Questions and Answers of Managerial Economics And Strategy

2.7 A firm that owns and manages rental properties is considering buying a building that would cost$800,000 this year, but would yield an annual revenue stream of $50,000 per year for the foreseeable
2.6 At the time of its initial public offering (initial sale of stock), Groupon, an Internet company that provides discount coupons, used unusual measures of its business performance (Michael J. de
2.5 A firm has to pay a tax equal to 10% of its revenue.Give a condition that determines the output level at which it maximizes its after-tax profit. (Hint:See “Using Calculus: Maximizing Profit”
*2.4 Should a firm shut down if its weekly revenue is$1,500, its variable cost is $1,000, and its fixed cost is $800, of which $700 is avoidable if it shuts down?Why?
2.3 Should a firm ever produce if it is losing money(making a negative economic profit)? Why or why not?
*2.2 A firm has revenue given by R(q) = 200q - 5q2 and its cost function is C(q) = 50 + 20q. What is the profit-maximizing level of output? What profit does the firm earn at this output level? (Hint:
2.1 A firm has three different production facilities, all of which produce the same product. While reviewing the firm’s cost data, Jasmin, a manager, discovers that one of the plants has a higher
1.4 Has Chinese government control of industrial production declined significantly over the last several decades? Quantify your answer. (Hint: see the Mini-Case “Chinese State-Owned Enterprises.”)
1.3 What types of firm organization allow owners of a firm to obtain the advantages of limited liability?
*1.2 Describe three important consequences of “going public” by selling shares in an initial public offering.
1.1 What types of firms would not normally maximize profit?
5. Explain how the various market structures affect firms’ characteristics and behavior.
4. Discuss a firm’s profit-maximizing vertical organization.
3. Explain how firms resolve conflicting objectives between owners and managers.
2. Determine the profit-maximizing output of a firm.
1. Describe how firms differ by type of ownership and objectives.
7.3 A Korean electronic chip manufacturer has a production function given by q = L0.5K0.5.a. Use Excel to determine the amount of capital, K, needed to produce 10 units of output for each value of
7.2 A furniture company has opened a small plant that builds tables. Jill, the production manager, knows the fixed cost of the plant, F = +78 per day, and includes the cost of the building, tools,
7.1 The production function for a firm is q = -0.6L3 + 18L2K + 10L, where q is the amount of output, L is the number of labor hours per week, and K is the amount of capital.The wage is $100 and the
*6.1 In Figure 6.9, show that for some wages and capital rental costs the firm is indifferent between using the wafer-handling stepper technology and the stepper technology. How does this wage/cost
5.4 The central activity of many acute-care hospitals is inpatient surgery, but some of these hospitals also provide outpatient services – services for patients who come to the hospital for
*5.3 A refiner produces heating fuel and gasoline from crude oil in virtually fixed proportions. What can you say about economies of scope for such a firm?What is the sign of its measure of economies
5.2 Yesbel sells wall hangings and sand candles to tourists.If Yesbel spends the morning (4 hours) making only wall hangings, she can make 6 wall hangings; if she spends the morning making only sand
5.1 The United Kingdom started regulating the size of grocery stores in the early 1990s, and today the average size of a typical U.K. grocery store is roughly half the size of a typical U.S. store
4.4 In the Mini-Case “Learning by Drilling,” an oil drilling firm’s average cost when working with production company M depends partly on its own cumulative drilling experience, N, and partly
4.3 Panel a of Figure 6.8 shows that Intel’s average cost in a given year falls with the quantity that it produces.In addition, extra production this year lowers the average cost curve next year.
*4.2 A firm’s learning curve, which shows the relationship between average cost and cumulative output(the sum of its output since the firm started producing), is AC = a + bN- r; where AC is its
4.1 In what types of industry would you expect to see substantial learning by doing? Why?
3.9 A U-shaped long-run average cost curve is the envelope of U-shaped short-run average cost curves. On what part of the curve (downward sloping, flat, or upward sloping) does a short-run curve
*3.8 What is the long-run cost function for a fixedproportions production function for which it takes two units of capital and one unit of labor to produce one unit of output as a function of the
3.7 The Mini-Case “Economies of Scale at Google”describes economies of scale for Google Cloud Storage. The cost function for this service is well approximated by C = F + cq, where C is total
3.6 An auto manufacturer in India is considering moving its production to a plant in Vietnam. Its estimated production function is q = 2L0.5K0.5. The factor prices in India are w = 300 and r = 1,200.
