Anthony Soprano is head of Satriale Pork Producers, Inc., a family-run pork producer with a hog-processing facility in Musconetcong, New Jersey. Each hog processed yields both pork and a render by-product in a fixed 1:1 ratio. Although the by-product is unfit for human consumption, some can be sold to a local pet food company for further processing. Relevant annual demand and cost relations are as follows: PP = $110 - $0.00005QP, (Demand for pork) MRP = ∂TRP/∂QP = $110 - $0.0001QP, (Marginal revenue from pork) PB = $10 - $0.0001QB, (Demand for render by-product) MRB = ∂TRB/∂QB = $10 - $0.0002QB, (Marginal revenue from render by-product) TC = $10,000,000 + $60Q, (Total cost) MC = ∂TC/∂Q = $60. (Marginal cost) Here, P is price in dollars, Q is the number of hogs processed (with an average weight of 100 pounds), and QP and QB are pork and render by-product per hog, respectively; both total and marginal costs are in dollars. Total costs include a risk-adjusted normal return of 15% on a $50 million investment in plant and equipment. Currently, the city allows the company to dump excess by-product into its sewage treatment facility at no charge, viewing the service as an attractive means of keeping a valued employer in the area. However, the sewage treatment facility is quickly approaching peak capacity and must be expanded at an expected operating cost of $3 million per year. This is an impossible burden on an already strained city budget. a. Calculate the profit-maximizing price/output combination and optimal total profit level for Satriale. b. How much by-product will the company dump into the Musconetcong sewage treatment facility at the profit-maximizing activity level? c. Calculate output and total profits if the city imposes a $35 per unit charge on the amount of by-product Satriale dumps. d. Calculate output and total profits if the city imposes a fixed $3-million-per-year tax on Satriale to pay for the sewage treatment facility expansion. e. Will either tax alternative permit Satriale to survive in the long run? In your opinion, what should the city of Musconetcong do about its sewage treatment problem?
> Determine whether each of the following is true or false. Explain why. a. Average cost equals marginal cost at the minimum efficient scale of plant. b. When total fixed cost and price are held constant, an increase in average variable cost will typicall
> Warren Buffett, chairman and CEO of Berkshire Hathaway, Inc., is an outspoken critic of executive-stock option plans, at least as they are commonly employed. In a typical stock-option plan, top executives are given the right to buy company stock at the c
> Shareholders face a daunting information asymmetry problem when it comes to measuring the performance of the CEO. As head of the corporation, the CEO is in charge of the firm’s management information system. Accounting methods always leave room for manag
> The Sarbanes-Oxley Act, named for sponsors Sen. Paul Sarbanes, D-Md., and Rep. Michael Oxley, R-Ohio, is the most sweeping law affecting corporations since the 1930s. It is having a dramatic effect on the costs companies pay for independent audits of the
> At the end of World War II, goods production and services provision were each responsible for roughly one-half of economic activity and total employment in the United States. Today, the provision of services is responsible for roughly two-thirds of emplo
> According to the Coase Theorem, resource allocation will be efficient so long as transaction costs remain low and property rights can be freely assigned and exchanged. a. Does the Coase Theorem imply that government has little if any role to play in the
> In 2002, Congress held hearings to investigate the collapse of Houston-based energy giant Enron Corp., aiming to discover how to protect against similar disasters. The spectacular implosion of Enron led to the largest corporate bankruptcy in U.S. history
> Describe each of the following factors as being responsible for increasing, decreasing, or having no effect on the amount of concentrated inside equity. Explain why. a. High research and development expenditure requirements b. A corporate history of poor
> 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 investment banking firm loses millions of corporate dollars through unsucce
> During the amazing bull market of the 1990s, an investment strategy of simply mimicking the Standard & Poor’s 500 Index became popular. The S&P 500 is a value-weighted market index of 500 common stocks thought to measure overall movement in the aggregate
> Several companies have learned that a well-funded and comprehensive employee benefits package constitutes an important part of the compensation plan needed to attract and retain key personnel. An employee stock ownership plan, profit-sharing arrangements
> 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 along the production-distribution chain. b. A work slowdown due to an unexpected strike
> Dunder-Mifflin, Inc., is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Revenue: Assume that (1) the company’s marginal city-plus-state-plus-federal tax rate is 50%; (2) each job is expected to ha
> Cunningham’s Drug Store, a medium-size drugstore located in Milwaukee, Wisconsin, is owned and operated by Richard Cunningham. Cunningham’s sells pharmaceuticals, cosmetics, toiletries, magazines, and various novelties. Cunningham’s most recent annual ne
