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business
managerial economics

Questions and Answers of Managerial Economics

G19-2. Divisional Evaluation Discuss a division or subunit of your organization and how it is evaluated (revenue center, profit center, cost center, etc.). How does the evaluation scheme affect
G19-1. Transfer Pricing Does your company use transfer pricing to ‘‘charge’’ divisions for the cost of the products they consume? Are these prices set equal to the opportunity cost of the
19-5. Transfer Pricing Suppose that a paper mill ‘‘feeds’’ a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the
19-4. Bank Transfer Pricing Banks earn money by borrowing from depositors at low interest rates and lending to individuals and businesses at high interest rates. As banks grow, they split into
19-3. Jet Turbine Design This problem is mentioned in the text (see the section on ‘‘Functional Silos versus Process Teams’’). Your task is to propose an organizational solution. To briefly
19-2. Furniture Forecasting Futura Furniture Products manufactures upscale office furniture for the ‘‘Office of the Future.’’ In addition to a manufacturing division, the company includes a
19-1. Divisional Profit Measure Discuss the advantages and disadvantages of using divisional profit as the basis of incentive compensation for division managers compared to using company profit as
5. Which of the following actions is consistent with a manager whose compensation reflects a specific budget goal and who does not believe he can make that goal?a. Asking a vendor to preship and
4. Which of the following organizational forms requires the strongest management oversight?a. Profit centersb. Functional organizationsc. M-form organizationsd. Functional and M-form organizations
3. As the CEO of a large multidivisional company, it falls to you to set a transfer price between your Materials Division and your Production Division. Which cost is most relevant in making your
2. Joe runs the Service Division for a car dealership. The overall dealership has profits of $10 million on sales of $100 million and costs of $90 million. Joe’s division contributed$9 million in
1. A computer manufacturer has two divisions, one serving residential customers and one serving business customers. If an incentive conflict arises between the two divisions, how will overall company
G18-3. Centralization versus Decentralization Describe a decision that is centralized (or decentralized) in your company. How could you decentralize (or centralize) the decision? What would happen if
G18-2. Incentive Pay Describe a job compensated with incentive pay in your company. What performance evaluation metric is used, and how is it tied to compensation? Does this compensation scheme align
G18-1. Incentive Conflict Describe an incentive conflict in your company. What is the source of the conflict, and how is it being controlled? Could you control it in a less costly way?
18-5. Venture Capital Venture capital (VC) firms are pools of private capital that typically invest in small, fastgrowing companies, which usually can’t raise funds through other means. In exchange
18-4. British Physicians The British government offered physicians incentive pay to offer better customer (patient)service, such as managing appointments better. In particular, physicians can score
18-3. Incentive Conflicts Which of the following are characteristic of principal–agent conflicts that often exist in a firm? (Note: The entire statement must be true in order to be a correct
18-2. Incentive Compensation Firm X is a small environmental consulting firm. The firm pays employees according to how much time they bill on projects. Because they are out in the field, in close
18-1. Real Estate Agents When real estate agents sell their own, rather than clients’, houses, they leave the houses on the market for a longer time (10 days longer on average) and wind up with
5. You own a retail establishment run by a store manager who receives a flat salary of$80,000. If you set up another store as a franchise with incentive compensation to the franchisee, what would be
4. Decentralization of decision-making authority is supported by which of the following?a. A trend of stronger, more active CEOsb. Shrinking costs of computing bandwidth, which allows information to
3. Principal–agent problemsa. occur when firm managers have more incentive to maximize profit than shareholders do.b. help explain why equity investments are an important financing source for