3.5 Cane sugar is an important input in a popular Mexican beverage. In response to a sharp increase in tax on cane sugar, the beverage’s manufacturers reformulated the production process by largely
*3.4 The all-American baseball is made using cork from Portugal, rubber from Malaysia, yarn from Australia, and leather from France, and it is stitched (108 stitches exactly) by workers in Costa
3.3 Suppose that the government subsidizes the cost of workers by paying for 25% of the wage (the rate offered by the U.S. government in the late 1970s under the New Jobs Tax Credit program). What
*3.2 A seafood-processing company in Nigeria uses two inputs: machines (K) and workers (L). The isoquants have the usual smooth shape. The machines cost N120,000 (Nigerian Naira) per day to run and
3.1 A newly invented machine serves as a mobile station for receiving and accumulating packed flats of strawberries close to where they are picked, which reduces workers’ time and burden of
2.9 Equation 6.5 gives the short-run variable cost function for Japanese beer as VC = 0.55q1.67. If the fixed cost is 600 and the firm produces 550 units, determine the C, VC, MC, AFC, and AVC. What
2.8 A firm has a Cobb-Douglas production function, q = ALK, where + 6 1. On the basis of this information, what properties does its cost function have? For example, a U.S. chemical firm has a
2.7 The only variable input a hotel uses to clean rooms is housecleaning staff who are paid a wage, w, of€15 an hour. Each worker can clean five rooms in an hour. Use math to determine the variable
*2.6 A firm builds shipping crates out of wood. How does the cost of producing a 1-cubic-foot crate(each side is 1-foot square) compare to the cost of building an 8-cubic-foot crate if wood costs $1
2.5 Gail works in a flower shop, where she produces 10 floral arrangements per hour. She is paid $15 an hour for the first eight hours she works and $20 an hour for each additional hour she works.
2.4 In 1796, Gottfried Christoph Härtel, a German music publisher, calculated the cost of printing music using an engraved plate technology and used these estimated cost functions to make production
2.3 For the following total cost functions, derive the equations for and plot AFC, MC, AVC, and AC.a. C = 36 + 20qb. C = 36 + 4q2c. C = 36 + 20q - 6q2 + q3 C
2.2 In the twentieth century, department stores and supermarkets largely replaced smaller specialty stores, as consumers found it more efficient to go to one store rather than many. Consumers incur a
*2.1 Nicolas has purchased a streaming audio service for$8.00 per month. As he listens to more songs in a month he spreads this fixed cost over a larger quantity, q. Derive an algebraic formula for
*1.4 A firm purchased copper pipes a few years ago at$20 per pipe and stored them, using them only as the need arises. The firm could sell its remaining pipes in the market at the current price of
1.3 Many corporations allow CEOs to use the firm’s corporate jet for personal travel (see the Mini-Case“Company Jets” in Chapter 7 for more details). The Internal Revenue Service (IRS) requires
1.2 Samantha bought a £200 ticket for a music festival in London. Because it stars several of her favorite rock groups, she would have been willing to pay up to £300 to attend the festival.
1.1 Executives at Leonesse Cellars, a premium winery in Southern California, were surprised to learn that shipping wine by sea to some cities in Asia was less expensive than sending it to the East
5. Determine when it pays to produce two goods simultaneously.
4. Predict how experience-based learning reduces costs.
3. Determine how to choose inputs to minimize the cost of producing a given quantity.
2. Draw marginal cost, average cost, and other cost curves.
1. Show how to make managerial decisions using the opportunity cost concept.
7.3 Summit Farms hires unskilled daily workers to pick strawberries in their fields. Output depends on the number of workers and on random factors such as weather. Summit Farms wishes to estimate its
7.2 The Green Revolution (see the Mini-Case “Malthus and the Green Revolution”) was based in part on extensive experimentation. The following data illustrates the relationship between nitrogen
7.1 Labor, L, and capital, K, are the only inputs in each of the following production functions:a. q1 = (L + K)2.b. q2 = (2L + 2K)2.c. q3 = (20 + 2L + 2K)2.For each production function, use a
*6.2 During recessions, U.S. firms lay off a larger proportion of their workers than Japanese firms do. (It has been claimed that Japanese firms continue to produce at high levels and store the
6.1 If a firm lays off workers during a recession, how will the firm’s marginal product of labor change?(Hint: See Figure 5.1.)
5.4 Until the mid-eighteenth century when spinning became mechanized, cotton was an expensive and relatively unimportant textile (Virginia Postrel,“What Separates Rich Nations from Poor Nations?”
5.3 In a manufacturing plant, workers use a specialized machine to produce belts. A new labor-saving machine is introduced. With the new machine, the firm uses fewer workers to produce the same
*5.2 Firm 1 and Firm 2 use the same type of production function, but Firm 2 is only 80% as productive as Firm 1. That is, the production function of Firm 1 is q1 = f(L, K), and the production
5.1 In the past twenty years USB flash memory sticks have replaced older floppy disks that could be used to move information from one computer to another.Over that same time period major corporations
4.9 Does it follow that because we observe that the average product of labor is higher for Firm 1 than for Firm 2, Firm 1 is more productive in the sense that it can produce more output from a given
4.8 Michelle’s business produces ceramic cups using labor, clay, and a kiln. She produces cups using a fixed proportion of labor and clay, but regardless of how many cups she produces, she uses
*4.7 The BlackBerry production function discussed in the text is q = 2.83L1.52K0.82, where L is labor and K is capital. Epple et al. (2010) estimated that the production function for U.S. housing is
4.6 Is it possible that a firm’s production function exhibits increasing returns to scale while exhibiting diminishing marginal productivity of each of its inputs? To answer this question,
*4.5 Show in a diagram that a production function can have diminishing marginal returns to a factor and constant returns to scale.
