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strategic management 5th

Questions and Answers of Strategic Management 5th

According to a study in the New England Journal of Medicine, your friendships or “social networks” are more likely than your genes to make you obese (Jennifer Levitz, “Can Your Friends Make You
Using information in the Challenge Solution, show how to calculate the price of fair insurance if the probability of being in a crash were as high as the frequency in 2001, 0.00000077? Use a graph to
Is someone who acts as described in prospect theory always more likely or less likely to take a gamble than someone who acts as described by expected utility theory? Why? Are there conditions (such
Evan is risk-seeking with respect to gains and riskaverse with respect to losses. Louisa is risk-seeking with respect to losses and risk-averse with respect to gains. Illustrate both utility
Before reading the rest of this exercise, answer the following two questions about your preferences:a. You are given $5,000 and offered a choice between receiving an extra $2,500 with certainty or
In Solved Problem 16.6, advertising increases the probability of high demand to 80%. What is the minimum probability of high demand resulting from advertising such that Gautam decides to invest and
Robert Green repeatedly and painstakingly applied herbicides to kill weeds that would harm his beet crops in 2007. However, in 2008, he planted beets genetically engineered to withstand Monsanto’s
Use a decision tree to illustrate how a kidney patient would decide whether to have a transplant operation. The patient currently uses a dialysis machine, which lowers her utility. If the operation
Use a decision tree to illustrate how a risk-neutral plaintiff in a lawsuit decides whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not
Andy and Kim live together. Andy may invest$10,000 (possibly by taking on an extra job to earn the additional money) in Kim’s MBA education this year. This investment will raise the current value
After Hurricane Katrina in 2005, the government offered subsidies to people whose houses were destroyed. How does the expectation that subsidies will be offered again for future major disasters
An insurance agent (interviewed in Jonathan Clements, “Dare to Live Dangerously: Passing on Some Insurance Can Pay Off,”Wall Street Journal, July 23, 2005, D1) states, “On paper, it never makes
probability of a burglary, where she would lose jewelry worth $70,000. She can buy an insurance policy for $15,000 that would fully reimburse the$70,000. Her utility function is U(X) = 4X0.5.a. What
Jill possesses $160,000 worth of valuables. She faces a
Helen, the owner of Dubrow Labs, worries about the firm being sued for botched results from blood tests. If it isn’t sued, the firm expects to earn a profit of 100, but if it is successfully sued,
Lori, who is risk averse, has two pieces of jewelry, each worth $1,000. She plans to send them to her sister’s firm in Thailand to be sold there. She is concerned about the safety of shipping them.
Carolyn and Sanjay are neighbors. Each owns a car valued at $10,000. Neither has comprehensive insurance (which covers losses due to theft). Carolyn’s wealth, including the value of her car is
Suppose that Irma’s utility function with respect to wealth is U(W) = 100 + 100W - W2. Show that for W 6 10, Irma’s Arrow-Pratt risk-aversion measure increases with her wealth. (Hint: See Solved
Joanna is considering three possible jobs. The following table shows the possible incomes she might get in each job.For each job, calculate the expected value, the variance and the standard
Lisa just inherited a vineyard from a distant relative.In good years (when there is no rain or frost during harvest season), she earns $100,000 from the sale of grapes from the vineyard. If the
Mary’s utility function is U(W) = W0.33, where W is wealth. Is she risk averse? Mary has an initial wealth of $27,000. How much of a risk premium would she require to participate in a gamble that
Hugo has a concave utility function of U(W) = W0.5. His only asset is shares in an Internet start-up company. Tomorrow he will learn the stock’s value. He believes that it is worth $144 with
In Solved Problem 16.3, what is Jen’s risk premium if her utility function were ln(W)? M
Given the information in Solved Problem 16.2, Irma prefers to buy the stock. Show graphically how high her certain wealth would have to be for her to choose not to buy the stock.
