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business
managerial economics

Questions and Answers of Managerial Economics

How the business environment (technology, regulation, and competition in input and output markets) drives the firm’s choice of strategy.
Explain the importance of the free-rider problem in political rentseeking activity.
Why is it necessary for governments to provide public goods?How do governments finance the provision of public goods? Explain why governments frequently provide socially inefficient amounts of the
What product characteristics cause the free-rider problem?
Explain why private markets will not provide socially efficient levels of public goods?
The most important, and unanticipated, shortcoming of the Clean Air Act is that a market for pollution emission permits encourages firms to avoid adopting environmentally friendly production
Under what circumstances will setting emissions standards result in a superior solution to the pollution problem than charging emission fees?
In general, direct government regulation of pollution emissions is superior to charging emission fees because compliance does not depend on the good will of the polluter. Do you agree with this
It is reasonable to assert that zero pollution should be the goal of public environmental protection agencies. Do you agree?
Suppose that a steel plant discharges significant amounts of air pollution.Residents within a 50-mile radius of the steel plant experience an incidence of lung cancer significantly higher than the
Explain how the assignment of private property rights will lead to a socially efficient level of output.
Ceteris paribus, a firm that pollutes a nearby river produces a greater level of output and sells its product at a lower price than a similar firm that cleans up its effluents prior to discharge into
Suppose that the price charged by a monopolist is regulated at its perfectly competitive level. Suppose, however, that at the profitmaximizing level of output ATC > Ppc. What can the government do to
It is always in the public’s best interest to regulate prices at levels lower than would be charged by a monopolist. Do you agree? Explain.
Explain how the presence of market power results in socially nonoptimal levels of goods and services and a misallocation of productive resources.
What is producer deadweight loss?
What is consumer deadweight loss?
Suppose that the firms in a perfectly competitive industry are organized into a profit-maximizing monopoly. The monopolist charges a higher price and produces a lower output level than was the case
How do deductibles on insurance claims address the problem of moral hazard?
Define moral hazard. Give an example.
Define adverse selection. Give an example.
Insurance companies require a deductible on all insurance claims to reduce costs and bolster profits. Do you agree? Explain.
Briefly explain the following decision criteria and the conditions under which each might be used:a. Laplace criterionb. Wald (maximin) criterionc. Hurwicz criteriond. Savage criterion
An individual with L-shaped indifference curves is indifferent to insurance offered at fair or unfair odds. Do you agree with this statement?Explain.
What risk preferences are described by L-shaped indifference curves?
Explain why insurance companies charge higher premiums to male drivers between 18 and 25 years of age than for all other drivers.
Explain why many life insurance policies contain clauses stipulating that benefits will not to the heirs of a policyholder who commits suicide.
Can the internal rate of return method discussed in Chapter 12 be used to determine the risk-adjusted discount rate?
Risk-averse individuals will always reject a fair gamble. Do you agree? Explain.
What is the difference between the standard deviation and the coefficient of variation as a measure of risk? When would it be appropriate to use each one?
Decision making under conditions of uncertainty with complete ignorance is never the same as decision making under conditions of uncertainty under partial ignorance. Do you agree? Explain.
When is the process of decision making under conditions of risk the same as the process of decision making under conditions of uncertainty?
Can uncertainty be estimated? If not, then why not? Explain.
What are the most commonly used measures of risk?
What is the difference between risk and uncertainty?
The existence of a trigger strategy that punishes a violator of a cooperative agreement will eliminate the problem of cheating in a simultaneous-move, infinitely repeated game. Do you agree? Explain.
Under what conditions will trigger strategies be successful in maintaining the integrity of a collusive agreement?
If neither player in a noncooperative, one-shot game has a strictly dominant strategy, or if the strategy results in a weakly dominant strategy equilibrium, explain how the concept of a focal-point
Explain the difference between a strictly dominant strategy and a weakly dominant strategy.
In a two-player, one-shot game, if one player has a dominant strategy, the second player will never adopt a maximin strategy. Do you agree? Explain.
It is not possible to have multiple Nash equilibria in the presence of a subgame perfect equilibrium. Do you agree with this statement? If not, why not?
Explain the difference between a strictly dominant strategy and a weakly dominated strategy.
In a two-player, simultaneous-move game with a strictly dominant strategy equilibrium, at least one of the players will adopt a secure strategy.Do you agree? If not, why not?
Explain the difference between a strictly dominant strategy and an iterated strictly dominant strategy.
The existence of a Nash equilibrium confirms Adam Smith’s famous metaphor of the invisible hand. Do you agree with this statement? If not, then why not?
Explain the difference between a strictly dominant strategy and a non–strictly dominant strategy equilibrium. Under what circumstances will a strictly dominant strategy lead to a non–strictly
Suppose you and a group of your coworkers have decided to have lunch at a Japanese restaurant. It has been decided in advance that the lunch bill will be divided equally. Each person in the group is
Explain the difference between moves and strategies.
A subgame perfect equilibrium is impossible in a game with multiple Nash equilibria. Do you agree or disagree? Explain.
In the game “rock–scissors–paper” two players in unison show a fist(rock), two fingers (scissors), or an open hand (paper). The winner of each round is determined by what hand signals the
The modified internal rate of return method is preferable to the net present value method for evaluating capital investment projects because it assumes that cash flows are reinvested at the cost of
