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business
managerial economics

Questions and Answers of Managerial Economics

In evaluating an investment, a manager forecasts cash flows to increase 2 percent in real terms over the life of the project. There is little or no uncertainty associated with these cash flows. Thus,
A state commission runs a lottery in which it sells 1 million $1 tickets, one of which will be selected as the grand-prize winner. The winner will receive $1 million payable in 20 annual installments
A tax-exempt, private university is considering whether to build a new dormitory. The university's financial vice president has the following facts. The university plans to start construction in 2009
Describe how you would compute the net present value of a personal investment decision, such as whether to pursue an M.B.A. degree, purchase a car, or pay a higher price for an energy-saving
A private company is considering building and operating a downtown parking garage. The company would site the garage on company-owned land, and construction would require demolition of a small,
A soft-drink producer must decide how to divide its spending between two forms of media: television advertising and magazine advertising. Each 30-second commercial on prime-time network television
Explain whether linear programming techniques can be used in each of the following economic settings.a. There are increasing returns to scale in production.b. The objective function and all
Firms J and K are competing to supply high-tech equipment to a government buyer. Firm J's expected production cost is $105 million and its profit requirement (on top of this) is $5 million. (The firm
In many sealed-bid auctions, one expects that an increase in the number of bidders will cause each potential buyer to raise his or her equilibrium bid. In some cases, the impact is just the reverse;
Do the tables support similar policy actions? Which table embodies better information?
Table 2 shows the information the firm collected on the lowest competing bid for each auction during this period.a. Based on the information in Table 1, what is the firm's optimal markup?b. Answer
Reliant Press produces business forms for large customers: major banks, insurance companies, and the government. More than half of its sales are by competitive bid. Its largest facility receives an
In a second-bid auction, buyers submit sealed bids, and the highest bidder obtains the item for sale but pays the seller an amount equal to the second-highest bid.a. Suppose buyers hold different
Firm A is attempting to acquire firm T but is uncertain about T's value. It judges that the firm's value under current management (call this vr) is in the range of $60 to $80 per share, with all
A buyer has value v, for a potential acquisition and believes the seller's reservation price has the cumulative probability distribution F(v). The buyer chooses P to maximize its expected profit: =
What offer should A make to maximize its expected profit? "11. Suppose two firms, X and Y, are bargaining over how to split a total stake of $120,000. As in the earlier management-labor example, the
Firms A and B are negotiating to conclude a business deal worth $200,000 in total value to the parties. At issue is how this total value will be split. Firm A knows B will agree to a 50-50 split, but
In the quantity-price contract example in Figure 16.3, we noted that the order quantity, Q 20, is efficient. We can demonstrate that seemingly reasonable contracting methods can lead to inefficient
Firm B and firm S are in the process of negotiating a contract whereby S will synthesize a hormone for B. Besides the payment from B to S, three issues are involved: (1) whether the hormone will be
Firm S supplies inputs to firm B. Because producing the input is quite complicated, some defects are inevitable. Firm S can reduce the rate of defects at a cost. In turn, defective parts lower firm
In labor negotiations, failure to reach a contract agreement frequently results in a labor strike or work slowdown. In each of the following situations, identify which side-labor or management-is
a. In 1999, Procter & Gamble and Ford Motor Co., two of the world's largest spenders on advertising, changed the way they paid their advertising agencies. Formerly, these agencies' fees were set as a
For planning purposes, company headquarters seeks to obtain accurate information about the productive capacity of one of its plants. The plant manager knows that the facility's capacity is Q-10,000
When a corporation offers shares of stock or other securities to the public, it hires an underwriter to conduct the sale. (The underwriter is an investment bank such as Morgan Stanley or Merrill
In the aftermath of the September 11, 2001, terrorist attacks in New York City and Washington, DC, there has been renewed con- cern about airport security. To date, security services at major
A state highway safety agency must allocate its budget for the next fiscal year. A total funding of $32 million has been granted for reducing fatalities and property damage due to automobile