Suppose that an individual is risk averse and has to choose between $100 with certainty and a risky option with two equally likely outcomes: $100 - x and $100 + x. Use a graph (or math) to show that
Jen, in Exercise 2.2, may buy Stock A or Stock B.Stock A has a 50% chance of being worth $100 and 50% of being worth $200. Stock B’s value is $50 with a change of a half or $250 with a probability
Jen’s utility function with respect to wealth is U(W) = 2W. Plot her utility function. Use your figure and calculus to show that Jen is risk averse.(Hint: You can also use calculus to see if she is
Guojun offers to bet Kristin that if a six-sided die comes up with one or two dots showing, he will pay her $3, but if it comes up with any other number of dots, she’ll owe him $2. Is that a fair
Suppose that most people will not speed if the expected fine is at least $500. The actual fine for speeding is $800. How high must the probability of being caught and convicted be to discourage
To discourage people from breaking the traffic laws, society can increase the probability that someone exceeding the speed limit will be caught and punished, or it can increase the size of the fine
What is the difference—if any—between an individual gambling at a casino and gambling by buying a stock? What is the difference for society?
The EZ Construction Company is offered a$20,000 contract to build a new deck for a house.The company’s profit if they do not have to sink piers (vertical supports) down to bedrock will be$4,000.
By next year, your stock has a 25% chance of being worth $400 and a 75% probability of being worth$200. What are the expected value and the variance?
Asa buys a painting. There is a 20% probability that the artist will become famous and the painting will be worth $1,000. There is a 10% probability that the painting will be destroyed by fire or
In a neighborhood with 1,000 houses, 5 catch fire(but are not damaged by high winds), 7 are damaged by high winds (but do not catch fire), and the rest are unharmed during a one-year period. What is
In 2012, the Clarkson Community Schools in Clarkson, Michigan paid its starting teachers $38,087 employees with a bachelor’s degree and $41,802 with a master’s degree. (For simplicity, assume
Which is worth more to you: (a) a $10,000 payment today or (b) a $1,000-per-year higher salary for as long as you work? At what interest rate would (a)be worth more to you than (b)? Does your answer
At current interest rates, it pays for Bob to go to college if he graduates in four years. If it takes an extra year to graduate from college, does going to college still pay? Show how the figure in
If the interest rate is near zero, should an individual go to college, given the information in the figure in the Challenge Solution? State a simple rule for determining whether this individual
Trees, wine, and cattle become more valuable over time and then possibly decrease in value. Draw a figure with present value on the vertical axis and years (age) on the horizontal axis and show this
If all the coal in the ground, Q, is to be consumed in two years and the demand for coal is Qt = A(pt)εin each year t where ε is a constant demand elasticity, what is the price of coal each year? M
You can sell a barrel of oil today for p dollars.Assuming no inflation and no storage cost, how high would the price have to be next year for you to sell the oil next year rather than now? M
In the figure in Solved Problem 15.5, suppose that the government’s demand curve remains constant at D1 g but the government starts to tax private earnings, collecting 1% of all interest earnings.
To virtually everyone’s surprise, the Washington Nationals baseball team earned a pretax profit of$20 million in 2005, compared to a $10 million loss when the team was the Montreal Expos in
As discussed in Solved Problem 15.3, Lewis Wolff and his investment group bought the Oakland A’s baseball team for $180 million in 2005. Reportedly, Hall-of-Famer Reggie Jackson offered $25 million
Your gas-guzzling car gets only 10 miles to the gallon and has no resale value, but you are sure that it will last five years. You know that you can always buy a used car for $8,000 that gets 20
Many retirement funds charge an administrative fee equal to 0.25% on managed assets. Suppose that Alexx and Spenser each invest $5,000 in the same stock this year. Alexx invests directly and earns
Dell Computer makes its suppliers wait 37 days on average to be paid for their goods; however, Dell is paid by its customers immediately. Thus, Dell earns interest on this float, the money that it is
With the end of the Cold War, the U.S. government decided to downsize the military. Along with a pink slip, the government offered ex-military personnel their choice of $8,000 a year for 30 years or
A firm is considering an investment in which its cash flow is π1 = $1 (million), π2 = -$12, π3 = $20, and πt = 0 for all other t. The interest rate is 7%.Use the net present value rule to
At a 10% interest rate, do you prefer to buy a phone for $100 or to rent the same phone for $10 a year? Does your answer depend on how long you think the phone will last? M
If you spend $4 a day on a latte (in real dollars) for the rest of your life (essentially forever), what is your present discounted value at a 3% interest rate? M
Discussing the $350 price of a ticket for one of her concerts, Barbra Streisand said, “If you amortize the money over 28 years, it’s $12.50 a year. So is it worth $12.50 a year to see me sing? To
You are buying a new $20,000 car and have the option to pay for the car with a 0% loan or to receive $500 cash back at the time of the purchase. With the loan, you pay $5,000 down when you purchase
Two different teams offer a professional basketball player contracts for playing this year. Both contracts are guaranteed, and payments will be made even if the athlete is injured and cannot play.