What is the difference between the internal rate of return method and the modified internal rate of return method for evaluating capital investment projects? What problem does the second method
Under what circumstances is a project likely to exhibit multiple internal rates of return possible?
What are the maximum possible internal rates of return for a single project?
For mutually exclusive projects, when the net present value profiles of two projects intersect, should the net present value method or the internal rate of return method be used for selecting one
Why may the net present value profiles of two projects intersectz.Give two reasons.
The net present value of a project in which the cash flows are received in the near future will decline at a faster rate than the net present value for projects in which the cash flows are generated
What is the relationship between changes in the hurdle rate and changes in the net present value of a project?
The net present value and internal rate of return methods will always result in the same accept and reject decisions for mutually exclusive projects. Do you agree with this statement?
The internal rate of return is the minimum rate of interest an investor will pay to finance a capital investment project. Do you agree? If not, then why not?
Suppose that two mutually exclusive projects have only cash outflows.The project with the highest net present value should be adopted. Do you agree with this statement? Explain.
If two independent projects have positive net present values, the project with the highest net present value should be adopted. Do you agree?If not, then why not?
What is the difference between the payback period and discounted payback period methods of evaluating a capital investment project? Assuming that the projects are mutually exclusive, do the two
The smallest interest component of an amortization schedule is paid in at the end of the first year; thereafter, as the amount of the principal outstanding declines, the paid interest component
Other things being equal, the present value of an ordinary annuity is greater than the present value of an annuity due. Do you agree with this statement? Explain.
The more frequent the compounding, the greater the present value of a lump-sum investment. Do you agree? If not, then why not?
Other things being equal, the future value of an ordinary annuity is greater than the future value of an annuity due. Do you agree with this statement? Explain.
Explain the difference between an ordinary annuity and an annuity due.
A dollar received today will never be worth the same as a dollar received tomorrow. Do you agree? If not, then why not?
Explain why assessing the time value of money is important in capital budgeting.
Define capital budgeting. What are the four main categories of capital budgeting projects? Briefly explain each.
Explain each of the following pricing practices.a. Barometric price leadershipb. Dominant price leadershipc. Price skimmingd. Penetration pricinge. Prestige pricingf. Psychological pricing
Suppose a firm that produces a product for sale in the market also produces a vital component of that good for which there is no outside market. How should the firm “price” this component?
Peak-load pricing suggests that users of commuter railroads be charged higher fares during off-peak hours to compensate the company for lost revenues arising from fewer riders. Do you agree with this
Identify situations in which peak-load pricing may be appropriate.What is the distinguishing characteristic of short-run production functions in these situations?
A firm producing two goods with independent demands, which are produced in fixed proportions, will maximize profits by equating the sum of the marginal revenues generated from the sale of both goods,
A firm producing in variable proportions two goods with independent demands, such as automobile taillight and flashlight bulbs, will maximize profits by equating the marginal cost of producing each
A firm producing two goods with interrelated demands, such as personal computers and modems, will maximize profits by equating the marginal revenue generated from the sale of each good separately to
The more price elastic is the demand for a good or service, the higher will be the price markup over the marginal cost of production. Do you agree with this statement? Explain.
Explain cost-plus (markup) pricing. Markup pricing suffers from what theoretical weakness? What are the advantages and disadvantages of markup pricing?
Explain how the practice of commodity bundling may give to a firm an unfair competitive advantage over its rivals.
What is two-part pricing? Provide examples.
Explain how block pricing by amusement parts is similar to block pricing by cable television companies.
The pricing of private goods is fundamentally different from the pricing of public goods because of the properties of excludability and depletability. Explain.
Explain the use of block pricing by amusement parks.Why do some amusement parks engage in block pricing while other, usually older, amusement parks do not?
Sales of frankfurter rolls in packages of eight or beer in six-packs are examples of what pricing practice? What is the objective of the firm?
What is the difference between block pricing and commodity bundling?
First-degree price discrimination is a relatively common practice, especially by firms dealing directly with the public, such as restaurants and retail outlets. Do you agree with this statement? If
An important objective of firms engaged that practice price discrimination is the extraction of consumer surplus. Do you agree? Explain.
What is consumer surplus?
Explain each of the following pricing practices.a. First-degree price discriminationb. Second-degree price discriminationc. Third-degree price discrimination
The Prisoners’ Dilemma is an example of a one-shot, two-player, simultaneous-move, noncooperative game. If the players are allowed to cooperate, a Nash equilibrium is no longer possible. Do you
What is a Nash equilibrium?
In what way does the application of game theory as an explanation of interdependent behavior among firms in oligopolistic industries represent an improvement over earlier models?
The “kinked” demand curve model has been criticized on two important points.What are these points?
The “kinked” demand curve model suffers from the same weakness as the Cournot, Bertrand, and Stackelberg models in that it fails to consider the interdependence of pricing and output decisions of
What is a cartel? In what way is an analysis of a cartel similar to an analysis of a monopoly?
E. H. Chamberlin criticized the Cournot, Bertrand, and Stackelberg duopoly models for the naivete of their underlying assumptions. To what, specifically, was Chamberlin referring?
How does the Stackelberg duopoly model modify the Cournot duopoly model?
What is a reaction function?

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