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business
managerial economics

Questions and Answers of Managerial Economics

Are the three legs of the stool mutually consistent? Given the decision-right system, does the control system fit, and vice versa?
Does the current architecture fit the business environment and strategy? In particular, does the architecture link specific knowledge and decision rights in an effective manner and provide incentives
6. Understand why, how, and when firms change their organizational architecture.
5. Describe the role of corporate culture and its connection to organizational architecture.
4. Describe how the three components of an organization’s architecture are interrelated and why it is important to design them in a balanced (complementary)fashion.
3. Explain how a firm’s business environment and strategy help to determine its optimal organizational architecture.
2. List the three components of a firm’s organizational architecture.
1. Describe the fundamental problem facing all organizations and how the architecture of markets differs from the architecture of firms.
10–12. The Sonjan company currently purchases health insurance for all of its 1,000 employees.The company is considering adopting a flexible plan whereby employees can either have$2,000 in cash or
10–11. The state of California charged Sears Auto Centers with overcharging customers for unneeded or unperformed repairs. Sears agreed to a settlement that could cost as much as $20 million. Sears
10–8. How do reputational concerns aid in the enforcement of contracts?
10–7. What is adverse selection? Give an example.
10–6. Is it worthwhile for shareholders to seek to completely eliminate incentive problems with managers and directors through means such as monitoring? Why or why not?
10–5. What potential problems exist in agency relationships?
10–4. Name the two parties involved in an agency relationship.
10–3. What is asymmetric information? How can it limit contracts from solving incentive conflicts?
10–2. Give examples of incentive conflicts:a. Between shareholders and managersb. Between coworkers on teams
10–1. What is a firm?
10–2. Suppose that a health insurance company is considering offering insurance to a population consisting of healthy and unhealthy people. Healthy people are expected to have$1,000 per year in
10–1. John owns a home construction company. His cost for building a new house is $300,000.Sue is a potential home buyer who would be willing to pay John up to $400,000 to construct a new house if
5. eBay claims that it has only a small problem with fraud and misuse of the system. Does this imply that it is overinvesting in addressing potential contracting problems? Underinvesting? Explain.
4. What are the contracting costs at eBay?
3. How does eBay address these problems?
2. What potential contracting problems exist on eBay?
1. How does eBay create value?
3. Should you offer the new head manager at the Salt Lake location the same compensation contract that you are using for the five managers in Portland?
2. You have been able to control these conflicts reasonably well at your existing restaurants. Do you anticipate that the conflicts will be easier or harder to control at the new Salt Lake location?
1. Discuss the incentive conflicts that are likely to arise between owners and managers of a restaurant.
If techniques to limit unproductive actions exist, why did the owners (shareholders) at scandal-ridden companies allow the managers to engage in such dysfunctional behavior?
Owner-manager conflicts can result in reduced productivity and waste.Unchecked, such conflicts of interest can destroy a firm. How do firms limit unproductive actions by self-interested managers to
Material conflicts of interest can exist between owners and managers: Shareholders are interested in the firm’s value, whereas the managers are interested in their own well-being. What other
In previous chapters, we employed standard economics tools, treated the firm as a “black box,” and focused on first-order conditions. We assumed that managers always maximize profits. Apparently,
8. Explain why all the firm’s stakeholders potentially have a common interest economizing on contracting costs.
7. Discuss how implicit contracts and reputational concerns can sometimes reduce incentive problems and contracting costs.
6. List the components of agency costs.
5. Differentiate between adverse selection problems and moral hazard problems.
4. Explain how asymmetric information can increase the costs of contracting.
3. Explain how contracts can be used to help control incentive problems.
2. Identify important owner-manager conflicts, as well as other potential stakeholder conflicts.
1. Define the firm as a focal point for a set of contracts.
9–12. Formulate the following situation as an extensive form game (using a game tree) and solve it using backward induction. Bingo Corporation and Canal Corporation are the only competitors in the
9–11. You are considering placing a bid over the Internet in an eBay auction for a rare oriental rug. You are not a dealer in these rugs, and you do not have a precise estimate of its market value.
9–3. What is the relation between a dominant strategy and a Nash equilibrium?
9–1. Some manufacturers that contract with the U.S. government have most favored nation clauses in their contracts. This provision makes the firm sell to the government at the lowest price it
6. Pepsi and Coke were the big winners in this case. Explain why.
5. Explain how Monsanto had a “first-mover’s advantage.”
4. Prior to Holland Sweetener’s entry into the U.S. market, Pepsi and Coke began deemphasizing the NutraSweet label on their cans and bottles. Why do you think they did this?
3. Why do you think Holland Sweetener entered?Were they just dumb or were there other potential considerations?
2. Now assume that the interaction is sequential where Holland Sweetener chooses to enter and if so they face the pricing problem in the second stage. Should Holland Sweetener enter?