You want to buy a room air conditioner. The price of one machine is $200. It costs $20 a year to operate. The price of another air conditioner is $300, but it costs only $10 a year to operate.
You plan to buy a used refrigerator this year for$200 and to sell it when you graduate in two years.Assuming that you can get $100 for the refrigerator at that time, there is no inflation, and the
Pacific Gas and Electric sent its customers a comparison showing that a person could save $80 per year in gas, water, and detergent expenses by replacing a traditional clothes washer with a new
How much money do you have to put into a bank account that pays 10% interest compounded annually to receive annual payments of $200? M
If you buy a car for $100 down and $100 a year for two more years, what is the present value of these payments at a 5% interest rate? If the interest rate is i? M
An economic consultant explaining the effect on labor demand of increasing health care costs, interviewed for the Wall Street Journal’s Capital column(Wessel, David, “Health-Care Costs Blamed for
What is a monopoly’s demand for labor if it uses a fixed-proportions production function in which each unit of output takes one unit of labor and one unit of capital?
Does a shift in the supply curve of labor have a greater effect on wages if the output market is competitive or if it is monopolistic? Explain.
A monopoly with a Cobb-Douglas production function, Q = (Lρ + Kρ)1/ρ, faces a constant elasticity demand curve. What is its marginal revenue product of labor? M
The estimated Cobb-Douglas production function for a U.S. tobacco products firm is q = L0.2K0.3(“Returns to Scale in U.S. Manufacturing” application, Chapter 6). Derive the marginal revenue
Show that the quantity of labor or capital that a firm demands decreases with a factor’s own factor price and increases with the output price when the production function is Cobb-Douglas as in
Georges, the owner of Maison d’Ail, earned his coveted Michelin star rating by smothering his dishes in freshly minced garlic. Georges knows that he can save labor costs by using less garlic,
If a local government starts collecting an ad valorem tax of α on the revenue of a competitive firm (and all other firms are located outside this jurisdiction), what happens to the firm’s demand
In Solved Problem 14.4, what fixed cost would result in four firms operating in the monopolistically competitive equilibrium? What are the equilibrium quantities and prices?7. Challenge
Exercise 6.5 shows that a monopolistically competitive firm maximizes its profit where it is operating at less than full capacity. Does this result depend upon whether firms produce identical or
Show that a monopolistically competitive firm maximizes its profit where it is operating at less than full capacity or minimum efficient scale, which is the smallest quantity at which the average
Does an oligopoly or a monopolistically competitive firm have a supply curve? Why or why not?(Hint: See the discussion in Chapter 11 of whether a monopoly has a supply curve.)
In a monopolistically competitive market, the government applies a specific tax of $1 per unit of output. What happens to the profit of a typical firm in this market? Does the number of firms in the
What is the effect of a government subsidy that reduces the fixed cost of each firm in an industry in a Cournot monopolistic competition equilibrium?
