = 40 + 10q + 2q2.a. What quantity maximizes the firm’s profit if the market price is p? How much does it produce if p = 50?b. If the government
*2.5 The cost function for Scranton Cement is C(q) = 50 + 20q + 3q2, so its marginal cost function is MC = 20 + 6q, where q is tons of cement produced.Derive the firm’s average cost and average
2.4 Should a firm shut down if its revenue is R = +1,800 per week,a. its variable cost is VC = +1,200, and its sunk fixed cost is F = +800?b. its variable cost is VC = +1,900, and its sunk fixed cost
2.3 Initially, the market price was p = 32, and the competitive firm’s minimum average variable cost was 30, while its minimum average cost was 35. Should it shut down? Why? Now this firm’s
*2.2 Many marginal cost curves are U-shaped. As a result, it is possible that the MC curve hits the demand or price line at two output levels. Which is the profitmaximizing output? Why?
2.1 Mercedes-Benz of San Francisco states on its Web page that the same family has owned and operated the company in the same location for over 50 years.It has also claimed in its advertising that it
*1.2 Why would high transaction costs or imperfect information tend to prevent price-taking behavior?
1.1 A large city has nearly 500 restaurants, with new ones entering regularly as the population grows.The city decides to limit the number of restaurant licenses to 500. Which characteristics of this
4. Use consumer and producer surplus to show the main advantage of perfect competition.
3. Contrast the short-run and long-run competitive equilibria and supply curves.
2. Graphically identify the competitive equilibrium and derive the short-run supply curve.
1. List the characteristics of perfect competition.
7.3 Second Look Enterprises (SLE) buys old computers, fixes them up, and resells them. Its weekly revenue function is R = 40q - 2q2, so its marginal revenue is MR = 40 - 4q. Its weekly cost function
7.2 A firm has the same revenue and cost function as in Spreadsheet Exercise 7.1.a. The shareholders of the firm hire a manager on a profit-sharing basis whose payment, M, is 25% of the firm’s
7.1 A firm’s revenue function is R(q) = 90q - 2q2. Its cost function is C(q) = 104 + 6q + 1.5q2.a. Using Excel, calculate the levels of revenue, total cost, and profit for the firm for q = 0, 1, 2,
6.1 Consider the following change to Angelo’s situation in the Managerial Solution. Now Angelo can provide loans to only one of the two groups. If he loans to the safer group, he gets his 10% in
5.2 Describe the effects of the Internet on the empirical relevance of perfect competition. Focus specifically on how the Internet has affected the availability of price and product information,
5.1 Which market structure best describes (a) airplane manufacturing, (b) electricians in a small town,(c) farms that grow tomatoes, and (d) cable television in a city? Explain your reasoning.
4.6 What are some of the major reasons that firms vertically integrate? Why don’t these factors cause all firms to vertically integrate?
4.5 When the western part of the United States was sparsely populated, many small towns had a single schoolhouse in which one teacher taught all subjects to students of all ages. Nowadays, in large
4.4 Based on the Mini-Case “Vertical Integration at Zara,” would you expect vertical integration to be as profitable for clothing retailers who specialize in work clothes and uniforms as it is
4.3 A manufacturer of DVDs has been purchasing plastic cases from a case supplier and is considering acquiring the case supplier. Would the DVD manufacturer be more or less likely to vertically
4.2 Anthony sells cakes, tiramisu, and other desserts.He currently purchases tiramisu from a pastry store for €4 each and sells them at his store for a price that does not change with the number of
*4.1 In 2012, the Campbell Soup Company acquired Bolthouse Farms for $1.55 billion. This acquisition increased the level of vertical integration in Campbell, as Bolthouse Farms owned and operated
3.10 An acquiring firm, A, seeks to buy a target firm, T.The acquiring firm has better managers. The value of the target firm, if acquired by A, is $100 million.The value of the target firm under its
3.9 How does the market for corporate control encourage firms to maximize profits?
3.8 Why are steps taken by corporate management to avoid takeovers often not in shareholders’ best interests?
3.7 Inside directors of a firm are also executives of the firm, and they normally receive compensation that includes some form of profit sharing. Outside directors are not employees of the firm. They
3.6 Milton Friedman argued that managers should try to maximize profit. Does his view conflict with the actions taken by senior executives of McDonald’s to use corporate resources to support Ronald
3.5 Michael, the CEO of a successful firm, enjoys both income, Y, and perquisites, S (such as a nice office and expensive office furniture). Michael’s utility function (Chapter 4) is U(S, Y) with
*3.4 Each of the three firms in Question 3.3 has a revenue function R(q) = 100q - 2q2 and a cost function C(q) = 100 + 20q. Determine how much output each firm chooses. C
3.3 Three firms have identical revenue and profit functions with the same general shape as those in Figure 7.3. Firm 1 is a private sector firm operated by an owner-manager who wishes to maximize
3.2 A firm’s revenue varies with its output: R(q). Its manager’s income, Y, equals aR(q), where 0 6 a 6 1 is the manager’s share of the firm’s revenue. Use calculus to prove that maximizing
3.1 In Q&A 7.2, suppose that Ann’s compensation, Y, is half of the firm’s profit minus $30,000:Y = /2 - 30,000. Will she still seek to maximize the firm’s profit?

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