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business
managerial economics

Questions and Answers of Managerial Economics

A firm faces uncertain revenues and uncertain costs. Its revenues may be $120,000, $160,000, or $175,000, with probabilities .2, .3, and .5, respectively. Its costs are $150,000 or $170,000 with
A European consortium has spent a considerable amount of time and money developing a new supersonic aircraft. The aircraft gets high marks on all performance measures except noise. In fact, because
For five years, a firm has successfully marketed a package of multitask software. Recently, sales have begun to slip because the software is incompatible with a number of popular application
In 1976, the parents of a 7-year-old boy sued a New York hospital for $3.5 million. The boy was blinded shortly after he was born two weeks prematurely. His parents claimed that hospital doctors
a. Using Equation 7A.3, find the short-run average cost of producing 108 thousand units in a 9 thousand-square-foot plant. Determine the necessary quantity of labor.b. Would the same output be less
Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number of large firms. (At the same time, some Internet businesses
A firm produces digital watches on a single production line serviced during one daily shift. The total output of watches depends directly on the number of labor-hours employed on the line. Maximum
As noted in Problem 5 of Chapter 3, General Motors (GM) produces light trucks in its Michigan factories. Currently, its Michigan production is 50,000 trucks per month, and its marginal cost is
Firm Z provides Internet access and a bundle of related information services to subscribers. The best estimate of subscriber demand is given by P-20-5Q, where Q is the number of subscribers per month
Firm A makes and sells motorcycles. The total cost of each cycle is the sum of the costs of frames, assembly, and engine. The firm produces its own engines according to the cost equation: C =
A firm uses a single plant with costs C160+ 160+.1Q and faces the price equation P=96-4Qa. Find the firm's profit-maximizing price and quantity. What is its profit?b. The firm's production manager
Suppose you are a theater owner fortunate enough to book a summer box-office hit into your single theater. You are now planning the length of its run. Your share of the film's projected box-office
Suppose the manufacturer of running shoes has collected the following quantitative information. Demand for the boys' shoe is estimated to be Q=9,600-200P, or, equivalently, P=48-Q/200. The shoe's
In 1971, Congress conducted hearings on emergency loan guarantee legislation for Lockheed Corporation, which was in the middle of a severe liquidity crisis due to losses on a number of military
An entrepreneur plans to convert a building she owns into a video-game arcade. Her main decision is how many games to purchase for the arcade. From survey information, she projects total revenue per
The year 1998 saw an unprecedented number of megamergers in the banking industry: NationsBank with BankAmerica, Bank One with First Chicago NBD, and Citicorp with Travelers Group to name the three
A company produces two main products: electronic control devices and specialty microchips. The average total cost of producing a microchip is $300; the firm then sells the chips to other high-tech
Let Q = L"KP. Suppose the firm seeks to produce a given output while minimizing its total input cost: TC PLL + PKK. Show that the optimal quantities of labor and capital satisfy L/K (a/B) (P/PL).
A firm is producing a given amount of output at least cost using a mix of labor and capital (which exhibit some degree of substitutability). Using an isoquant graph, show that if one input price
Consider the production function Q = 100L K. Suppose L=1 and K 1 so that Q 100.a. If L is increased by 1 percent, that is, to L = 1.01, with capital unchanged, what is the resulting percentage
In her last-minute preparations for final exams, a student has set aside five hours to split between studying for two subjects, finance and economics. Her goal is to maximize the average grade
Making dresses is a labor-intensive process. Indeed, the production function of a dressmaking firm is well described by the equation Q-L-L2/800, where Q denotes the number of dresses per week and Lis
Steel can be produced using three different methods: (1) a basic process using coke that produces steel ingots, (2) continuous casting, or (3) an electric furnace using steel scrap. The following
A trendy French restaurant is one of the first businesses to open in a small corner of a commercial building still under construction. The restaurant has received rave reviews and has lines of diners
A 200-pound steer can be sustained on a diet calling for various proportions of grass and grain. These combinations are shown in the table. Pounds of Grass Pounds of Grain 50 80 56 70 60 65 68 .60 80
Determine the optimal quantity of each input.