> Toby Amberville’s Manhattan Café, Inc., is considering investment in two alternative capital budgeting projects. Project A is an investment of $75,000 to replace working but obsolete refrigeration equipment. Project B is an investment of $150,000 to expa
> 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 recovery of a well that was plugged and abandoned five years ago but that ma
> 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 financial analysis by staff personnel resulted in the following projections for a
> 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 are imposed on the number of taxicabs by restricting the number of licenses,
> 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 rates rise because the Federal Reserve System tightens the money supply. b. The
> 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 statements as true or false, and explain your answers. a. The IRR method can tend to
> 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 national brokerage firm indicates that debt yielding 13% composes 25% of Eureka’s
> Cost estimation and cost containment are an important concern for a wide range of for-profit and not-for-profit organizations offering health-care services. For such organizations, the accurate measurement of costs per patient day (a measure of output) i
> 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 rate of return on investment projects. b. Depreciation expenses involve no direc
> General Cereals, Inc. (GCI), produces and markets Sweeties!, a popular ready-to-eat breakfast cereal. In an effort to expand sales in the Secaucus, New Jersey, market, the company is considering a one-month promotion whereby GCI would distribute a coupon
> Prohibitions against predatory pricing stem from big business conspiracy theories popularized in the late nineteenth century by journalists such as Ida Tarbell, author of an influential book titled History of the Standard Oil Company. In that book, Tarbe
> Game theory can be used to analyse conflicts that arise between managers and workers. Managers can choose to monitor worker performance, or not monitor worker performance. For their part, workers can choose to perform the requested task within the time f
> In the United States any contract, combination or conspiracy in restraint of trade is illegal. In practice, this means it is against the law to control or attempt to control the quantity, price or exchange of goods and services. In addition to this legal
> The breakfast cereal industry is heavily concentrated. Kellogg, General Mills, General Foods (Post) and Ralcorp account for over 85 per cent of industry sales. Advertising by individual firms does not convince more people to eat breakfast. Effective adve
> The Home Depot, Inc., and the Lowes Companies are locked in a vicious struggle for market share in the home improvement market. Suppose each competitor is considering the advisability of offering 90-day free financing as a means for boosting sales during
> Conceive of two competitors facing important strategic decisions where the payoff to each decision depends upon the reactions of the competitor. Firm A can choose either row in the payoff matrix defined below, whereas firm B can choose either column. For
> The classic prisoner's dilemma involves two suspects, A and B, who are arrested by the police. Because the police have insufficient evidence for conviction on a key charge, they place the prisoners in isolation and offer each of them the following deal:
> Near the checkout stand, grocery stores and convenience stores prominently display low-price impulse items like candy, gum and soda that customers crave. Despite low prices, such products generate enviable profit margins for retailers and for the compan
> Traditional measures of firm productivity tend to focus on profit margins, the rate of return on stockholder’s equity, or related measures like total asset turnover, inventory turnover, or receivables turnover. Profit margin is net income divided by sale
> Recognize each of the following statements as being true or false and explain why. a. A set of strategies constitutes a Nash equilibrium if no player can improve their position given the strategies chosen by other players. b. A secure strategy is very co
> During recent years, MicroChips Corp. has enjoyed substantial economic profits derived from patents covering a wide range of inventions and innovations for microprocessors used in high-performance desktop computers. A recent introduction, the Penultimate
> Portland Fluid Control, Inc., (PFC) is a major supplier of reverse osmosis and ultrafiltration equipment, which helps industrial and commercial customers achieve improved production processes and a cleaner work environment. The company has recently intro
> The Organization of the Petroleum Exporting Countries (OPEC) was formed on September 14, 1960 in Baghdad, Iraq. The current membership is comprised of five founding members plus six others: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, S
> The Onondaga County Resource Recovery (OCRRA) system assumed responsibility for solid waste management on November 1, 1990, for thirty-three of the thirty-five municipalities in Onondaga County, New York. OCRRA is a non-profit public benefit corporation
> Calvin’s Barber Shops, Inc. has a monopoly on barbershop services provided on the south side of Chicago because of restrictive licensing requirements, and not because of superior operating efficiency. As a monopoly, Calvin’s provides all industry output.