4.4 A production function has the property that f(xL, xK) = x2f(L, K) for any positive value of x.What kind of returns to scale does this production function exhibit? If the firm doubles L and K,
4.3 Under what conditions do the following production functions exhibit decreasing, constant, or increasing returns to scale? (Hint: See Q&A 5.3.)a. q = L + 10Kb. q = L + LK + 10K
*4.2 Suppose the production function for the automotive and parts industry is q = L0.31K0.20M0.41, where M is energy and materials. What kind of returns to scale does this production function
4.1 To speed relief to isolated South Asian communities that were devastated by the December 2004 tsunami, the U.S. government doubled the number of Navy helicopters supporting the relief operation
*3.7 At L = 3, and K = 2, the marginal product of labor is 4 and the marginal product of capital is 5. What is the marginal rate of technical substitution (MRTS)?
*3.6 A building maintenance company cleans hardwood floors using the production function q = 30S + 10M, where S is the number of cups of a maximum-strength cleaning solution, M is the number of cups
3.5 Using the figure in the Mini-Case “A Semiconductor Isoquant,” show that as the firm employs additional fixed-proportion technologies, the firm’s overall isoquant approaches a smooth curve
3.4 The production function at Copy Smart copy shop is q = 500 * min(L, 2K), where q is the number of copies per hour, L is the number of workers, and K is the number of copy machines. As an example,
*3.3 To cut a tree, q = 1, a landscaping company uses two workers, L = 2, and one saw, K = 1, for one hour(Hint: See Q&A 5.2.)a. Draw the isoquants for this production function and explain its
3.2 Using the information given in Table 5.2, draw the isoquant corresponding to an output level of 20.Starting from L = 4 and K = 1, how much extra capital is needed to keep output constant if the
3.1 Why must isoquants be thin?
2.5 Based on the information in the Mini-Case “Malthus and the Green Revolution” how did the average product of labor in food production change over time?
2.4 In the short run, a firm cannot vary its capital, K = 4, but it can vary its labor, L. It produces output q.Explain why the firm will or will not experience diminishing marginal returns to labor
*2.3 Suppose that the production function is q = L0.75K0.25.(Hint: See Q&A 5.1.)a. What is the average product of labor, holding capital fixed at K?b. What is the marginal product of labor?c. How is
2.2 Each extra worker produces an additional unit of output up to six workers. As more workers are added, no additional output is produced. Draw the total product of labor, average product of labor,
*2.1 If each extra worker produces an additional unit of output, how do the total product of labor, average product of labor, and marginal product of labor vary with labor? Plot these curves in a
1.3 Consider Boeing (a producer of jet aircraft), Walmart(a retail chain), and Facebook (a social networking company). For which of these firms is the short run the longest period of time? For which
*1.2 Suppose that for the function q = f(L,K), if L = 3 and K = 5 then q = 10. Is it possible that L = 3 and K = 6 also yields q = 10 for this production function?Why or why not?
1.1 What are the main types of capital, labor, and materials used to produce licorice?
5. Describe the effect of innovation on production.
4. Determine whether a production function has decreasing, constant, or increasing returns to scale.
3. Explain the long-run trade-off between labor and capital in production.
2. Predict the effect of short-run changes in labor on output.
1. Use a production function to describe the relationship between inputs and output.
8.3 Sam’s utility function over iced coffee, C, and tacos, T, is U = min (C, T), where min denotes the minimum value. For example, if C = 2 and T = 3, U = min (2, 3) = 2. Sam spends his entire
8.2 As described in Exercise 8.1, Lucy wants carpets and paintings for her office. Her company has given her a budget of $7,200 for this purpose. Persian carpets of the size that she wants can be
8.1 Lucy has just been promoted to a managerial position and given a new office. She is very fond of small Persian carpets and Native American paintings and wants to get some carpets and paintings
7.1 In the Managerial Problem, suppose that entertainment is relatively more expensive in London than in Seattle so that the LL budget line cuts the LS budget line from below rather than from above
*6.2 Why would a consumer’s demand for a product change when the product price is quoted inclusive of taxes rather than before tax? Do you think fewer people would apply for a job if the salary
6.1 Illustrate the logic of the endowment effect using a kinked indifference curve. Let the angle be greater than 90°. Suppose that the prices change, so the slope of the budget line through the
5.4 According to Towers Watson, (https://www.towerswatson.com/), at large employers, 48% of employees earning between $10,000 and $24,999 a year participated in a voluntary retirement savings

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