2. Principal–agent relationshipsa. reduce monitoring costs.b. occur because managers have good information about employees.c. are not related to asymmetric information.d. are subject to moral
1. Your notebook computer’s hard drive recently crashed, and you decide to take it to a local repair technician to have it fixed. In this relationship,a. you are the agent.b. the technician is the
G17-1. Moral Hazard Describe a moral hazard problem your company is facing. What is the source of the asymmetric information? Who is the less informed party? Are there any wealth-creating
17-5. Moral Hazard in Bank Loans Suppose that, as an owner of a federally insured S&L in the 1980s, the price of real estate falls, and most of your loans go into default. In fact, so many loans go
17-4. Auto Insurance Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there are two types of
17-3. AIDS Insurance Suppose your company is considering three health insurance policies. The first policy requires no tests and covers all preexisting illnesses. The second policy requires that all
17-2. Usage-Based Insurance With a GPS system attached to each insured vehicle, insurance companies are able to charge‘‘usage-based insurance rates,’’ depending onhowmuch, when, and where the
17-1. Business Loan A colleague tells you that he can get a business loan from the bank, but the rates seem very high for what your colleague considers a low-risk loan.a. Give an adverse selection
5. A moral hazard explanation would tell us that homeowners are __________ likely to lock their houses at night after buying insurance.a. lessb. morec. equallyd. None of the above
4. Due to the problems associated with __________, one would expect a doctor to spend __________ time with patients after buying malpractice insurance.a. moral hazard, moreb. adverse selection,
3. Which of the following is not an example of a process designed to combat moral hazard problems?a. Banks include restrictive covenants in loan agreements.b. Universities have students complete
2. Moral hazard means that a borrower would be more likely to use loan proceeds to invest in which of the following?a. A blue chip stockb. A mutual fundc. A corporate bond fundd. A start-up
1. Which of the following is an example of moral hazard?a. Reckless drivers are the ones most likely to buy automobile insurance.b. Retail stores located in high-crime areas tend to buy theft
G16-1. Adverse Selection Describe an adverse selection problem your company is facing. What is the source of the asymmetric information? Who is the less-informed party? What transactions are not
16-5. Hiring Employees You need to hire some new employees to staff your start-up venture. You know that potential employees are distributed throughout the population as follows, but you can’t
16-4. Student Work Groups You’ll complete a number of your school assignments in small groups, many of which will be student selected. Assume group members are rational and select fellow group
16-3. ‘‘Soft Selling’’ and Adverse Selection Soft selling occurs when a buyer is skeptical of the quality or usefulness of a product or service. For example, suppose you’re trying to sell a
16-2. IPOs and Adverse Selection Should owners of a private company contemplating an IPO (a sale of stock to the public) release information about the company, or keep as much of it as they can to
16-1. Bicycle Insurance and Information Asymmetry If bicycle owners do not know whether they are high- or low-risk consumers, is there an adverse selection problem?
5. To overcome the problem of adverse selection, employers can use __________ techniques, such as __________.a. signaling, monitoring employee performanceb. screening, monitoring employee
4. Which of the following is not an example of adverse selection?a. A business bets the proceeds of a bank loan on the over/under on the next NFL game.b. An accident-prone driver buys auto
3. To combat the problem of adverse selection, __________ informed parties can employ __________ techniques.a. more, signalingb. less, signalingc. equally, screeningd. equally, signaling
2. An insurance company offers doctors malpractice insurance. Assume that settling malpractice claims against careful doctors costs $5,000 and settling malpractice claims against reckless doctors