> In a celebrated case tried during 1998, The Department of Justice charged Microsoft Corporation with a wide range of anti-competitive behavior. Among the charges leveled by the DOJ was the allegation that Microsoft illegally “bundled” the sale of its Mic
> An antitrust case launched more than a decade ago sent tremors throughout the academic community. Over the 1989 -91 period, the Department of Justice (DOJ) investigated a number of highly selective private colleges for price fixing. The investigation foc
> On May 12, 2000, the two daily newspapers in Denver, Colorado, filed an application with the U.S. Department of Justice for approval of a joint operating agreement. The application was filed by The E.W. Scripps Company, whose subsidiary, the Denver Publ
> The long-run supply curve for a given competitive firm can be written as QF= -250 + 8P or P = $31.25 + $0.125QF. Explain why the amount supplied by 50 such competitors is determined by multiplying the first expression by 50 rather than by multiplying the
> Courtney-Cox, Inc., is a Texas-based manufacturer and distributor of components and replacement parts for the auto, machinery, farm, and construction equipment industries. The company is presently funding a program of capital investment that is necessary
> Project Valuation. The Central Perk Coffee House, Inc., is engaged in an aggressive store refurbishing program and is contemplating expansion of its in-store baking facilities. This investment project is to be evaluated using the certainty equivalent adj
> Safecard Corporation offers a unique service. The company notifies credit card issuers after being informed that a subscriber's credit card has been lost or stolen. The Safecard service is sold to card issuers on an annual subscription basis. Relevant re
> Monopolistically Competitive Equilibrium. Soft Lens, Inc., has enjoyed rapid growth in sales and high operating profits on its innovative extended-wear soft contact lenses. However, the company faces potentially fierce competition from a host of new comp
> Optimal Input Usage. Medical Testing Labs, Inc., provides routine testing services for blood banks in the Los Angeles area. Tests are supervised by skilled technicians using equipment produced by two leading competitors in the medical equipment industry
> The benefit-cost approach first surfaced in France during 1844. In this century, benefit-cost analysis has been widely used in the evaluation of river and harbor projects since as early as 1902. In the United States, the 1936 Flood Control Act authorized
> Production Function Estimation. Washington-Pacific, Inc., manufactures and sells lumber, plywood, veneer, particle board, medium-density fiberboard, and laminated beams. The company has estimated the following multiplicative production function for basic
> Bob Sponge has been retained to analyze two proposed capital investment projects, projects X and Y, by Square Pants, Inc., a local specialty retailer. Project X is a sophisticated working capital and inventory control system based upon a powerful persona
> Suppose that your college roommate has approached you with an opportunity to lend $25,000 to her fledgling home healthcare business. The business, called Home Health Care, Inc., plans to offer home infusion therapy and monitored in-the-home healthcare se
> 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 earned on a number of recent projects. Unfortunately, your
> Assume that Hewlett-Packard (H-P) and Dell Computer have a large inventory of personal computers that they would like to sell before a new generation of faster, cheaper machines is introduced. Assume that the question facing each competitor is whether or
> Suppose two local suppliers are seeking to win the right to upgrade the communications capability of the internal “intranets” that link a number of customers with their suppliers. The system quality decision facing ea
> The local government in a West Coast college town is concerned about a recent explosion in apartment rental rates for students and other low-income renters. To combat the problem, a proposal has been made to institute rent control that would place a $900
> Indicate whether each of the following statements is true or false, and explain why. a. The Justice Department generally concerns itself with significant or flagrant offenses under the Sherman Act, as well as with mergers for monopoly covered by Section
> A number of domestic and foreign manufacturers produce replacement parts and components for personal computer systems. With exacting user specifications, products are standardized, and price competition is brutal. To illustrate the net amount of social w
> Idaho Natural Resources (INR) has two mines with different production capabilities for producing the same type of ore. After mining and crushing, the ore is graded into three classes: high, medium, and low. The company has contracted to provide local sme
> Suppose Modern Merchandise, Inc., makes and markets do-it- yourself hardware, housewares, and industrial products. The company's new Aperture Miniblind is winning customers by virtue of its high quality and quick order turnaround time. The product also b
> Both General Electric and Microsoft Corp. feature charismatic and highly effective chief executive officers, display enviable records of serving growing markets with remarkable efficiency, and enjoy sterling accounting returns and stock- market valuation
> In the 1930s, economists Adolf A. Berle and Gardiner C. Means expressed concern that managers with relatively little ownership interest might demonstrate a suboptimal focus on transitory short-term profits rather than durable long-run value. Berle and Me
> Gross Domestic Product (GDP) is a measure of overall activity in the economy. It is defined as the value at the final point of sale of all goods and services produced during a given period by both domestic and foreign-owned enterprises. GDP data for the
> Branded Products, Inc., based in Oakland, California, is a leading producer and marketer of household laundry detergent and bleach products. About a year ago, Branded Products rolled out its new Super Detergent in 30 regional markets following its succes
> It remains a widely held belief that regulation is in the public interest and influences firm behavior toward socially desirable ends. However, in the early 1970s, Nobel laureate George Stigler and his colleague Sam Peltzman at the University of Chicago
> The Las Vegas Valley Water District (LVVWD) is a not-for-profit agency that began providing water to the Las Vegas Valley in 1954. The District helped build the city's water delivery system and now provides water to more than one million people in Southe
> In linear programming, why is it so critical that the number of nonzero-valued variables exactly equal the number of constraints at corners of the feasible space?
