ConsulPlus hires out consultants in three distinct areas: Economics, Law, and Marketing. Although all three areas benefit from the ConsulPlus brand name, there is little interaction between them on a day-by-day basis. The three divisions rent out separate floors of a building and all their costs and revenues are independent of each other. Currently, economics has yearly revenues of 150 and yearly costs of 145, law has yearly revenues of 180 and yearly costs of 170 and marketing has yearly revenues of 100 and yearly costs of 90. This is the best that each division can do. On top of this, ConsulPlus incurs a yearly "coordination" cost of 20 from running its operations in a centralized manner.

Question 1

1.What are ConsulPlus' yearly profits?

Question 2

ConsulPlus has determined that there is actually no good reason for its centralized structure; it can do away with the coordinating cost by letting each division operate independently. The CEO believes that if each manager is evaluated based on the profitability of their own division, they will be properly incentivized and each division will continue to operate in the current optimal manner. Accordingly, ConsulPlus decentralizes. It turns out that the CEO's beliefs are correct; ConsulPlus now acts in a completely decentralized manner and its revenues and costs remain the same, except that it no longer incurs the coordinating cost.

What are ConsulPlus' yearly profits now?

Question 3

The Economics division has proposed that ConsulPlus subscribe to a software system that all three divisions can use. The system has a fixed cost of 150/year and will enable each division to reduce its operating costs: Economics will save 70/year, Law will save 70/year, and Marketing will save 20/year. While each independent division knows how much the system will reduce its costs, the CEO will only be able to tell after the system is adopted - if it is adopted.

Is it in ConsulPlus' interest that the system be acquired?

a. Yes, the system will save ConsulPlus more money than it costs to acquire.

b. No, the system will cost ConsulPlus more money than it saves.

Question 4

The software system can be acquired for all divisions to use or only for a subset. ConsulPlus has several proposals in mind. Given the decentralized nature of the company, the divisions involved will have to agree to any proposal. Each division seeks to maximize its own profits, independently of what happens to the other divisions.

Proposal A. All three divisions use the system. The cost of 150 is split equally among the three of them. Which of the three divisions will agree to this proposal?

a. Economics

b. Law

c. Marketing

d. None of them

Question 5

ConsulPlus needs all three of them to agree for the proposal to pass. Does Proposal A pass?

Yes

No

Question 6

Proposal B. Only Economics and Law use the system. The cost of 150 is split equally among the two of them. Which of the two divisions will agree to this proposal?

a. Economics

b. Law

c. Neither of them

Question 7

ConsulPlus needs both Economics and Law to agree for the proposal to pass and the system to be acquired. Does Proposal B pass?

a. Yes

b. No

Question 8

Proposal C. All three divisions use the system. The cost is split among the three divisions in proportion to each division's cost savings. Thus Economics and Law each pay 70/(70+70+20)x150, while Marketing pays 20/(70+70+20)x150. Which of the threedivisions will agree to this proposal?

a. Economics

b. Law

c. Marketing

d. None of them

Question 9

ConsulPlus needs all three of them to agree for the proposal to pass and the system to be acquired. Does Proposal C pass?

a. Yes

b. No

Question 10

Let us add a wrinkle. If the software system is not acquired, Marketing will change its internal procedures. This change in procedure will cost Marketing 7 while saving Marketing 10, for a net gain of 3. (If the system is acquired, Marketing's savings are 20, as before).

Is it better for ConsulPlus that the software system be acquired or, instead, that the system not be acquired and Marketing make the change to its internal procedures?

a. ConsulPlus' profits will increase more if the system is acquired (and marketing does not make the change).

b. ConsulPlus' profits will increase more if the system is not acquired and, instead, marketing makes the change.

Question 11

Proposal C'. The same as Proposal C: All three divisions use the new software system and the cost is split among the three divisions in proportion to each division's (direct) cost savings. Bearing in mind the new wrinkle, which of the following divisions will agree to this proposal?

a. Economics

b. Law

c. Marketing

d. None of them

Question 12

ConsulPlus needs all three of them to agree for the proposal to pass and the system to be acquired. Does Proposal C' pass?

a. Yes

b. No

Carter makes unique fancy boots. It sells its boots in London, where the yearly demand for the boots is described by the straight-line equation. It has a factory in London, with yearly production costs given by c(Q) = 50,000 + 100Q. Note that Q is given in terms of pairs of boots. Thus, producing 4 pairs of boots costs 50,400. There are no other costs.