a. Suppose the inputs in Problem 5 can be purchased at the same price per unit. Will production be relatively labor intensive or capital intensive? Explain.b. Suppose input prices are P = 40 and Px
Consider the production function Q-10L-.5L2+ 24K-K for L and K in the range 0 to 10 units. Does this production function exhibit diminishing returns to each input? Does it exhibit decreasing returns
In November 1990, Chrysler Corporation announced plans to initiate three- shift or nearly continuous (21-hours per day) production at a number of its plants. Explain why Chrysler's decision might
Over a span of 170 years, the men's world record for the mile run was reduced from 4 minutes and 56 seconds in 1804 to Roger Bannister's 3:59.4 in 1954 to John Walker's 3:49.4 in 1975. The graph
A publisher of an industry newsletter wants to forecast the number of firms that are likely to subscribe in future years. Total subscriptions in a given year consist of renewals by current
As the name suggests, a lagging indicator is an economic variable whose movements occur after movements in the overall economy.a. A number of employment measures are lagging indicators. Consider the
a. Using a computer program, estimate the linear increasing trend equation, S a + bt, using ordinary least-squares regression.b. According to your regression statistics, how well does your estimated
Consider again the data in Problem
Extrapolating this trend, he predicts 135 units will be sold in the coming year (year 5). Do you agree? Explain. No.b. A second manager notes that annual sales increases have averaged (120-100)/3
a. Discuss and compare the relative merits of time-series and structural economic forecasts.b. Suppose a firm recently introduced cable television service into a rapidly growing city and surrounding
The following table lists the Neebok Company's sales (in millions of dollars) in each of its five department stores. Management expects total sales to increase 10 percent in the coming year. Store A
A chemical company uses large amounts of shredded steel scrap metal in its production processes. Most of this scrap comes from 12-ounce beverage cans (soft-drink and beer cans). On behalf of the
Suppose that a two-way network initially involves two groups of users(A and B) and a single provider (H1). Suppose that H2 and H3 enter the market with superior network technologies. This one-time,
The Pruett-Joneses have argued that marauding is an evolutionary stable strategy among bowerbirds. Suppose initially that the population is evenly divided between guarding and marauding
What are the potential antitrust issues associated with bottlenecks in network industries?
Discuss the difference between a one-way and a two-way bottleneck.
Twitter is a real-time, on-line communication service that allows users to simultaneously share information with every other user. Is Twitter a network, a bulletin board, or both? Diagram and explain.
How would you describe local cable television networks? What effect has this kind of network had on prices paid by cable television subscribers?
The Internet auction site eBay is an example a hub-and-spoke network that connects multiple buyers and sellers. Explain how first-mover and positive feedback effects enabled eBay to dominate the
Linux is generally considered to be superior to Microsoft’s Windows and Apple’s Macintosh operating systems.a. Do Windows and Macintosh constitute networks?b. Does this explain why Linux has been
QWERTY keyboards were invented in 1878 to minimize typewriter keys from jamming. This arrangement of letters has long been recognized as inefficient and confusing. Although jamming is no longer an
Consider an independent private value auction with twenty riskneutral players. The players’ valuations are generally believed to be uniformly distributed between $0 and $50,000. Suppose that the
Consider a sealed-bid, first-price auction in which the players have independent private values. The general consensus is that the true value of the object being sold is uniformly distributed between
The U.S. Department of the Interior has announced its intention to use a sealed-bid, first-price auction to sell petroleum-drilling rights on public land in Alaska. Four oil companies have indicated
Why would a company going public using a multiple-item Dutch auction begin by specifying a price range for investor bids?
In a sealed-bid, first-price auction with independent private values, as the number of risk-neutral bidders increases, each bid will be lowered, eventually converging to the next-highest bidder’s
In a sealed-bid, first-price auction with independent private values, risk-neutral bidders will submit bids that are higher than their private values of the object. Do you agree? Explain.
Is there any difference in optimal bidding strategies in auctions that involve independent private value estimates and correlated value estimates?
Consider the game depicted in the following figure. Two companies(Firm 1 and Firm 2) form a joint venture to develop a new product.The players write a contract that obligates both parties to fully
Consider the game depicted in following figure. Suppose that two companies (Firm 1 and Firm 2) form a joint venture to develop a new product. The parties write a contract that obligates both parties
A lender has to decide whether to extend a $1,000 loan in exchange for a promise by the borrower to repay the loan and 10 percent simple interest in one year. The borrower plans to invest the
Consider the lending game depicted in Figure 14.1. Suppose that the payoff to the borrower in the event of default is rL – R, where R represents the present value of the borrower’s reputation in
When it is difficult to fully verify damages, the court-imposed breach remedies may be based on legal principles. Name three such legal principles, and explain how they differ.
When the parties to a contract are reasonably certain that the victim of a breach has legal recourse to recover damages, it is possible to structure a contract that gives players an incentive to
What problems are confronted by the courts when attempting to enforce a complete contract with limited verifiability?
What is the role of the courts when enforcing a complete contract that is fully verifiable?
Under what circumstances will a contract be self-enforced? When is it necessary to externally enforce a contract?
Legally enforceable contracts are always necessary for a market transaction to take place. Do you agree with this statement? Explain.
Explain the difference between a contractual relationship and a contracting environment.
and 13.2.What is the Nash equilibrium strategy profile if PETROX and GLOMAR are risk neutral and there is a 50–50 chance of finding oil?