In the early 1970s, the governor of Maine assembled a task force to evaluate several oil company proposals to develop a deep-water harbor for tankers and to build a refinery at Machias, a seaport at
Three blocs of nations are beginning negotiations aimed at reducing the emissions of greenhouse gases (GHGs). The blocs are the United States, the European Community, and a coalition of developing
Two large manufacturing firms are major sources of airborne pollutants in a metropolitan area. Currently, each firm generates about 15 million units of pollution per year. The firms' costs of
Suppose Coca-Cola and Pepsi announced plans to merge into a single global soft-drink company. What would be the possible effects on soft- drink consumers of such a union? What kind of regulatory
Consider the following payoff tables. In the first period, each firm determines its price (high or low). In the second period, each firm chooses a design standard (design 1 or design 2). They both
The following payoff table lists the profits of a buyer and a seller. The seller acts first by choosing a sale price ($9, $8, or $6). The buyer then decides the quantity of the good to purchase (two
In the following game tree, players A and B alternate moves. At each turn, a player can terminate the game or pass the move to the next player. By passing, the player increases the rival's potential
One way to lower the rate of auto accidents is strict enforcement of motor vehicle laws (speeding, drunk driving, and so on). However, maximum enforcement is very costly. The following payoff table
Firm A and firm B are battling for market share in two separate markets. Market I is worth $30 million in revenue; market II is worth $18 million. Firm A must decide how to allocate its three
The following payoff table depicts service competition between two hospitals in a southeastern city. (Each payoff represents profit in millions of dollars.) Hospital B's Service Basic All Purpose
Consider the following zero-sum game.a. Does either player have a dominant strategy? Does either have a dominated strategy? Explain.b. Find the players' equilibrium strategies. Player C Cl C2 C3 R1
In 2008, Saudi Arabia and Venezuela (both members of OPEC) produced an average of 8 million and 3 million barrels of oil a day, respectively. Production costs were about $10 per barrel and the price
Two firms dominate the market for surgical sutures and compete aggressively with respect to research and development. The following payoff table depicts the profit implications of their different R&D
Firms J and K produce compact-disc players and compete against one another. Each firm can develop either an economy player (E) or a deluxe player (D). According to the best available market research,
a. Identify the equilibrium outcome(s) in each of the three payoff tables. I. RI Cl 12.10 10,4 C2 II. Cl C2 III. CI C2 RI 12,10 4,4 R1 12, 10 4,4 R2 4,8 9,6 R2 4,4 9,6 R2 4.-100 9,6b. In each table,
Consider the accompanying zero-sum payoff table.a. Does either player have a dominant strategy? Does either have a dominated strategy? Explain.b. Once you have eliminated one dominated strategy, see
Choose a good or service that is supplied by a small num- ber of oligopoly firms. (Examples range from athletic shoes to aircraft to tooth- paste, or choose a product from the industry list in Table
a. Using the marginal condition in Equation 12.7, show that an equivalent condition for the optimal level of advertising is (P-MC)Q/A = 1/EA, where EA (3Q/Q)/(A/A) is the elasticity of demand with
Firm Z faces the price equation P = 50 + A-Q and the cost function C 200+ A, where A denotes advertising spending.a. Other things (price) held constant, does an increase in advertising spending lead
Suppose instead that the firms in Problem 9 compete by setting quantities rather than prices. All other facts are the same. It is possible to rewrite the original demand equations as P [150 (2/3)Q] -
Two firms produce differentiated products. Firm 1 faces the demand curve Q 75-P+5P. (Note that a lower competing price robs the firm of some, but not all, sales. Thus, price competition is not as
Suppose four firms engage in price competition in a Bertrand setting in which the lowest-price firm will capture the entire market. The firms differ with respect to their costs. Firm A's marginal
In each of the following cases, provide a brief explanation of whether a prisoner's dilemma is present. If so, suggest ways the dilemma can be overcome.a. When there is a bumper crop (a large supply
Firms M and N compete for a market and must independently decide how much to advertise. Each can spend either $10 million or $20 million on advertising. If the firms spend equal amounts, they split
Two firms serve a market in which demand is described by P 40-5(Q+Q). Each firm's marginal cost is 20.a. Suppose each firm maximizes its own profit, treating the other's quantity as constant. Find an
Firm A is the dominant firm in a market where industry demand is given by Q 48-4P. There are four "follower" firms, each with long- run marginal cost given by MC 6+ Q. Firm A's long-run marginal cost