> In the United States, steel production has remained constant since the 1970s at about 100 million tons per year. Large integrated companies, like U.S. Steel remain important in the industry, but roughly 50% of domestic production is now produced by newer
> Is the number of isocost, isorevenue, or isoprofit lines in a typical two-input bounded feasible space limited?
> Describe the relative distance method used in graphic linear programming analysis.
> Assume that output can be produced only using processes A and B. Process A requires inputs L and K to be combined in the fixed ratio 2L:4K, and process B requires 4L:2K. Is it possible to produce output efficiently using 3L and 3K? Why or why no
> Do equal distances along a given production process ray in a linear programming problem always represent an identical level of output?
> Why can’t linear programming be used in each of the following circumstances a. Strong economies of scale exist. b. As the firm expands output, the prices of variable factors of production increase. c. As output increases, product prices decline.
> Give some illustrations of managerial decision situations in which you think the linear programming technique would be useful.
> 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 to takeovers, even though takeovers usually occur at substant
> Suppose that Black & Decker’s interest rate on newly-issued debt is 7.5% and the firm’s marginal federal-plus-state income tax rate is 40%. This implies a 4.5% after-tax component cost of debt. Also assume that the firm has decided to finance next year’s
> 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 should equal the marginal cost of equity in the optimal capit
> How is a crossover discount rate calculated, and how does it affect capital budgeting decisions?
> Critics argue that if Congress wants to make the tax code more equitable, a good place to start would be removing unfair tariffs and quotas. Today, there are more than eight thousand import tariffs, quotas, so-called voluntary import restraints, and othe
> 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 ratio” approach in capital budgeting for Level 3, and illustrate
> 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 project selection process.
> OIBDA is an abbreviation for "operating income before depreciation and amortization.” Like its predecessor EBITDA (“earnings before interest, taxes, depreciation and amortization”), OIBDA is used to analyze profitability before non-cash charges tied t
> What major steps are involved in the capital budgeting process?
> “Risky projects are accepted for investment on the basis of favorable expectations concerning profitability. In the post-audit process, they must not be unfairly criticized for failing to meet those expectations.” Discuss this statement.
> “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 basis.” Discuss this statement.
> Discuss the role of common costs in pricing practice.
> What conditions are necessary before price discrimination is both possible and profitable? Why does price discrimination result in higher profits?
> What is price discrimination?
> “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, regulated industries do indeed employ these rational techniques q
> Each year, about 9 billion bushels of corn are harvested in the United States. The average market price of corn is a little over $2 per bushel, but costs farmers about $3 per bushel. Tax payers make up the difference. Under the 2002 $190 billion, 10-year
> “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.
> Why does The Wall Street Journal offer bargain rates to students but not to business executives?
> Discuss how seasonal factors influence supply and demand, and why markups on fresh fruits and vegetable are at their highest during the peak of season.
> Explain why successful firms that employ markup pricing use fully allocated costs under normal conditions, but typically offer price discounts or accept lower margins during off-peak periods when excess capacity is available.
> Why is it possible to determine the marginal costs of joint products produced in variable proportions but not those of joint products produced in fixed proportions?
> Express the markup on cost formula in terms of the markup on price, and use this relation to explain why a 100% markup implies a 50% markup on price.
> How are the solution values for primal and dual linear programming problems actually employed in practice?
> The primal problem calls for determining the set of outputs that will maximize profit, subject to input constraints. a. What is the dual objective function? b. What interpretation can be given to the dual variables called the shadow prices or implicit va
> Will maximizing a profit contribution objective function always result in also maximizing total net profits?
> When the basic valuation model is adjusted using the risk-free rate, i, what economic factor is being explicitly accounted for?
