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business
managerial economics

Questions and Answers of Managerial Economics

Understand and apply organizational architecture.
Appreciate vertical integration.
Understand ownership and its consequences.
Appreciate holdup and the application of detailed contracts.
Appreciate that incentives create risk and affect performance on multiple responsibilities.
Apply monitoring and incentives to resolve moral hazard.
Appreciate moral hazard.
12. How should a bidder adjust for the winner's curse in (a) an auction to sell, and (b) an auction to buy?
11. 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)
10. During peak hours, a tunnel is congested. From the standpoint of economic efficiency, the tunnel service should be allocated to the drivers who value time most highly. Explain how a toll can
9. 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
8. Give an example of screening. Explain: (a) the asymmetry of information; and (b) self-selection.
7. Young people do not have much driving history. Does this explain why insurers are reluctant to insure young drivers?
6. Jill is about to buy a secondhand car at a below-market price. The seller assured Jill that the car is in perfect condition. Why should Jill get an expert to evaluate the car?
5. A manufacturer of women's clothing pays production workers a piece rate. The human resources manager has proposed offering workers the alternative of a fixed salary. Explain the possible adverse
4. 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
3. A bank has just rejected Ming's application for a car loan. Ming approaches the loan officer and offers to pay a higher interest rate. Why does the loan officer laugh?
2. In the following situations, explain the asymmetry of information, if any: (a) Investors do not know the next day's Standard & Poor's 500 Index. (b) Acquirer is planning a takeover bid for Target
1. Explain the difference between imperfect information and risk.
Appreciate and apply contingent contracts to resolve information asymmetry.
Appreciate and apply signaling to resolve information asymmetry.
Understand how to design and bid in auctions.
Appreciate and apply screening to resolve information asymmetry.
Appreciate and apply appraisal to resolve information asymmetry.
Appreciate asymmetry of information and its consequences.
Understand imperfect information and risk.
15. Why does it make sense to sell a public good to more consumers?
14. In what way does excludability depend on law and technology?
13. For a public good, why is the combined marginal benefit equal to the sum of the individual marginal benefits?
12. Which of the following are public goods? (a) Dental treatment at a public hospital. (b) Welfare payments to unemployed people. (c) National defense.
11. Give an example of a public good. Explain how the use of the good is non-rival.
10. Where are technical standards relatively more important: in markets with network effects or those without? Explain your answer.
9. Does the presence of network effects cause demand to be more or less price elastic?
8. Give an example of a network externality, and in that context explain the concepts of critical mass and tipping.
7. Explain the possible network effects in the demand for spreadsheet software.
6. 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
5. Explain how the following action will help to resolve the externalities generated by a new subway line: the subway system buys the property around the new stations.
4. When the sum of the marginal costs from a negative externality exceeds the marginal benefit to the source, what is the profit opportunity? Explain.
3. 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.
2. 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?
Appreciate how to provide public goods commercially.1. What is the difference between a negative and a positive externality?
Understand public goods.
Understand network effects and appreciate how to manage demand with network effects.
Appreciate how to resolve externalities and the corresponding barriers.
Appreciate economic efficiency as a benchmark and the opportunity to profit by resolving an externality.
Understand positive and negative externalities.
15. Is a cartel easier or more difficult to enforce in a market with less heterogeneous products than in a market with more heterogeneous products?
14. What are the five factors that influence the effectiveness of a cartel?
13. In committing to production capacity before other sellers, why is it important to look forward and consider how the other sellers would set capacity?
12. 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 to the situation where you commit to
11. Suppose that your cost of capacity is sunk, once incurred. Does this help or hinder a strategy of limit pricing?
10. Explain why limit pricing does not make sense in an industry where production involves no fixed cost.
9. Suppose that advertising expenditures are strategic substitutes. On a graph like Figure 11.7, illustrate the best response functions.
8. Explain the meaning of strategic substitutes.
7. In competition between sellers on capacity to sell a homogeneous product, how would an increase in fixed cost affect the equilibrium?
6. How is Figure 11.3 related to a game in strategic form?
5. In an oligopoly, how does differentiation raise profit?
4. If advertising expenditures are strategic complements, and your competitor raises advertising, how should you respond?
3. Explain the meaning of best response function in the context of competition on: (a) price; (b) capacity.
2. Explain the meaning of residual demand in the context of competition on: (a) price; (b) capacity.
1. Price will equal marginal cost only in a perfectly competitive industry. True or false? Explain your answer.
Appreciate how to limit competition.
Apply capacity leadership for first-mover advantage.
Apply limit pricing to deter entry.
Appreciate that capacities can be strategic substitutes.
identify the capacity that maximizes profit and how to adjust capacity.
For sellers competing on capacity to sell a homogeneous product,
Appreciate that prices can be strategic complements.
For sellers competing on price to sell differentiated products, identify the price that maximizes profit and how to adjust the price.
15. How do strategies in repeated strategic situations differ from those that occur only once?
14. Loan sharks are not allowed to use the legal system to collect debts. Does this explain why they employ violence?
13. In bargaining, a common tactic is to "walk away." Is this credible?
12. Suppose a bank offers deposit insurance to its depositors, with the compensation to be paid from its own funds. Why is this not credible?
11. Why are conditional strategic moves better than unconditional strategic moves?
10. In the Battle of the Bismarck Sea (Table 10.2), does the first mover have an advantage? Why or why not?
9. In a game in extensive form, what is wrong with planning by reasoning forward from the initial node?
8. In a game in strategic form, the consequences to the two players in every cell add up to -10. Is this a zero-sum game?
7. Explain the associations between: (a) zero-sum game and competition; and (b) positive-sum game and coordination.
6. Some right-handed boxers also train themselves to box with their left hands. Which of the following strategies will be more effective? (a) Throw a left-hand punch after every three right-handers.
5. Explain the meaning of a randomized strategy.
4. If others do not act strategically (for instance, they use a non-equilibrium strategy), should I follow?
3. Which of the following are reasons to adopt a Nash equilibrium strategy? (a) I can minimize my expected loss. (b) I can guarantee a minimum outcome. (c) Even if the other party knows my strategy,
2. Explain why you should not use a dominated strategy.
1. In situations of (a) perfect competition and (b) monopoly, does it matter whether the seller acts strategically?
Appreciate strategy in repeated situations.
Plan strategic moves and conditional strategic moves, both threats and promises.
Apply games in extensive form to situations with sequential moves.
Distinguish zero-sum and non-zero-sum games.
Appreciate the use of randomization in competitive situations.
Apply games in strategic form to situations with simultaneous moves.
Appreciate strategic situations.
15. What is cannibalization and how can it be managed?
14. How does information technology affect a seller's ability to discriminate on price?
13. Rank the various pricing policies in terms of profit.
12. How can consumer goods manufacturers use coupons to discriminate on price?
11. Typically, car rental agencies charge much higher prices for gasoline than nearby gas stations. Explain how this indirectly segments between drivers who are paying for the rental themselves and
10. Give an example of indirect segment discrimination. Discuss whether the example meets the conditions for such discrimination.
9. On which of the following products would it be easier to discriminate by the buyer's location: newspapers or scientific journals? Explain your answer.
8. Explain the difference between FOB and CF prices.
7. Give an example of direct segment discrimination. Discuss whether the example meets the conditions for such discrimination.

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