1. If a life insurance company knows that smoking increases the risk of death but is unable to determine which applicants smoke, the problem of __________ refers to __________ being more likely to
G15-1. Uncertainty Describe a decision your company has made when facing uncertainty. Compute the expected costs and benefits of the decision. Offer advice on how to proceed. Compute the profit
15-5. Lottery Expected Value Tennessee just instituted a state lottery. The initial jackpot is $100,000. If the first week yields no winners, the next week’s jackpot goes up, depending on the
15-4. Hot Dog Uncertainty You want to invest in a hot dog stand near the ballpark. You have a .35 probability that you can turn your current $15,000 into $50,000 and a .65 probability that fierce
15-3. Vickrey Auction Suppose after submitting your sealed bid in a Vickrey auction, you find out that you have lost the auction (you were not the highest bidder); however, you have the opportunity
15-2. Two Bidder Auction You hold an auction on eBay and expect two bidders to show up. You estimate that each bidder has a value of either $5 or $8 for the item, and you attach probabilities to each
15-1. Global Expansion You’re the manager of global opportunities for a U.S. manufacturer, who is considering expanding sales into Europe. Your market research has identified three potential market
5. You’re considering holding a closed-bid auction for a new technology your company has developed. One of your assistants raises a concern that the potential for a winner’s curse may encourage
4. Suppose that the second, third, and fourth bidders from the preceding oral auction form a cartel. What is the new winning price?a. $3b. $4c. $5d. $6
3. Six bidders in an oral auction place the following values on a good: ($6, $5, $4, $3,$2, $1}. In an oral competitive auction, what is the winning price?a. $3b. $4c. $5d. $6
2. You have two types of buyers for your product. The first type values your product at $10;the second values it at $6. Forty percent of buyers are of the first type ($10 value); 60% are of the
1. You’ve just decided to add a new line to your manufacturing plant. Compute the expected loss/profit from the line addition if you estimate the following: There’s a 70% chance that profit will
G14-3. Test Your Bargaining Skill7 How do different bargaining strategies influence the final purchase price of a new car? In particular, determine whether having better information, being willing to
G14-2. Repeated Bargaining Describe a repeated bargaining game your firm faces. Compute and analyze the equilibrium of the game, and explicitly show how it differs from the one-shot (nonrepeated)
G14-1. Sequential Bargaining Describe a bargaining game within your firm, or between your firm and a competitor, or between your firm and a customer or supplier. Draw a formal game tree with the
14-5. House Closing You’ve entered into a contract to purchase a new house, and the closing is scheduled for next week. It’s typical for some last-minute bargaining to occur at the closing table,
14-4. Price Matching ElectroWorld and Galaxy Appliance are competing retail stores that tacitly bargain with each other in deciding pricing policies. Each can either price high or price low. If both
14-3. Newspaper Bargaining Two equal-sized newspapers have overlap circulation of 10% (10% of the subscribers subscribe to both newspapers). Advertisers are willing to pay $10 to advertise in one
14-2. Ultimatum Game Continued How could you take the advantage away from the other player in the ultimatum game?
14-1. Ultimatum Game You are given an offer to split a $20 bill. The other player offers you $1. If you accept the offer, you keep the $1, and the other player keeps $19. If you reject the offer,
5. The game of chicken hasa. a second-mover advantage.b. a first-mover advantage.c. no sequential-move advantage.d. potential sequential-move advantages, depending on the players.
4. Pete and Lisa are entering into a bargaining situation in which Pete stands to gain up to$5,000 and Lisa stands to gain up to $1,000. Who is likely to be the better bargainer?a. Peteb. Lisac. They
3. Consider a vendor–buyer relationship. Which of the following conditions would lead to the buyer having more bargaining power?a. Lots of substitutes for the vendor’s product are available.b.
2. How many pure strategy equilibria does the following game have?a. 0b. 1c. 2d. 3 Mgmt. Bargain Hard Be Nice Bargain Hard 0, 0 10, 20 Labor Be Nice 20, 10 15,15
