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business
managerial economics

Questions and Answers of Managerial Economics

4–2. Suppose your firm faces a demand curve of P = 90 − 0.30Q. Find the revenue maximizing output and price. Calculate the total revenue. Is this outcome on the elastic, inelastic, or unitary
4–1. Suppose Product A has the demand function QA = 10 − 5PA + 2PB + 0.01I. The initial values of the variables are QA = 15, PA = $4, PB = $2.5 and I = $2,000.a. When PA moves to $3.4, keeping
5. What advice would you give the major commercial networks and producers of programming for these networks as more consumers adopt PVRs?
4. Discuss the long-run effects if a significant proportion of the viewers begin adopting these“advertising snipping” systems.
3. As more viewers begin using PVRs, what happens to the revenues of the major networks(CBS, NBC, ABC, and Fox)?
2. Suppose you are in charge of setting the price for commercial advertisements shown during Enemies, a top network television show. There is a 60-minute slot for the show. However, the running time
1. Discuss how PVRs will affect the demand from advertisers.
4. Is this price likely to be optimal from your firm’s standpoint, which has profit maximization as a goal?
3. You are paid a sales commission based on your total sales. What price would you charge to maximize your bonus?
2. Are you currently operating in the elastic or inelastic portion of your demand curve?
1. Derive the equation for your demand curve from the two price and sales points.
8. Derive and graph the demand curve, marginal revenue, and total revenue, when given a linear demand function.
7. Discuss network effects.
6. Identify differences between industry and firm demand.
5. Interpret and explain income and cross elasticities.
4. Define marginal revenue and discuss its relation to the demand curve, total revenue, and price elasticity.
3. Calculate price elasticities. Explain price elasticity and its relation to total revenue.
2. Explain the Law of Demand and the connection between declining marginal value and downward sloping demand curves.
1. Define and mathematically express a demand function.
4. Find an event reported in today’s business press that is likely to have an important effect on the cash flows for a given firm. Use Yahoo’s finance website to produce a chart of the
3. Is the discount rate used by investors to value a given stock necessarily constant over time?Explain.
2. Calculate the present value of an investment with the following expected cash flows at a discount rate of 10 percent: year 1 = $500, year 2 = $600, and year 3 = $650. Recalculate the present value
1. Suppose that you purchase a newly issued 10-year U.S. Treasury bond for $10,000. The bond has a promised interest rate of 5 percent ($250 every six months). The stated interest rate of 5 percent
3–24. Assume that the demand curve for sporting guns is described by QD = 100 − 2p and the supply is described by QS = − 20 + p(QD and QS are in millions, p is in $).a. Compute the competitive
3–22. Assume that before the ice storm of 2003, the weekly demand and supply for ice in the Rochester Metro Area was given by the following equations:Dpre: P = 100 − Q Spre: S = 5 + 0.5Qa. Draw a
3–15. The guide at the Washington Monument tells your 10-year-old nephew, “Enjoy the monument. As a citizen, you are one of its owners.” Your nephew asks you if that is true.What do you say?•
3–13. If markets are so wonderful, why do firms exist?
3–12.a. What are contracting costs?b. Give a few examples of contracting costs.c. What effect does the existence of contracting costs have on market economies?
3–10. What is the difference between general and specific knowledge? How can specific knowledge motivate the use of decentralized decision making?
3–8. Suppose that the U.S. government caps the price of milk at $1 per gallon. Prior to the cap milk sold for $1 per gallon. Picture the effects of the price cap using a supply and demand graph.
3. Can the combined production of balls be increased while holding the number of bats produced constant? How?
2. If Chris and Bill each split their time evenly between producing balls and producing bats, what is the total number of bats and balls that will be produced in one day?
1. Which of the following, if any, is true? Explain why.a. Chris has an absolute advantage producing balls and a comparative advantage producing balls.b. Chris has an absolute advantage producing
3–6. Bill and Chris produce balls and bats. In one hour, Bill can produce two bats or four balls, while Chris can produce one bat or three balls. They each work 10 hours a day.
3–4. Many economists favor free trade between nations. They argue that free trade will increase total world output and make people of trading nations better off. Discuss how this argument relates
3–2. What is a property right? What role do property rights play in a market economy?
3–1. What is Pareto efficiency? Why do economists use this criterion for comparing alternative economic systems?
3–2.a. Suppose sugar has the demand curve P = 50 − 5Q and the supply curve P = 5Q.Compute the equilibrium price and quantity and show graphically. Calculate the consumer surplus and producer
3–1. Two men, Tom Hanks and Forest Gump, have been marooned separately on the same deserted island. There are two activities each man can undertake to obtain food: fishing and gathering coconuts.
2. What actions might you consider given the results of your analysis?
1. Use basic supply and demand analysis to illustrate the likely effect of the government’s mandated increase of ethanol production on(1) corn prices and (2) pork prices.
4. What are potential reasons why you might not want to change the work assignments (assume that more assembly of either or both products is desirable)?
3. Devise a way of reassigning the work activities between the two employees that keeps the number of modems being assembled the same as before but increases the number of keyboards.
2. What are Julio’s opportunity costs for assembling modems and keyboards? What are Chenyu’s? Does either employee have a comparative advantage in assembling one of the products?
1. How many modems and keyboards are being assembled under the current work assignments?
10. Explain the effects of price controls both within the supply and demand model and in real-world terms.
9. Define and interpret consumer and producer surplus; define and interpret dead-weight loss in terms of the value of foregone gains from trade.
