In the analysis of an exchange between two people, suppose both people have identical preferences. Will the contract curve be a straight line? Explain. Can you think of a counter example?
> Consider a firm with monopoly power that faces the demand curve P = 100 – 3Q + 4A1/2 and has the total cost function C = 4Q2 + 10Q + A where A is the level of advertising expenditures, and P and Q are price and output. a. Find the values of A, Q, and P
> Medical research has shown the negative health effects of “secondhand” smoke. Recent social trends point to growing intolerance of smoking in public areas. If you are a smoker and you wish to continue smoking despite tougher anti-smoking laws, describe t
> Why might managers be able to achieve objectives other than profit maximization, which is the goal of the firm’s shareholders?
> Explain the difference between adverse selection and moral hazard in insurance markets. Can one exist without the other?
> If the used car market is a “lemons” market, how would you expect the repair record of used cars that are sold to compare with the repair record of those not sold?
> Why can asymmetric information between buyers and sellers lead to market failure when a market is otherwise perfectly competitive?
> What is an efficiency wage? Why is it profitable for the firm to pay it when workers have better information about their productivity than firms do?
> Why are bonus and profit-sharing payment schemes likely to resolve principal-agent problems, whereas a fixed-wage payment will not?
> How can the principal-agent model be used to explain why public enterprises, such as post offices, might pursue goals other than profit maximization?
> Joe earned a high grade-point average during his four years of college. Is this achievement a strong signal to Joe’s future employer that he will be a highly productive worker? Why or why not?
> Why might a seller find it advantageous to signal the quality of a product? How are guarantees and warranties a form of market signaling?
> A cable TV company offers, in addition to its basic service, two products: a Sports Channel (Product 1) and a Movie Channel (Product 2). Subscribers to the basic service can subscribe to these additional services individually at the monthly prices P1 and
> Describe several ways in which sellers can convince buyers that their products are of high quality. Which methods apply to the following products: Maytag washing machines, Burger King hamburgers, large diamonds?
> Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers (e.g., a seven year warranty on all parts and labor associated with mechanical problems). a. I
> Professor Jones has just been hired by the economics department at a major university. The president of the board of regents has stated that the university is committed to providing top-quality education for undergraduates. Two months into the semester,
> A major university bans the assignment of D or F grades. It defends its action by claiming that students tend to perform above average when they are free from the pressures of flunking out. The university states that it wants all its students to get As a
> Gary is a recent college graduate. After six months at his new job, he has finally saved enough to buy his first car. a. Gary knows very little about the differences between makes and models. How could he use market signals, reputation, or standardizati
> Many consumers view a well-known brand name as a signal of quality and will pay more for a brand-name product (e.g., Bayer aspirin instead of generic aspirin, Birds Eye frozen vegetables instead of the supermarket’s own brand). Can a brand name provide a
> A firm’s short-run revenue is given by R = 10e – e2, where e is the level of effort by a typical worker (all workers are assumed to be identical). A worker chooses his level of effort to maximize wage less effort w – e (the per-unit cost of effort is ass
> As Chairman of the Board of ASP Industries, you estimate that your annual profit is given by the table below. Profit (Î ) is conditional upon market demand and the effort of your new CEO. The probabilities of each demand condition occurring ar
> Two used car dealerships compete side by side on a main road. The first, Harry’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Harry’s $8000 to buy and service each car that it sells. Th
> You have seen how asymmetric information can reduce the average quality of products sold in a market, as low-quality products drive out high-quality products. For those markets in which asymmetric information is prevalent, would you agree or disagree wi
> Your firm produces two products, the demands for which are independent. Both products are produced at zero marginal cost. You face four consumers (or groups of consumers) with the following reservation prices: a. Consider three alternative pricing strate
> An insurance company is considering issuing three types of fire insurance policies: (i) complete insurance coverage, (ii) complete coverage above and beyond a $10,000 deductible, and (iii) 90 percent coverage of all losses. Which policy is more likel
> To promote competition and consumer welfare, the Federal Trade Commission requires firms to advertise truthfully. How does truth in advertising promote competition? Why would a market be less competitive if firms advertised deceptively?