Question 13

What is Carter's fixed cost?

Question 14

What is Carter's marginal cost?

Question 15

Carter exhibits

a. Economies of scale

b. Diseconomies of scale

c. Constant economies of scale

d. Economies of scale followed by diseconomies of scale

Question 16

What is Carter's profit-maximizing price?

Question 17

What is Carter's profit-maximizing (yearly) quantity?

Question 18

What are Carter's (yearly) profits?

Carter has just opened a branch in Manchester, where the (yearly) demand curve is given by. Carter produces boots that it sells in Manchester in its London factory, shipping them to Manchester at a cost of 2 per pair of boots. In addition, there are fixed costs of 10,000 associated with the Manchester branch. The Carter management knows about price discrimination and will charge different prices in London and Manchester.

Question 19

What price should Carter charge in London?

Question 20

What price should Carter charge in Manchester?

Question 21

What are Carter's total profits now?

Carter has hired a new manager, who has not taken any economics. The manager argues that it does not make sense for Carter to sell boots in Manchester for less money than it gets for the boots in London. Accordingly, Carter increases the Manchester price to the same level as the London price.

Question 22

What are Carter's (yearly) profits now?

PDQ has the beach-side concession for selling ice cream in Tyrico Bay, Trinidad. It can make two types of ice cream, which it labels Deluxe and Super Deluxe. It costs PDQ 2.00 to make a serving of Deluxe ice cream and 2.50 to make a serving of Super Deluxe.

Each day, PDQ has n potential customers, where n is a number that varies randomly from day to day, depending mainly on the weather. PDQ has determined that there are two types of customers, ice cream fanatics and regular customers. Although the number of customers varies, on any given day 50% of them are fanatics and 50% are regular. The customers have the following valuations, or willingness to pay, for the two types of ice cream:

Deluxe Super Deluxe

Fanatics 5.50. 8.00

Regular 4.00. 4.50

Note that Fanatics are willing to pay 8.00-5.50=2.50 to upgrade from Deluxe to Super Deluxe, while Regulars are willing to pay 4.50-4.00=0.50 to upgrade from Deluxe to Super Deluxe.

(Assume that if customers are indifferent between buying and not buying, they buy; if they are indifferent between buying a Deluxe and a Super Deluxe, they buy the Super Deluxe.)

Question 23

Suppose PDQ sells only Deluxe ice cream. How much should it charge?

Question 24

Suppose PDQ sells only Super Deluxe ice cream. How much should it charge?

Question 25

If PDQ sells both Deluxe ice cream and Super Deluxe ice cream, how much should it charge for Deluxe ice cream?

Question 26

If PDQ sells both Deluxe ice cream and Super Deluxe ice cream, how much should it charge for Super Deluxe ice cream?

Question 27

What should PDQ do?

a. Sell only Deluxe ice cream

b. Sell only Super Deluxe ice cream

c. Sell both Deluxe and Super Deluxe ice cream

Question 28

When Michelin lowers the price of its premium tire by 1%, demand rises by 3%. This means that Michelin's elasticity of demand is _ _ _ _ and the demand for Michelin's tires is _ _ _ _ _:

a. (1/3), elastic.

b. (1/3), inelastic.

c. 3, elastic.

d. 3, inelastic.

Question 29

A monopolist is charging a price of 50 for its product, and selling 10,000 units. We can conclude that

a. The firm's marginal cost is 50.

b. The firm's marginal cost is greater than 50.

c. The firm's marginal cost is less than 50.

d. All of the above are possible.

(Make the standard assumption that production is infinitely divisible and there are no capacity constraints.)

Question 30

Chiropractors and physical therapists can both treat back injuries, but only physical therapists can treat ankle injuries. Suppose that the hourly rate for chiropractic treatment isP_C, regardless of the specific treatment, and the hourly rate for physical therapy isP_T, regardless of the specific treatment. Suppose ankle injuries become more common. At the same time, the per treatment cost of delivering chiropractic services falls (per hour room rates, insurance, etc...). What is the effect on the market for chiropractic treatment?

a. The price and quantity both increase.

b. The price and quantity both decrease.

c. The price increases, the effect on quantity is ambiguous.

d. The quantity increases, the effect on price is ambiguous.