The OPEC cartel is trying to determine the total amount of oil to sell on the world market. It estimates world demand for oil to be Qw-60-.5P,where Qw denotes the quantity of oil (in millions of
In granting (or prohibiting) proposed acquisitions or mergers in an industry, government regulators consider a number of factors, including the acquisition's effect on concentration, ease of entry
Pharmaceutical companies can expect to earn large prof- its from blockbuster drugs (for high blood pressure, depression, ulcers, aller- gies, sexual dysfunction) while under patent protection. What
A single buyer who wields monopoly power in its purchase of an item is called a monopsonist. Suppose that a large firm is the sole buyer of parts from 10 small suppliers. The cost of a typical
Consider again the New York taxi market, where demand is given by Q=7-5P, each taxi's cost is C 910+ 1.5Q, and ACmin $8 at 140 trips per week.a. Suppose that, instead of limiting medallions, the
Firms A and B make up a cartel that monopolizes the market for a scarce natural resource. The firms' marginal costs are MCA 6+ 2QA and MCB 18+Q, respectively. The firms seek to maximize the cartel's
Suppose that, over the short run (say, the next five years), demand for OPEC oil is given by Q 52.5-1.25P or, equivalently, P = 42-.8Q(Here Q is measured in millions of barrels per day.) OPEC's
Let's reconsider the case of gasoline price gouging.a. Suppose that, during the day, the station owner's demand is given by PD 2.06-00025Q. The marginal cost of selling gasoline is $1.31 per gallon.
Consider a natural monopoly with declining average costs summarized by the equation AC 16/Q+ 1, where AC is in dollars and Q is in millions of units. (The total cost function is C 16+Q) Demand for
Until recently, the market for air travel within Europe was highly regulated. Entry of new airlines was severely restricted, and air fares were set by regulation. Partly as a result, European air
A pharmaceutical company has a monopoly on a new medicine. Under pressure by regulators and consumers, the company is considering lowering the price of the medicine by 10 percent. The company has
Over the last 30 years in the United States, the real price of a college education (i.e., after adjusting for inflation) has increased by almost 70 percent. Over the same period, an increasing number
a. When a best-selling book was first released in paperback, the Hercules Bookstore chain seized a profit opportunity by setting a selling price of $9 per book (well above Hercules' $5 average cost
The market for rice in an East Asian country has demand and supply given by Q 28-4P and Q-12+ 6P, where quantities denote millions of bushels per day.a. If the domestic market is perfectly
Consider once again the digital watch numerical example.a. Suppose U.S. demand for watches increases to Q-65-2Py at the same time that the dollar depreciates from 100 per dollar to V90 per dollar.
Demand for microprocessors is given by P-35-50, where Q is the quantity of microchips (in millions). The typical firm's total cost of producing a chip is C = 5q,, where q; is the output of firm i.a.
In a competitive market, the industry demand and supply curves are P 70 Q and P40+2Q5.a. Find the market's equilibrium price and output.b. Suppose that the government provides a subsidy to producers
In a perfectly competitive market, industry demand is given by Q=1,000 20P. The typical firm's average cost is AC300/Q+Q/3.a. Confirm that Qmin 30.(Hint: Set AC equal to MC.) What is ACmin?b. Suppose
Firm Z, operating in a perfectly competitive market, can sell as much or as little as it wants of a good at a price of $16 per unit. Its cost function is C=50+ 40+20.The associated marginal cost is
The Green Company produces chemicals in a perfectly competitive market. The current market price is $40; the firm's total cost is C-100+ 4Q+Qa. Determine the firm's profit-maximizing output. More
In a competitive market, the industry demand and supply curves are P-200 20 and P-100+.3Q, respectively.a. Find the market's equilibrium price and output.b. Suppose the government imposes a tax of
Potato farming (like farming of most agricultural products) is highly competitive. Price is determined by demand and supply. Based on Department of Agriculture statistics, U.S. demand for potatoes is
Consider the regional supply curve of farmers who produce a particular crop.a. What does the supply curve look like at the time the crop is harvested? (Show a plausible graph.)b. Depict the crop's
In August 1999, Bridgestone/Firestone Inc. recalled 6.5 million tires in the wake of a number of tire-related rollover accidents involv ing the Explorer SUV produced by Ford Motor Company. Although
Suppose you will be shown three "prizes" in order. You know absolutely nothing about how valuable the prizes might be; only after viewing all three can you determine which one you like best. However,
A firm is looking for the best (ie., lowest) price from one of two sellers. It can approach each seller only once (and at no cost). Seller X's price is distributed uniformly between $30 and $40.