> In the analysis of exchange using the Edgeworth box diagram, explain why both consumers’ marginal rates of substitution are equal at every point on the contract curve.
> In the Edgeworth box diagram, explain how one point can simultaneously represent the market baskets owned by two consumers.
> Why can feedback effects make a general equilibrium analysis substantially different from a partial equilibrium analysis?
> What are the four major sources of market failure? Explain briefly why each prevents the competitive market from operating efficiently.
> Do you agree or disagree with each of the following statements? Explain. a. If it is possible to exchange 3 pounds of cheese for 2 bottles of wine, then the price of cheese is 2/3 the price of wine. b. A country can only gain from trade if it can produc
> If Country A has an absolute advantage in the production of two goods compared to Country B, then it is not in Country A’s best interest to trade with country B. True or false? Explain.
> Why can free trade between two countries make consumers of both countries better off?
> Explain why goods will not be distributed efficiently among consumers if the MRT is not equal to the consumers’ marginal rate of substitution.
> You are selling two goods, 1 and 2, to a market consisting of three consumers with reservation prices as follows: The unit cost of each product is $30. a. Compute the optimal prices and profits for (i) selling the goods separately, (ii) pure bundling, an
> What is the marginal rate of transformation (MRT)? Explain why the MRT of one good for another is equal to the ratio of the marginal costs of producing the two goods.
> How is the production possibilities frontier related to the production contract curve?
> In the Edgeworth production box diagram, what conditions must hold for an allocation to be on the production contract curve? Why is a competitive equilibrium on the contract curve?
> How does the utility possibilities frontier relate to the contract curve?
> “Because all points on a contract curve are efficient, they are all equally desirable from a social point of view.” Do you agree with this statement? Explain.
> Jennifer and Drew consume orange juice and coffee. Jennifer’s MRS of orange juice for coffee is 1 and Drew’s MRS of orange juice for coffee is 3. If the price of orange juice is $2 and the price of coffee is $3, which market is in excess demand? What do
> Jane has 3 liters of soft drinks and 9 sandwiches. Bob, on the other hand, has 8 liters of soft drinks and 4 sandwiches. With these endowments, Jane’s marginal rate of substitution (MRS) of soft drinks for sandwiches is 4 and Bob’s MRS is equal to 2. Dra
> Using general equilibrium analysis, and taking into account feedback effects, analyze the following: a. The likely effects of outbreaks of disease on chicken farms on the markets for chicken and pork. b. The effects of increased taxes on airline tickets
> Suppose gold (G) and silver (S) are substitutes for each other because both serve as hedges against inflation. Suppose also that the supplies of both are fixed in the short run (QG = 75 and QS = 300) and that the demands for gold and silver are given by
> Suppose that country A and country B both produce wine and cheese. Country A has 800 units of available labor, while country B has 600 units. Prior to trade, country A consumes 40 pounds of cheese and 8 bottles of wine, and country B consumes 30 pounds o
> Some years ago, an article appeared in the New York Times about IBM’s pricing policy. The previous day, IBM had announced major price cuts on most of its small and medium sized computers. The article said: IBM probably has no choice but to cut prices per
> In the context of our analysis of the Edgeworth production box, suppose that a new invention changes a constant-returns-to-scale food production process into one that exhibits sharply increasing returns. How does this change affect the production contrac
> The Acme Corporation produces x and y units of goods Alpha and Beta, respectively. a. Use a production possibility frontier to explain how the willingness to produce more or less Alpha depends on the marginal rate of transformation of Alpha for Beta. b.
> A monopsonist buys labor for less than the competitive wage. What type of inefficiency will this use of monopsony power cause? How would your answer change if the monopsonist in the labor market were also a monopolist in the output market?
> Give an example of conditions when the production possibilities frontier might not be concave.
> Fill in the missing information in the following tables. For each table, use the information provided to identify a possible trade. Then identify the final allocation and a possible value for the MRS at the efficient solution. (Note: there is more than o
> What is the Net Present Value (NPV) criterion for investment decisions? How does one calculate the NPV of an investment project? If all cash flows for a project are certain, what discount rate should be used to calculate NPV?
> What is the effective yield on a bond? How does one calculate it? Why do some corporate bonds have higher effective yields than others?
