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business
managerial economics

Questions and Answers of Managerial Economics

6. Suppose you are a stock market analyst specializing in the stocks of theme parks, and you are examining Disneyland’s stock. The Wall Street Journal reports that tourism has slowed down in the
9. A new processing technology makes it economically feasible to turn natural gas into a liquid petroleum that yields superclean gasoline, diesel fuel, or any other product derived from crude oil.
8. Construct a graph showing equilibrium in the market for movie tickets.Label both axes and denote the initial equilibrium price and quantity as P0 and Q0. For each of the following events, draw an
7. California voters, in an attempt to halt the rapid increase in the state’s automobile insurance rates, approved Proposition 103. The measure proposes to roll back auto insurance rates by 20
6. Suppose you are a stock market analyst specializing in the stocks of theme parks, and you are examining Disneyland’s stock. The Wall Street Journal reports that tourism has slowed down in the
5. The famous Swedish economist Assar Lindbeck remarked in his book on rent controls, “Rent control appears to be the most efficient technique presently known to destroy a city—except for
4. Rising jet fuel prices recently led most major U.S. airlines to raise fares by approximately 15 percent. Explain how this substantial increase in airfares would affect the following:a. The demand
3. Evaluate the following statements using graphical analysis. Provide a brief narrative explanation of your graph to support your evaluation.Make sure the axes and curves in your graphs are properly
2. Florida Citrus Mutual, an agricultural cooperative association for citrus growers in Florida, needs to predict what will happen to the price and output of Florida oranges under the conditions
1. Suppose you are the manager of a California winery. How would you expect the following events to affect the price you receive for a bottle of wine?a. The price of comparable French wines
9. Use the following graph to answer these questions.a. What are the equilibrium price and quantity?b. What is the effect of a ceiling price of $40?c. What is the effect of a floor price of $50? A
8. In Technical Problem 12, suppose the city council decides rents are too high and imposes a rent ceiling of $400.a. The ceiling on rent causes a _______ of _______ apartments per month.b. How many
7. Suppose that the general demand function for good X is wherea. Is good X normal or inferior? Explain.b. Are goods X and R substitutes or complements? Explain.Suppose that M = $40,000 and PR =
6. Suppose that a pair of events from Technical Problem 15 occur simultaneously. For each of the pairs of events indicated below, perform a qualitative analysis to predict the direction of change in
5. Determine the effect upon equilibrium price and quantity sold if the following changes occur in a particular market:a. Consumers’ income increases and the good is normal.b. The price of a
4. Use the linear demand and supply curves shown below to answer the following questions:a. The market or equilibrium price is $_______.b. The economic value of the 2,000th unit is $_______, and the
3. Suppose that the demand and supply functions for good X area. What are the equilibrium price and quantity?b. What is the market outcome if price is $2.75? What do you expect to happen? Why?c. What
2. The following table presents the demand and supply schedules for apartments in a small U.S. city:
1. Other things remaining the same, what would happen to the supply of a particular commodity if the following changes occur?a. The price of the commodity decreases.b. A technological breakthrough
9. The following general supply function shows the quantity of good X that producers offer for sale (Qs):where Px is the price of X, PI is the price of labor, T is an index measuring the level of
8. Suppose the supply curve for good X passes through the point P = $25, Qs = 500. Give two interpretations of this point on the supply curve.
7. Consider the general supply function:where Qs = quantity supplied, P = price of the commodity, PI = price of a key input in the production process, and F = number of firms producing the
6. What happens to demand when the following changes occur?a. The price of the commodity falls.b. Income increases and the commodity is normal.c. Income increases and the commodity is inferior.d. The
5. Using a graph, explain carefully the difference between a movement along a demand curve and a shift in the demand curve.
3. The demand curve for good X passes through the point P = $2 and Qd =35. Give two interpretations of this point on the demand curve.
2. Consider the general demand function:a. Derive the equation for the demand function when M = $30,000 and PR= $50.172b. Interpret the intercept and slope parameters of the demand function derived
1. The general demand function for good A is where Qd = quantity demanded of good A each month, PA = price of good A, M = average household income, PB = price of related good B, ????= a consumer
4. You are considering the purchase of a piece of land that can be leased to the government for 100 years. The annual lease payment is $20,000 and the appropriate discount rate for your situation is
3. Suppose that in their divorce settlement, Ashton Kutcher offers Demi Moore $10 million spread evenly over 10 years, but she instead demands$5 million now. If the appropriate discount rate is 8
2. What is the present value of a firm with a five-year life span that earns the following stream of expected profit? (Treat all profits as being received at year-end.) Use a risk-adjusted discount
1. Using a discount rate of 6.5 percent, calculate the present value of a $1,000 profit payment to be received at the end ofa. One yearb. Two yearsc. Three years
Q 19.10 'Regulation is often proposed on the basis of equity considerations and opposed on the basis of efficiency considerations. As a result, the regulation versus deregulation controversy is not
Q19.9 The former chairman of the Federal Communications Commission heralded Voice over Internet Protocol, or VoIP, as 'the most important shift in the entire history of modern communications since
Q19.8 To measure public project desirability, positive and negative aspects of the project must be expressed in terms of a common monetary unit. Explain the importance of the present value concept in
Q19.7 In 1848, the idea of cost-benefit analysis originated with a French engineer by the name of Jules Dupuit. Economists argue that underlying calculations of costs and benefits must be based upon
Q19.6 A pipeline break reduced the supply of gasoline to the Phoenix, Arizona, area in August 2003. Press reports indicated that some stations ran out of gasoline, consumers waited in line for hours,
Q19.5 Does the fact that public decisions are sometimes made by self-interested politicians and bureaucrats undermine the efficiency of public-sector decision-making?