1. Construct the strategic-form payoff matrix for this strategic pricing problem. Find the Nash equilibrium.
2. Can you conclude from your example that all firms in all industries will favor bans on television advertising? Explain. Can you ever envision a situation where one firm might favor the ban and a
1. Design a simple two-company game that illustrates why it might have been in the economic interests of the cigarette companies to support the ban. In designing the game, assume that there is no
10. Describe the key managerial insights obtained from game theory.
9. Define first-mover advantage.
8.Apply backward induction to find the equilibrium in two-person sequential games.
7. Understand simple diagrams that depict sequential games in extensive form.
6. Define mixed strategy and describe why managers might sometimes choose to use one.
5. Determine (pure strategy) Nash equilibria in simple two-person games.
4. Explain the economics of a prisoner’s dilemma and provide examples of how these dilemmas can arise within firms.
3. Define dominant strategy.
2. Understand simple diagrams that depict games in strategic (normal) form.
1. Define game theory.
8–6. Evaluate the following statement: “Business is war. Never consort with the enemy.”
8–4. What are team capabilities? Give examples of firms that appear to have them.
8–1. Choose a company that markets computer products over the Internet (e.g., through a Web search). In what ways does the company create value? Is it likely to capture much of this value? Explain.
6. In November 2007, Walmart.com announced that it wants to be “the most visited, most valued online retail site.” Suppose you were hired by an outside consulting firm to evaluate Walmart.com’s
5. What do you think the potential impact of Walmart.com will be on the company’s efforts to expand internationally?
4. Should Walmart have pursued e-commerce more aggressively sooner?
3. Is it likely that Walmart will capture any value created by Walmart.com?
2. Do you think that Walmart.com is likely to create additional value?
1. What is the impact of Walmart.com on customer-borne transaction costs?
Do all high-performing firms ultimately “fall back with the rest of the pack”as Walmart did in the mid-1990s?
Can managers enhance financial returns through diversification (as Walmart was attempting to do by opening grocery stores)?
What actions can managers take to generate superior performance?
Should all properly managed firms expect sustained superior performance?
What accounts for the success of these firms?
7. Show why it is impossible for some firms to capture value and why it is unlikely that any firm can capture value in perpetuity
6. Describe a general framework that can be used for strategic planning.
5. Summarize the economic costs and benefits of diversification (multiple businesses within the same firm).
4. List the conditions that must exist for a firm to make economic profits over the long run.
3. Explain why producer surplus is often captured as “rents” by superior assets.
2. Discuss how competitive forces make it difficult for individual firms to capture value over the long term.
1. Explain the general ways by which managers within an industry might increase value.
7–13. Consider three firms: a shoe store at the mall, an automobile dealership, and a house painting firm.a. Which firm would you expect to engage in the most price discrimination? Why?b. How has
7–9. The Snow City Ski Resort caters to both out-of-town skiers and local skiers. The demand for ski tickets for each market segment is independent of the other market segments. The marginal cost
7–8. You own a theater with 200 seats. The demand for seats is Q = 300 − 100P. You are charging $1.25 per ticket and selling tickets to 175 people. Your costs are fixed and do not depend on the
7–7. Why do companies grant discounts to senior citizens and students?
7–6. In the example in this chapter, the linear approximation method produced the profitmaximizing price, whereas the markup pricing rule did not. Does this imply that the linear rule is always
7–5. Explain why perfect personalized pricing is typically more profitable than menu pricing.Why then do companies use menu pricing?
7–4. Suppose in Table 7.2 (Product Bundling) that the consumer user values Microsoft Word at $70 rather than $100. Keep all other valuations the same. Are there still obvious advantages from
7–3. Textbook publishers have traditionally produced both U.S. and international editions of most leading textbooks. The U.S. version typically sells at a higher price than the international
7–2. The local space museum has hired you to assist them in setting admission prices. The museum’s managers recognize that there are two distinct demand curves for admission.One demand curve
7–1. Macrosoft is a new producer of word processing software. Recently, it announced that it is giving away its product to the first 100,000 customers. Using the concepts from this chapter, explain
6. Do you think that Apple’s ability to control the pricing of downloaded music is likely to change in the future? Explain
5. Is Apple’s pricing objective to maximize the revenue it receives from the sales of downloaded music? Is this the objective of the major record companies? Explain. (Hint: Review the
4. What are the risks and potential costs of implementing more sophisticated pricing schemes for the downloaded music?
3. Discuss other potential pricing policies that might increase the revenue from Music Store sales.
2. Why do you think Apple moved from one to three price points in 2009? What types of songs do you think Apple tends to sell at the lower prices?
1. Provide an argument for why a more variable pricing policy might increase the sales revenue from Apple’s Music Store (compared to the flat pricing policy).
3. What happens if you increase the monthly fee for the plan designed for the Type B customers?Explain.

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