“Airline passenger service is a terrible high-fixed cost business featuring fierce price competition. With uniform safety, customers pick the lowest airfare with the most convenient departures. Except for pilots, nobody in the airline business makes any money.” Use the competitive firm short-run supply curve concept to explain entry and exit in the airline passenger business. Why are pilots so well paid?
> 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?
> In Africa, the continent where the polio epidemic has been most difficult to control, international relief efforts aimed at disease eradication often work against a backdrop of civil unrest and war. In some countries, temporary cease-fire agreements must
> What is the value of decision trees in managerial decision making?
> “One might expect firms in a monopolistically competitive market to experience greater swings in the price of their products over the business cycle than those in an oligopoly market. However, fluctuations in profits do not necessarily follow the same pa
> Would you expect the demand curve for a firm in a monopolistically competitive industry to be more or less elastic in the long run after competitor entry has eliminated economic profits?
> Explain the process by which economic profits are eliminated in a monopolistically competitive market as compared to a perfectly competitive market.
> Describe the oligopoly market structure and give some examples.
> Describe the monopolistically competitive market structure and give some examples.
> “Economic profits result whenever only a few large competitors are active in a given market.” Discuss this statement
> Suppose that a competitive firm long-run supply curve is given by the expression QF = - 500 + 10P. Does this mean that the firm will supply -500 units of output at a zero price? If so, what does output of -500 units mean?
> “If excess profits are rampant in the oil business, why aren’t the stockholders of industry giants like Exxon Mobil, Chevron Texaco, and Royal Dutch Petroleum making huge stock-market profits?” Discuss this statement.
> In 1998, California’s newly deregulated power market began operation. The large power utilities in the state turned over control of their electric transmission facilities to the new Independent System Operator (ISO) to assure fair access to transmission
> “For smaller firms managed by their owners in competitive markets, profit considerations are apt to dominate almost all decisions. However, managers of giant corporations have little contact with stockholders, and often deviate from profit- maximizing
> “A higher minimum wage means some low wage workers will get fired because there will be less money available for labor costs. An international minimum wage, scaled according to the working conditions and cost of living in a particular country, would all
> The Worker Adjustment and Retraining Notification Act (WARN) requires employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs. Advance notice gives workers and their families transition
> Competitive firms are sometimes criticized for costly but superfluous product differentiation. Is there an easy means for determining if such efforts are in fact wasteful?
> One way of inferring competitive conditions in a market is to consider the lifestyle enjoyed by employees and owners. In vigorously competitive markets, employee compensation tends to be meager and profits are apt to be slim. Describe the perfectly com
> Historically, the Regional Bell Operating Companies (RBOCs) had a monopoly on the provision of local voice phone service. Regulation has now been eased to permit competition from Competitive Local Exchange Carriers (CLECs), cable companies, satellite o
> “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 precision.” Discuss this statement.
> 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.
> Graph the relation between money and its utility for an individual who buys both household fire insurance and state lottery tickets.
> State-run lotteries commonly pay out 50 percent of total lottery ticket sales in the form of jackpots and prizes. Use the certainty equivalent concept to quantify the minimum value placed on each risky dollar of expected return by lottery ticket buyers.
> To many upscale homeowners, no other flooring offers the warmth, beauty, and value of wood. New technology in stains and finishes call for regular cleaning that takes little more than sweeping and/or vacuuming, with occasional use of a professional wood
> Confronted with a choice between $50 today or $100 one year from now, economic experiments suggest that the vast majority of people will take will take the $50 today. At the same time, economic experiments show that most people will opt to take $100 in t
> 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?
> 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 faced by global investors.
> In economic terms, what is the difference between risk and uncertainty?
> The statement “You get what you pay for” reflects the common perception that high prices indicate high product quality and low prices indicate low quality. Irrespective of market structure considerations, is this statement always correct?
> Why is the four-firm concentration ratio only an imperfect measure of market power?
> Which oligopoly model(s) result in long-run oligopoly market equilibrium that is identical to a competitive market price/output solution?
> What is the essential difference between the Cournot and Stackelberg models?
> What are agency costs? Describe some agency costs common among U. S. corporations.
> Characterize the essential difference between a sequential game and a simultaneous- move game.
> Natural gas is in high demand as a clean-burning energy source for home heating and air conditioning, especially in major metropolitan areas where air quality is a prime concern. The domestic supply of natural gas is also plentiful. Government reports p
> Suppose Exxon Mobil Corp. independently reduced the price of gasoline, and that this price cut was quickly matched by competitors. Could these actions be described as reflective of a cooperative game?