8. Predict the relative changes in price versus quantity when demand or supply changes in applied settings.
7. Explain why long-run demand and supply curves are generally more elastic than short-run curves.
6. Explain the forces that move prices and quantities toward their equilibrium levels in a competitive market.
5. Distinguish between movements along supply and demand curves and shifts in the curves.
4. Explain the difference between demand and supply functions versus demand and supply curves.
3. Define and apply the concept of comparative advantage.
2. Explain the role of alienable private property rights in markets and why voluntary trade takes place.
A charity has patented a drug for bone-marrow cancer and is selling it on a commercial basis. Explain whether the use of the drug will be economically efficient.
Why should the government charge a toll for use of a tunnel?
How does the government regulate accidents?
Explain how to regulate construction site noise with: (a) a user fee; (b) a standard.
Explain how to resolve asymmetric information by regulating conduct and business structure.
Mandatory disclosure is always the best way to resolve asymmetric information. True or false?
Name one self-regulated profession. Does it regulate disclosure, conduct, or structure?
Generally, what does competition law seek to prohibit?
Does privatization necessarily increase competition? Explain why or why not.
What are the problems with rate-of-return regulation?
Explain rate-of-return regulation.
What are the problems with price regulation?
What are the challenges for the efficiency of businesses owned and operated by government?
Give an example of a holdup. Explain how this will induce the affected parties to avoid specific investments.
Maria is a pilot. Which of the following investments by her is relatively more specific to the airline that she works for? (a) An executive MBA program. (b) Training on the airline’s flight
A secretary’s job includes typing letters and other responsibilities. Comment on a proposal to pay a secretary according to the number of letters that he types.
Explain how a taxi company can structure incentives based on relative performance to motivate its drivers to maintain their taxis carefully and avoid breakdowns.
Why is it better to pay a real estate broker by commission, in which she receives a percentage of the selling price of the property, rather than an hourly rate?
Explain the moral hazard in the following situation. Leah has just bought comprehensive insurance on her car that covers loss and damage for any reason, including theft. Her insurer is concerned that
A producer of financial management software offers full refunds to any dissatisfied purchaser. Is the refund policy a credible signal of product quality?
This question relies on the auctions section. The seller of the rights to oil in a particular area has undertaken a geological study. Will the winner’s curse be more serious if the seller (a)
This question relies on the auctions section. Explain the impact of the following on collusion among bidders at an auction: (a) open bidding as compared with sealed bids; and(b) reserve pricing.
An automobile insurance policy with a $2,000 deductible only covers loss in excess of $2,000. Typically, automobile insurers offer policies with a choice between higher deductibles and higher
A manufacturer of women’s clothing pays production workers a piece rate. The human resources manager has proposed to offer workers the alternative of a fixed salary. Explain the implications in
If a borrower defaults on a secured loan, the creditor can seize and sell the item against which the loan is secured. Explain why the interest rate on secured loans is lower than that on unsecured
Whenever people face risk, they will seek insurance. True or false?
Index. (b) Acquirer is planning a takeover bid for Target at $50 a share, which is 25% above the current market price of $40, and is secretly buying shares of Target.
In the following situations, explain the asymmetry of information, if any: (a) Investors do not know the next day’s Standard & Poor’s
Why does it make sense to sell a public good to more consumers?
In what way does excludability depend on law and technology?
Which of the following are public goods? (a) Dental treatment at a public hospital.(b)Welfare payments to unemployed people. (c) National defense.
Where are technical standards relatively more important: in markets with network effects or those without? Explain your answer.
Give an example of a network externality, and in that context explain the concepts of critical mass and tipping.
What is the possible free-rider problem in the following context? Saturn City lies two miles off a busy highway. The city’s major businesses have proposed to build an exit from the highway to draw
Explain the relation between the combined marginal benefit curve from additional customers for all retailers in a mall and the retailers’ individual marginal benefit curves.
Luna and Neptune have both launched a new consumer electronic device. Luna’s advertising is raising Neptune’s demand. What is the economically efficient level of Luna’s advertising?
What is the difference between a negative and positive externality?
Is a cartel easier or more difficult to enforce in a market with less heterogeneous products as compared with a market with more heterogeneous products?
What are the five factors that influence the effectiveness of a cartel?
In committing to production capacity before other sellers, why is it important to look forward and consider how the other sellers would set capacity?
Suppose that you can commit to production capacity before other sellers set their capacity.Should you set a relatively larger or smaller capacity as compared with the situation where you commit to
Suppose that your cost of capacity is sunk, once incurred. Does this help or hinder a strategy of limit pricing?
Explain why limit pricing does not make sense in an industry where production involves no fixed cost.
Suppose that advertising expenditures are strategic substitutes. On a graph like Figure 11.5, illustrate the best response functions.
Explain the meaning of strategic substitutes.
In competition between sellers on capacity to sell a homogeneous product, how would an increase in fixed cost affect the equilibrium?

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