1. For threats or commitments to be effective, they must bea. irrational.b. rational.c. credible.d. None of the above.
G13-3. Repeated Game Describe a repeated game facing your firm. Compute and analyze the equilibrium of the game, and explicitly show how it differs from the one-shot (nonrepeated) equilibrium.What
G13-2. Sequential Game Describe a sequential game facing your firm, and represent it in extensive or tree form.Compute and analyze the equilibrium of the game. What advice can you derive from your
G13-1. Simultaneous Game Describe a simultaneous game within your firm, or between your firm and a competitor, or between your firm and a customer or supplier. Draw a formal 2 2 payoff matrix with
13-5. Auditing Game The manager of a corporate division faces the possibility of an audit every year. She prefers to spend time preparing if she will be audited; otherwise, she would prefer to invest
13-4. Airline Hub Game Two airlines, A and B, are deciding to choose whether Atlanta or Chicago should be their major hub. Given the diagram here, find all equilibria of this game. Airline A Atlanta
13-3. Cell Phone Standards Game Nokia and Ericsson plan to introduce new handheld communications devices. However, they must decide whether to use their own software standard or a common
13-2. Coke versus Pepsi In 1931, Pepsi was almost broke. The Great Depression hit it hard, and Coke had most of the duopoly market for soft drinks in the United States. Pepsi tried many things:
13-1. Study Group Free Riding 1. In the game shown below, change the ranking of values that Sally and Joe place on leisure and grades to change the game from a prisoners’ dilemma into a game of
5. In the previous game, up to how much, if anything, would Joe be willing to pay to move first?a. $0b. $10c. $80d. $90
4. The following matrix representation identifies a Nash equilibrium (Black, Even) for a simultaneous-move game between Joe and Sally. If this were a sequential-move game, and Joe had the opportunity
3. If you find yourself in a repeated prisoner’s dilemma, which of the following would be appropriate actions?a. Launch a first strike.b. Punish your competitor severely.c. Respond immediately to
2. In a strategic game, if the other player has adopted a Nash equilibrium strategy, you shoulda. also adopt a Nash equilibrium strategy.b. use a strategy that delivers you a higher payoff than the
1. What is the equilibrium of the following game?a. Up, Leftb. Down, Leftc. Up, Rightd. Down, Right Mary Left Right Up 10, 10 15,5 Gary Down 5,15 12, 12
12-3. Amazon Discrimination In September 2000, Amazon offered a Planet of the Apes DVD to customers using a Netscape Web browser for $64.99. Several seconds later, however, a similar search performed
12-1. Newspaper versus Soft Drink Vending Machines Why do newspaper vending machines allow buyers to take more than one paper while soft drink vending machines dispense just one can of soda at a time?
5. Bundling helps sellers extract more consumer surplus bya. smoothing out different preferences in different buyer groups.b. grouping buyers into more heterogeneous segments.c. implementing an
4. Which of the following statements is consistent with an indirect price discrimination scheme?a. The seller doesn’t have market power.b. The seller has no means to identify different customer
3. Direct price discrimination may be based ona. the age groups of buyers.b. the location of buyers.c. a buyer’s membership in certain clubs or associations.d. All of the above.
2. The strategy underlying price discrimination isa. to charge higher prices to customers who have good substitutes available to them.b. to charge everyone the same price, but limit the quantity they
1. The individual demand curve slopes downward becausea. the value an individual places on an extra unit of the good decreases.b. the amount an individual is willing to pay for the additional unit
WHY (PRICE) DISCRIMINATE?
G10-2. Yield or Revenue Management Describe a pricing decision your company made that involved a product or service with fixed capacity. Was price set optimally? If not, why not? How would you adjust
G10-1. Pricing Commonly Owned Products Describe a pricing decision your company made involving commonly owned products.Was it optimal? If not, why not? How would you adjust price? Compute the profit
10-5. Yield or Revenue Management 3 Suppose your parking lot has two different consumers who use it at two different times.Daily commuters use it during the daytime, and sports fans use it at
10-4. Yield or Revenue Management 2 Suppose your elasticity of demand for your parking lot spaces is –0.5, and price is $20/day.If your MC is zero, and your capacity at 9 A.M. is 96% full over the
10-3. Yield or Revenue Management 1 Suppose your elasticity of demand for your parking lot spaces is –2, and price is $8/day. If your MC is zero, and your capacity is 80% full at 9 A.M. over the
10-2. Pricing Commonly Owned Complementary Products You are a hospital administrator trying to raise capital to refurbish the hospital. Your local bank is reluctant to lend to you because you already
10-1. Pricing Commonly Owned Substitute Products Branded drugs face generic entry by rival drugs that typically take 80% of sales away from the branded drug within three years. This loss occurs
5. Local retailers and producers often use weekly mailed circulars to promote their products to local consumers. The circulars feature a variety of products and make consumers aware of pricing

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