> Explain why the establishment and exploitation of network effects are key elements in the competitive strategy of computer software provider Microsoft Corp.
> From a game theory perspective, how would you characterize the bargaining between a customer and a used car dealer?
> The New York City Rent Stabilization Law of 1969 established maximum rental rates for apartments in New York City. Explain how such controls can lead to shortages, especially in the long run, and other economic costs. Despite obvious disadvantages, why d
> The Fair Labour Standards Act establishes a federal minimum wage of $7.25 per hour effective July 24, 2009. Use your knowledge of market equilibrium and the elasticity of demand to explain how an increase in the minimum wage could have no effect on unski
> Both employers and employees pay Social Security (FICA) on wage income. While the burden of this tax is designed to be borne equally by employers and employees, is a straight 50/50 sharing of the FICA tax burden likely? Explain.
> In 1990, Congress adopted a luxury tax to be paid by buyers of high-price cars, yachts, private airplanes, and jewellery. Proponents saw the levy as an effective means of taxing the rich. Critics pointed out that those bearing the hardship of a tax may o
> The demand for basic foodstuffs, like feed grains, tends to be inelastic with respect to price. Use this fact to explain why highly fertile farmland will fetch a relatively high price at any point in time, but that rising farm productivity over time has
> In 2004, OPEC reduced the quantity of oil it was willing to supply to world markets. Explain why the resulting price increase was much larger in the short run than in the long run.
> After having declined during the 1970s and 1980s, the proportion of teenage smokers in the United States has risen sharply since the early-1990s. To reverse this trend, advertising programs have been launched to discourage teenage smoking, penalties for
> People of many different age groups and circumstances take advantage of part-time employment opportunities provided by the fast-food industry. Given the wide variety of different fast-food vendors, the industry is fiercely competitive, as is the unskill
> Assume that you are willing to pay $1,100 for a new personal computer that has all the “bells and whistles.” On the Internet, you buy one for the bargain price of $900. Unbeknownst to you, the Internet retailer’s marginal cost was only $750. How much con
> Wal-Mart founder Sam Walton amassed an enormous fortune in discount retailing, one of the most viciously competitive markets imaginable. How is this possible?
> Your best income-earning opportunity appears to be an offer to work for a local developer during the month of June and earn $2,000. However, before taking the job, you accept a surprise offer from a competitor. If you earn $2,600 during the month, how mu
> Will firms in industries in which high levels of output are necessary for minimum efficient scale tend to have substantial degrees of operating leverage?
> With traditional medical insurance plans, workers pay a premium that is taken out of each pay check and must meet an annual deductible of a few hundred dollars. After that, insurance picks up most of their health-care costs. Companies complain that this
> The president of a small firm has been complaining to the controller about rising labour and material costs. However, the controller notes that average costs have not increased during the past year. Is this possible?
> The definition of point output elasticity is εQ = ∂Q/Q ÷ ∂X/X (X represents all inputs), whereas the definition of point cost elasticity is εC = ∂C/C ÷ ∂Q/Q. Explain why εQ > 1 indicates increasing returns to scale, whereas εC < 1 indicates economies of
> What is the relation between production functions and cost functions? Be sure to include in your discussion the effect of competitive conditions in input factor markets.
> Suppose the Big Enchilada restaurant has been offered a binding one-year lease agreement on an attractive site for $5,200 per month. Before the lease agreement has been signed, what is the incremental cost per month of site rental? After the lease agreem
> Southwest Airlines offers four flights per weekday from Cleveland, Ohio to Tucson, Arizona. If adding a fifth flight per weekday would cost $15,000 per flight, or $110 per available seat, calculate the incremental costs borne by Southwest following a dec
> The Federal Trade Commission seeks to ensure that the process of bringing new low-cost generic alternatives to the marketplace and into the hands of consumers is not impeded in ways that are anti-competitive. To illustrate the potential for economic
> Simpson Flanders, Inc., is a Motor City-based manufacturer and distributor of valves used in nuclear power plants. Currently, all output is sold to North American customers. Demand and marginal revenue curves for the firm are as follows: P= $1,000 - $0.
> Assume that two years ago, you purchased a new Jeep Wrangler SE 4WD with a soft top for $16,500 using five-year interest-free financing. Today, the remaining loan balance is $9,900 and your Jeep has a trade-in value of $9,500. What is your opportunity co
> Do operating strategies of average cost minimization and profit maximization always lead to identical levels of output?
> What advantages or disadvantages do you see in using current costs for tax and stockholder reporting purposes?
> Explain why company productivity is important to managers, employees, and investors. Is superior worker productivity a necessary and sufficient condition for above-average compensation?