A firm anticipates an R&D program requiring as many as three stages. A successful program (sooner or later) will earn the firm a commercial profit of $20 million. The investment costs for the
An oil wildcatter is considering drilling a site that she judges to be wet with probability .2 and dry with probability .8. Her profit from an oil strike is $1 million, and her loss from a dry hole
Firm B is considering whether to pursue an R&D effort to develop a powerful new microchip. One concern with the chip's design is that the chip might generate too much heat operating at high speeds.
Recall the earlier example of assessing the risk of loan defaults. Suppose the bank's top managers are divided on whether to adopt the scoring system permanently. A number of top officers believe
On behalf of your company, you are preparing a price bid to supply a fixed quantity of a good to a potential buyer. You are aware that a number of competitors also are eager to obtain the contract.
Consider the following simplified version of the television game show Let's Make a Deal. There is a grand prize behind one of three curtains; the other two curtains are empty. As a contestant, you
Consider once again the decision to redesign an aircraft (Problem 4 in Chapter 8).a. Find the expected value of perfect information about the redesign program. Calculate separately the expected value
The table that follows (compiled from police reports) shows the driving safety records for three age groups over the last year in a large metropolitan area.a. An analyst points out that of 57,051
A health club has sent promotional material to a mailing list consisting of local college students, area doctors, and lawyers. The accompanying table shows the record of individuals taking up the
Just prior to baseball's spring training season, you are asked to assess the probability that a particular baseball team will win the coming World Series.a. How would you go about making this
It is time to buy a new car, and you have done a considerable amount of research on the matter over the past weeks. From several articles in consumer magazines and scrutiny of numerous auto-buying
a. You are given $1,000 to keep. You then are offered a choice between receiving an additional $500 for certain or taking a 50-50 gamble with outcomes of $1,000 and $0. Which would you choose?b. You
Put yourself in the yacht dealer's shoes. You currently are considering other order quantities in addition to 50 and 100.Find the optimal order quantity, that is, the exact quantity that maximizes
In attempting to quantify its attitude toward risk, top management of the pharmaceutical company has reported certainty equivalent values for a variety of 50-50 risks. These are summarized in the
Firm A is about to embark on a risky development project that offers a .2 chance of a $4 million profit and a .8 chance of a $0 profit. Unexpectedly, firm B proposes a joint venture. In return for
Consider once again the dilemma facing Consolidated Edison's system operator. To keep things simple, we focus on one of the decisions he faced: to maintain load or to shed load. Suppose his choices
Consider once again the R&D strategies of the pharmaceutical company described earlier in this chapter. Suppose the company's management is risk averse and has assessed the following utility values
As CEO of firm M, you and your management team face the decision of whether to undertake a $200 million R&D effort to create a new megamedicine. Your research scientists estimate that there is a 40
Filene's Basement, a Boston-based department store, has a policy of marking down the price of sale items each week that they go unsold. You covet an expensive brand of winter coat that is on sale for
Firm A is facing a possible lawsuit by legal firm B. Firm B represents the family of Mr. Smith, who was killed in a motel fire (allegedly caused by faulty wiring). Firm A was the builder of the
In 1996, McDonald's (MD) launched Campaign 55, reducing the prices of its "flagship" sandwiches with the objective of regaining market share. Before the launch, suppose MD's management envisioned two
Global Studios is thinking of producing a megafilm, Aqua World, which could be a megahit or a megaflop. Profit is uncertain for two reasons: (1) The cost of producing the film may be low or high, and

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