> How do investors calculate the net present value of a bond? If the interest rate is 5 percent, what is the present value of a perpetuity that pays $1000 per year forever?
> A firm uses cloth and labor to produce shirts in a factory that it bought for $10 million. Which of its factor inputs are measured as flows and which as stocks? How would your answer change if the firm had leased a factory instead of buying one? Is its o
> Look again at Figure 11.17. Suppose that the marginal costs c1 and c2 were zero. Show that in this case, pure bundling, not mixed bundling, is the most profitable pricing strategy. What price should be charged for the bundle? What will the firm’s profit
> What determines the supply of loanable funds? The demand for loanable funds? What might cause the supply or demand for loanable funds to shift? How would such a shift affect interest rates?
> What is meant by the “user cost” of producing an exhaustible resource? Why does price minus extraction cost rise at the rate of interest in a competitive market for an exhaustible resource?
> How does a consumer trade off current and future costs when selecting an air conditioner or other major appliance? How could this selection be aided by an NPV calculation?
> Suppose you are deciding whether to invest $100 million in a steel mill. You know the expected cash flows for the project, but they are risky – steel prices could rise or fall in the future. How would the CAPM help you select a discount rate for an NPV c
> What is meant by the “market return” in the Capital Asset Pricing Model (CAPM)? Why is the market return greater than the risk-free interest rate? What does an asset’s “beta” measure in the CAPM? Why should high-beta assets have a higher expected return
> How is risk premium used to account for risk in NPV calculations? What is the difference between diversifiable and non diversifiable risk? Why should only non diversifiable risk enter into the risk premium?
> What is the difference between a real discount rate and a nominal discount rate? When should a real discount rate be used in an NPV calculation and when should a nominal rate be used?
> You have noticed that bond prices have been rising over the past few months. All else equal, what does this suggest has been happening to interest rates? Explain.
> You are retiring from your job and are given two options. You can accept a lump sum payment from the company, or you can accept a smaller annual payment that will continue for as long as you live. How would you decide which option is best? What informati
> A bond has two years to mature. It makes a coupon payment of $100 after one year and both a coupon payment of $100 and a principal repayment of $1000 after two years. The bond is selling for $966. What is its effective yield?
> Look again at Figure 11.12, which shows the reservation prices of three consumers for two goods. Assuming that marginal production cost is zero for both goods, can the producer make the most money by selling the goods separately, by using pure bundling,
> Suppose the interest rate is 10 percent. What is the value of a coupon bond that pays $80 per year for each of the next five years and then makes a principal repayment of $1000 in the sixth year? Repeat for an interest rate of 15 percent.
> You are offered the choice of two payment streams: (a) $150 paid one year from now and $150 paid two years from now; (b) $130 paid one year from now and $160 paid two years from now. Which payment stream would you prefer if the interest rate is 5 perc
> Suppose the interest rate is 10 percent. If $100 is invested at this rate today, how much will it be worth after one year? After two years? After five years? What is the value today of $100 paid one year from now? Paid two years from now? Paid five years
> A consumer faces the following decision: She can buy a computer for $1000 and $10 per month for Internet access for three years, or she can receive a $400 rebate on the computer (so that its cost is $600) but agree to pay $25 per month for three years fo
> Suppose you can buy a new Toyota Corolla for $20,000 and sell it for $12,000 after six years. Alternatively, you can lease the car for $300 per month for three years and return it at the end of the three years. For simplification, assume that lease payme
> Reexamine the capital investment decision in the disposable diaper industry (Example 15.3) from the point of view of an incumbent firm. If P&G or Kimberly-Clark were to expand capacity by building three new plants, they would not need to spend $60 millio
> You are planning to invest in fine wine. Each case costs $100, and you know from experience that the value of a case of wine held for t years is 100t1/2. One hundred cases of wine are available for sale, and the interest rate is 10 percent. a. How many c
> Suppose your uncle gave you an oil well like the one described in Section 15.8. (Marginal production cost is constant at $10.) The price of oil is currently $20 but is controlled by a cartel that accounts for a large fraction of total production. Should
> Ralph is trying to decide whether to go to graduate school. If he spends two years in graduate school, paying $15,000 tuition each year, he will get a job that will pay $60,000 per year for the rest of his working life. If he does not go to school, he wi
> The market interest rate is 5 percent and is expected to stay at that level. Consumers can borrow and lend all they want at this rate. Explain your choice in each of the following situations: a. Would you prefer a $500 gift today or a $540 gift next yea
> As the owner of the only tennis club in an isolated wealthy community, you must decide on membership dues and fees for court time. There are two types of tennis players. “Serious” players have demand Q1 = 10 – P where Q1 is court hours per week and P is
> Equation (15.5) shows the net present value of an investment in an electric motor factory. Half of the $10 million cost is paid initially and the other half after a year. The factory is expected to lose money during its first two years of operation. If t
> How is a computer company’s demand for computer programmers a derived demand?