Q19.4 In the 1880s, cattlemen in the American West crowded more and more animals onto common grazing land to feed a growing nation. Cattlemen contended,'None of us knows anything about grass outside
Q19.3 What is the essential difference between public and private goods? Give some examples of each and some examples of goods and services that involve elements of both.
Q19.2 What role does the price elasticity of demand play in determining the short-run effects of regulations that increase fixed costs? What if they lead to increased variable costs?
Q19.1 Air pollution costs the USA billions of dollars per year in worker absenteeism, health care, pain and suffering, and loss of life. Discuss some of the costs and benefits of a Pigou tax on air
PI 8.2 Agency Costs. Indicate whether each of the following transaction costs is explicit or implicit, and describe how it is a manifestation of a particular type of agency problem.A. A trader at an
PI 8.1 Organization Structure. Determine whether each of the following statements is true or false. Explain why.A. A vertical relation is a business connection between companies at the same point
Q18.10 Describe four essential components of an effective decision management and control system.
Q18.9 Discuss important differences between centralized and decentralized allocations of decision authority within an organization. Are these methods of decision authority allocation mutually
Q18.8 Describe three basic needs that must be met in the design of any organization.
Q18.7 What are agency costs? Describe some agency costs common among US corporations.
Q18.6 Executive stock options are often seen as a simple and effective solution to the 'other people's money' problem that can occur when managers with little ownership interest mismanage firm
Q18.5 In a typical corporation, who are the'principals' and who are the 'agents'? What is the firm's agency problem?
Q18.4 What is the Coase Theorem, and why is it important in managerial economics?
Q18.3 Cite three important categories oftransaction costs encountered within the firm, and give some examples.
Q18.2 The personal computer has evolved from a tool for computation to an Internet-centered communications device. Is this likely to change corporate structures by increasing the efficiency of
Q18.1 Describe the difference between vertical and horizontal business relationships.
P17.10 Cost of Capital. Eureka Membership Warehouse, Inc., is a rapidly growing chain of retail outlets offering brand-name merchandise at discount prices. A security analyst's report issued by a
Suppose that Dunder-Mifflin's primary business is quite cyclical, improving, and declining with the economy, but that job A is expected to be countercyclical. Might this have any bearing on your
What is the net present value of each project? On which project, if any, should the company bid?
What is the expected net cash flow each year? (Hint: Cash flow equals net profit after taxes plus depreciation and amortization charges.)
PI 7.9 Cash Flow Analysis. Dunder-Mifflin, Inc., is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Revenue:?
PI 7.8 Cash Flow Estimation. Cunningham's Drug Store, a medium-size drugstore located in Milwaukee, Wisconsin, is owned and operated by Richard Cunningham. Cunningham's sells pharmaceuticals,
PI 7.7 Investment Project Choice. Toby Amberville's Manhattan Cafe, Inc., is considering investment in two alternative capital budgeting projects. Project A is an investment of $75000 to replace
PI 7.6 NPV and PI. Louisiana Drilling and Exploration, Inc., (LD&E) has the funds necessary to complete one of two risky oil and gas drilling projects. The first, Permian Basin 1, involves the
PI 7.5 NPV and PI. Suppose the Pacific Princess luxury cruise line is contemplating leasing an additional cruise ship to expand service from the Hawaiian Islands to Long Beach or San Diego.A
PI 7.4 Present Value. New York City licenses taxicabs in two classes: (1) for operation by companies with fleets and (2) for operation by independent driver-owners having only one cab. Strict limits
PI 7.3 Cost of Capital. Indicate whether each of the following would increase or decrease the cost of capital that should be used by the firm in investment project evaluation. Explain.A. Interest
PI 7.2 Decision Rule Criteria. The net present value (NPV), profitability index (PI), and internal rate of return (IRR) methods are often employed in project valuation. Identify each of the following
PI 7.1 Cost of Capital. Identify each of the following statements as true or false, and explain your answers.A. Information costs both increase the marginal cost of capital and reduce the internal
ST17.1 NPV and Payback Period Analysis. Suppose that your college roommate has approached you with an opportunity to lend $25000 to her fledgling home health care business.The business, called Home
Q17.10 Risky projects are accepted for investment on the basis of favorable expectations concerning profitability. In the postaudit process, they must not be unfairly criticized for failing to meet
Q17.9 Research in financial economics concludes that stockholders of target firms in takeover battles'win' (earn abnormal returns) and that stockholders of successful bidders do not lose subsequent
Q17.8 Suppose that Black & Decker's interest rate on newly issued debt is 7.5 per cent and the firm's marginal federal-plus-state income tax rate is 40 per cent. This implies a 4.5 per cent after-tax
Q17.7 An efficient firm employs inputs in such proportions that the marginal product/price ratios for all inputs are equal. In terms of capital budgeting, this implies that the marginal cost of debt
Q17.6 How is a crossover discount rate calculated, and how does it affect capital budgeting decisions?