Consider the static oil-drilling games depicted in Figures
Ted Sillywalk offers Wally Wobble the fair gamble of receiving$500 of the flip of a fair coin showing heads, and losing $500 if the coin comes up tails. Suppose that Wally’s total utility of money
Using investor indifference curves, illustrate three investment in which the expected rates of return are kA > kB > kC, and the risks associated with each project are σC > σA > σB. Draw an
Using investor indifference curves, illustrate three investment in which the expected rates of return are kC > kA > kB, and the risks associated with each project are σC > σA > σB. Draw an
and the probability of a high price after 30 days is pH = 0.6?
A share of stock in MagnumOpus, Inc. is $54 per share. It is equally probable that MagnumOpus shares will sell for $50 or $62 per share in 30 days.a. Suppose that the strike price on a 30-day call
Sally purchases a dozen eggs. Although the cost of transporting the eggs is zero, Sally knows that there is still a 50 percent probability that she will break all of the eggs before she gets home.
$12,000 0.15b. Suppose that two types of insurance policies are available. Policy 1 is fair insurance covering complete loss. Policy 2 is fair insurance covering half of the loss incurred.
$10,000 0.35$14,000
$8,000 0.35$11,000
$6,000 0.15$8,000
Suppose that capital investment project X has an expected value ofµX = $1,000 and a standard deviation of σX = $500. Suppose that capital investment project Y has an expected value of µY = $1,500
Rosie Hemlock offers Robin Nightshade the following wager. For a payment of $10, Rosie will pay Robin the dollar value of any card drawn from a standard 52-card deck. For example, for an ace of any
In your opinion, what is a better signal for worker productivity: A so-so grade point average from a prestigious research university, or a high grade point average from a mediocre private or public
Explain why graduates of Ivy League universities receive higher starting salaries than do graduates from less prestigious institutions. How is this related to the problem of adverse selection? Do you
Do you think that the lemons problem is more or less severe for financial securities traded in the New York Stock Exchange or in the market for financial derivatives?
Would you be more or less willing to make a business loan to a friend who had invested his or her life savings in a business?
What is the market for lemons? In what way do you think used-car dealers help reduce the problem of adverse selection? How might the lemons problem manifest itself in the labor market?
Explain how a Harsanyi transformation transforms a static game with incomplete information into a static game with imperfect information.Is it possible to find a perfect Bayesian equilibrium for such
Many risk-averse people play government-sponsored lotteries even though they are unfair gambles. How would you explain this? Would a government ever sponsor a fair lottery?
What is the standard statistical measure of risk? What does it measure?If two payoffs have the same expected value, why is the payoff with the large standard deviation considered riskier than the
Greater volatility of payoffs must be compensated by a higher expected payoff. Do you agree with this statement? For what type of person is this statement likely to be true?
Suppose that Betty wants to purchase Spike’s car. Betty is prepared to pay a maximum of $2,000. Spike will not accept any amount less than $1,000.a. Suppose that the interest rates used to
and iS = 0.20. What portion of the bargaining surplus will Benny and Sylvia receive?d. At these interest rates, how much should Benny offer Sylvia?
Suppose that Benny wants to purchase a boat from Sylvia. Benny is willing to pay up to $18,000, while Sylvia will not part with the boat for anything less than $15,000.a. Suppose that the interest
Two individuals are bargaining over the distribution of $100 in which payoffs must be in increments of $5. Each player must submit a onetime bid. If the sum of the bids is less than or equal to $100,
Suppose that two individuals are bargaining over the distribution of$1,000. Each player submits a one-time bid, which must be in increments of $1. If the sum of the bids is less than or equal to
The Interboro Rapid Transit Authority (IRTA) has estimated the following peak and off-peak demand equations for its commuter rail service:Q P p p = 50 − 2 ;Q P op op = 20 − 4 , where Q is
Suppose that a company produces an intermediate good that is used in the production of a good for final sale. The demand equation the final good is Q P f f = 1,500 −15 .The total cost of producing
What is the estimated percentage mark-up over the fully-allocated perunit cost of production when the price elasticities of demand are −10,−6, −3, −2.3, and −1.8?
Suppose that a company has estimated the average variable cost of producing its product to be $10. The firms total fixed cost is $100,000.a. If the company produces 1,000 units and its standard
Jacob Grimm sells barrels of Skull & Bones Ale to the isolated villages of Forlorn and Dismal. Because Forlorn and Dismal are separated by a high mountain range populated by werewolves and vampires,
, where Q = Q1 + Q2.a. Calculate the firm’s profit-maximizing price and output level in each market.b. Verify that the demand is less elastic in the market with the higher price.c. What is the
;Q P 2 2 = 20 −

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