> What happens to the demand for one input when the use of a complementary input increases?
> Rock musicians sometimes earn several million dollars per year. Can you explain such large incomes in terms of economic rent?
> Compare the hiring choices of a monopsonistic and a competitive employer of workers. Which will hire more workers, and which will pay the higher wage? Explain.
> Why might a labor supply curve be backward bending?
> Why is a firm’s demand for labor curve more inelastic when the firm has monopoly power in the output market than when the firm is producing competitively?
> A firm uses both labor and machines in production. Explain why an increase in the average wage rate causes both a movement along the labor demand curve and a shift of the curve.
> A small specialty cookie company, whose only variable input is labor, finds that the average worker can produce 50 cookies per day, the cost of the average worker is $64 per day, and the price of a cookie is $1. Is the company maximizing its profit? Expl
> The government wants to encourage individuals on welfare to become employed. It is considering two possible incentive programs: a. Give firms $2 per hour for every individual on welfare who is hired. b. Give each firm that hires one or more welfare wor
> You are an executive for Super Computer, Inc. (SC), which rents out super computers. SC receives a fixed rental payment per time period in exchange for the right to unlimited computing at a rate of P cents per second. SC has two types of potential custom
> Explain briefly how the U.S. antitrust laws are actually enforced.
> The company tries to offer a wider range of office supplies at lower costs than other retailers by using just-in-time replenishment and tight inventory control systems. It uses information from a demand forecasting system and point-of-sale data to replen
> Companies like DST Systems have recognized the value in Scrum development to their bottom lines, but making the transition from traditional developmental methods to Scrum development can be challenging. DST Systems is a software development company whose
> You may soon hear more about Honam Petrochemical Corporation. Headquartered in Seoul, South Korea, this company manufactures and sells petrochemical products, such as synthetic resins, synthetic industrial materials, such as ethylene glycol and ethylene
> How do business intelligence and business analytics support decision making? 1. Define and describe business intelligence and business analytics. 2. List and describe the elements of a business intelligence environment. 3. List and describe the analytic
> Applebee’s is the largest casual dining chain in the world, with over 1,800 locations throughout the United States and 20 other countries. The menu features beef, chicken, and pork items, as well as burgers, pasta, and seafood. Applebee’s CEO wants to ma
> Describe various ways that knowledge management systems could help firms with sales and marketing or with manufacturing and production.
> Why are information systems vulnerable to destruction, error, and abuse? 1. List and describe the most common threats against contemporary information systems. 2. Define malware and distinguish among a virus, a worm, and a Trojan horse. 3. Define a hacke
> In February 2011, an IBM computer named Watson took on the two most-decorated champions of the game show Jeopardy, Ken Jennings and Brad Rutter. Watson, which was named after IBM’s founder, Thomas J. Watson, won handily. Watson’s achievement represents a
> Colgate-Palmolive Company is the second largest consumer products company in the world, and its products are marketed in over 200 countries and territories. The company had 39,000 employees worldwide and $16 billion in annual revenue in 2010. Colgate has
> What are the principal e-commerce business and revenue models? 1. Name and describe the principal e-commerce business models. 2. Name and describe the e-commerce revenue models.
> Company-sponsored blog: Visit Blue Nile, J.Crew, Circuit City, Black & Decker, Peet’s Coffee & Tea, and Priceline. Determine which would benefit most from adding a company-sponsored blog to the Web site. List the business benefits of the blog. Specify th