Firms in some industries with a small number of competitors earn normal economic profit. The Wall Street Journal (Gomes, Lee, “Competition Lives On in Just One PC Sector,” March 17, 2003,
In February 2005, the U.S. Federal Trade Commission (FTC) went to court to undo the January 2000 takeover of Highland Park Hospital by Evanston Northwestern Healthcare Corp. The FTC accused Evanston
At a busy intersection on Route 309 in Quakertown, Pennsylvania, the convenience store and gasoline station, Wawa, competes with the service and gasoline station, Fred’s Sunoco. In the
In the Coke and Pepsi example, what is the effect of a specific tax, τ, on the equilibrium prices? (Hint:What does the tax do to the firm’s marginal cost?You do not have to use math to provide a
Solve for the Nash-Bertrand equilibrium for the firms described in Exercise 5.3 if Firm 1’s marginal cost is $30 per unit and Firm 2’s marginal cost is$10 per unit. M
Solve for the Nash-Bertrand equilibrium for the firms described in Exercise 5.3 if both firms have a marginal cost of $0 per unit. M
Suppose that identical duopoly firms have constant marginal costs of $10 per unit. Firm 1 faces a demand function of q1 = 100 - 2p1 + p2, where q1 is Firm 1’s output, p1 is Firm 1’s price, and p2
Two firms, each in a different country, sell homogeneous output in a third country. Government 1 subsidizes its domestic firm by s per unit. The other government does not react. In the absence of
Show the effect of a subsidy on Firm 1’s bestresponse function in Solved Problem 14.3 if the firm faces a general demand function p(Q). M
Determine the Stackelberg equilibrium with one leader firm and two follower firms if the market demand curve is linear and each firm faces a constant marginal cost, m, and no fixed cost. M
Duopoly quantity-setting firms face the market demand p = 150 - q1 - q2.Each firm has a marginal cost of $60 per unit.a. What is the Nash-Cournot equilibrium?b. What is the Stackelberg equilibrium
An incumbent firm, Firm 1, faces a potential entrant, Firm 2, that has a lower marginal cost. The market demand curve is p = 120 - q1 - q2. Firm 1 has a constant marginal cost of $20, while Firm
The firms in a duopoly produce differentiated products. The inverse demand for Firm 1 is p1 = 52 -q1 - 0.5q2. The inverse demand for Firm 2 is p2 = 40 - q2 - 0.5q1. Each firm has a marginal cost of m
To examine the trade-off between efficiency and market power from a merger, consider a market with two firms that sell identical products. Firm 1 has a constant marginal cost of 1, and Firm 2 has a
How would the Nash-Cournot equilibrium change in the airline example if United’s marginal cost were$100 and American’s were $200? (Hint: See Solved Problem 14.1.) M
In 2012, Southwest Airlines reported that its “cost per available seat mile” was 13.0¢ compared to 13.8¢ for United Airlines. Assuming that Southwest and United compete on a single route, use a
Graph the best-response curve of the second firm in Solved Problem 14.1 if its marginal cost is m and if it is m + x. Add the first firm’s best-response curve and show how the Nash-Cournot
A duopoly faces an inverse market demand function of p = 120 - Q. Firm 1 has a constant marginal cost of 20. Firm 2’s constant marginal cost is 40.Calculate the output of each firm, market output,
The viatical settlement industry enables terminally ill consumers, typically HIV patients, to borrow against equity in their existing life insurance contracts to finance their consumption and medical
The application “Deadweight Losses in the Food and Tobacco Industries” shows that the deadweight loss as a fraction of sales varies substantially across industries. One possible explanation is
Consider the Cournot model with n firms.The inverse linear market demand function is p = a - bQ. Each of the n identical firms has the same cost function C(qi) = Aqi + 1 2Bqi 2, where a 7 A. In terms
In 2005, the prices for 36 prescription painkillers shot up as much as 15% after Merck yanked its once-popular arthritis drug Vioxx from the market due to fears that it caused heart problems
Connecticut sets a maximum fee that bail-bond businesses can charge for posting a given-size bond (Ayres and Waldfogel, 1994). The bail-bond fee is set at virtually the maximum amount allowed by law
Your college is considering renting space in the student union to one or two commercial textbook stores.The rent the college can charge per square foot of space depends on the profit (before rent) of
In a Nash-Cournot equilibrium, each of the n firms faces a constant marginal cost m, the inverse market demand function is p = a - bQ, and the government assesses a specific tax of τ per unit. What
In 2008, cruise ship lines announced they were increasing prices from $7 to $9 per person per day because of increased fuel costs. According to one analyst, fuel costs for Carnival Corporation’s

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