Q17.5 Level 3 Communications, Inc., like many emerging telecom carriers, has only limited and infrequent access to domestic debt and equity markets.Explain the attractiveness of a 'benefit/cost
Q17.4 Toyota Motor Corp., like most major multinational corporations, enjoys easy access to world financial markets. Explain why the NPV approach is the most appropriate tool for Toyota's investment
Q17.3 OIBDA is an abbreviation for 'operating income before depreciation and amortization.' Like its predecessor EBITDA ('earnings before interest, taxes, depreciation, and amortization'), OIBDA is
Q17.2 What major steps are involved in the capital budgeting process?
Q17.1 'The decision to start your own firm and go into business can be thought of as a capital budgeting decision.You only go ahead if projected returns look attractive on a personal and financial
Q16.10 What is the value of decision trees in managerial decision-making?
Q16.9 'Market estimates of investors' reactions to risk cannot be measured precisely, so it is impossible to set risk-adjusted discount rates for various classes of investment with a high degree of
Q16.8 If the expected net present value of returns from an investment project is $50 000, what is the maximum price that a risk-neutral investor would pay for it? Explain.
Q16.7 When the basic valuation model is adjusted using the risk-free rate, i, what economic factor is being explicitly accounted for?
Q16.6 Graph the relation between money and its utility for an individual who buys both household fire insurance and state-run lottery tickets.
Q16.5 State-run lotteries commonly pay out 50 per cent of total lottery-ticket sales in the form of jackpots and prizes. Use the certainty equivalent concept to quantify the minimum value placed on
Q16.4 Confronted with a choice between $50 today or $100 1 year from now, economic experiments suggest that the vast majority of people will take the $50 today.At the same time, economic experiments
Q16.3 The standard deviation measure of risk implicitly gives equal weight to variations on both sides of the expected value. Can you see any potential limitations of this treatment?
Q16.2 Domestic investors sometimes miss out on better investment opportunities available to global investors. At the same time, global investors face special risks. Discuss some of the special risks
Q16.1 In economic terms, what is the difference between risk and uncertainty?
ST15.2 Optimal Mark-Up on Price. TLC Lawncare, Inc., provides fertilizer and weed control lawn services to residential customers. Its seasonal service package, regularly priced at$250, includes
ST15.1 George Constanza is a project coordinator at Kramer-Seinfeld & Associates, Ltd., a large Brooklyn-based painting contractor. Constanza has asked you to complete an analysis of profit margins
Q15.10 Why is it possible to determine the marginal costs ofjoint products produced in variable proportions but not those of joint products produced in fixed proportions?
Q15.9 Discuss the role of common costs in pricing practice.
Q15.8 What conditions are necessary before price discrimination is both possible and profitable? Why does price discrimination result in higher profits?
Q15.7 What is price discrimination?
Q15.6 'Marginal cost pricing, as well as the use of incremental analysis, is looked upon with favor by economists, especially those on the staffs of regulatory agencies. With this encouragement,
Q15.5 'One of the least practical suggestions that economists have offered to managers is that they set marginal revenues equal to marginal costs.' Discuss this statement.
Q1 5.4 Why does The Wall Street Journal offer bargain rates to students but not to business executives?
Q15.3 Discuss how seasonal factors influence supply and demand, and why mark-ups on fresh fruits and vegetable are at their highest during the peak ofseason.
Q15.2 Explain why successful firms that employ mark-up pricing use fully allocated costs under normal conditions, but typically offer price discounts or accept lower margins during off-peak periods
Q1 5.1 Express the mark-up on cost formula in terms of the mark-up on price, and use this relation to explain why a 100 per cent mark-up implies a 50 per cent markup on price.
PI 4.10 Variability of Business Profits. Near the checkout stand, grocery stores and convenience stores prominently display low-price impulse items like candy, gum, and soda that customers crave.

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