Pharmaceutical Benefits Managers or PBMs are intermediaries between upstream drug manufacturers and downstream insurance companies. They design formularies (list of drugs that insurance will cover) and negotiate prices with drug companies. PBMs want a wider variety of drugs available to their insured populations, but at low prices. Suppose that a PBM is negotiating with two nondrowsy allergy drugs, Claritin and Allegra, for inclusion on the formulary. The “value” or “surplus” created by including one nondrowsy allergy drug on the formulary is $100, but the value of including a second drug is only $30. a. What’s the likely bargaining negotiation outcome if the PBM bargains by telling each drug company that they’re going to reach agreement with the other drug company? b. Now suppose the two drug companies merge. What is the likely post-merger bargaining outcome?
> State utility commissions typically regulate local phone companies, but local phone companies also offer long-distance service to their customers. Rival long-distance carriers also connect to local phone lines to provide long-distance service to customer
> In a bad economy, a CEO has a 4% chance of meeting earnings estimates at regular effort, and a 5% chance at extraordinary effort. Extraordinary effort costs the CEO $10,000. How large a bonus should the CEO be paid for meeting estimates to encourage extr
> Intel made large loyalty payments to HP in exchange for HP buying most of their chips from Intel instead of rival AMD. AMD sued Intel under the antitrust laws, and Intel settled the case by paying $1.25 billion to AMD. What incentive conflict was being c
> Under a proposed healthcare reform, doctors’ fees will be capped at 80% of their current rate, but doctors can order blood tests that will be reimbursed at 90% of the current rate. How does vertical integration of physician groups into testing services i
> Futura Furniture Products manufactures upscale office furniture for the “Office of the Future.” The sales division comprises regionally based sales offices made up of sales representatives and regional managers. Sales representatives—who report to the re
> Discuss the advantages and disadvantages of using divisional profit as the basis of incentive compensation for division managers compared to using company profit as the basis.
> Your local fast food chain with two dozen stores uses the company’s internal corporate marketing department to produce signage, print ads, in-store displays, and so forth. When placing an order, store managers are assessed a chargeback (transfer price) t
> List three reasons why might it be a bad idea to have corporate headquarters set transfer prices.
> This problem is mentioned in the text (see the section on “Organizational Alternatives”). Your task is to propose an organizational solution. To briefly recap, a manufacturer is trying to design the next generation of turbine engines for jet airplanes. T
> Suppose that a paper mill “feeds” a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the first unit of boxes increases earnings by $10, the second $9, the third $8, and so on,
> Venture capital (VC) firms are pools of private capital that typically invest in small, fast-growing companies, which usually can’t raise funds through other means. In exchange for this financing, the VCs receive a share of the company’s equity, and the
> Each year, public schools are rewarded with bigger budgets for achieving a rating of “excellent” or “recommended” and are punished for rating “needs improvement.” These ratings are based on meeting thresholds on a broad set of measures such as attendance
> Which of the following is an example of moral hazard? a. Reckless drivers are the ones most likely to buy automobile insurance. b. Retail stores located in high-crime areas tend to buy theft insurance more often than stores located in low-crime areas. c.
> Planes frequently push back from the gate on time, but then wait 2 feet away from the gate until it is time to queue up for take-off. This increases fuel consumption, and increases the time that passengers must sit in a cramped plane awaiting take-off. W
> When real estate agents sell their own, rather than clients’, houses, they leave the houses on the market for a longer time (10 days longer on average) and wind up with better prices (2% higher on average). Why?
> A convenience store manager earns a base salary plus small bonuses for each of ten different possible monthly milestones he meets. Typical managers can meet half of these milestones. Do they miss the others by a little or a lot?
> Which of the following are characteristic of principal-agent conflicts that often exist in a firm? a. Managers do not always operate in the best interest of owners because owners are generally more risk averse than managers. b. Managers generally have a
> Frequent flyer programs are targeted more toward business travelers (who do not pay for their own tickets) than leisure travelers (who do). Explain their effect on each type of traveler. Why is there a difference?
> BPO Services is in the business of digitizing information from forms that are filled out by hand. In 2006, a big client gave BPO a distribution of the forms that it digitized in house last year, and BPO estimated how much it would cost to digitize each f
> Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there are two types of individuals: those with $60,000 in the bank and those with $5,000 in the bank.
> Lightweight personal locator beacons are now available to hikers that make it easier for the Forest Service’s rescue teams to locate those lost or in trouble in the wilderness. How will this affect the costs that the Forest Service incurs?
> A colleague tells you that he can get a business loan from the bank, but the rates seem very high for what your colleague considers a low risk loan. a. Give an adverse selection explanation for this, and offer advice to your friend on how to solve the pr
> Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Would you want to price the extended warranty at 2% of the product price? Discuss both moral h
> In the magazine Budget Travel, a hotel maid admits, “I cut corners everywhere I could. Instead of vacuuming, I found that just picking up the larger crumbs from the carpet would do. Rather than scrub the tub with hot water, sometimes it was just a spray-
> Which of the following is an example of vertical integration? a. A custom software company purchasing a competing software firm b. A soft drink producer buying a brand of iced tea c. A coal producer purchasing a nuclear power plant d. A gourmet cheese co
> Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you’re trying to sell a company a new accounting system that will reduce costs by 10%.
> When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to th
> Many police officer positions require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don’t police departments increase their applicant pool by dropping this requirement?
> In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer
> You need to hire some new employees to staff your start-up venture. You know that potential employees are distributed throughout the population as follows, but you can’t distinguish among them: Employee Value Probability $50,000 0.25 $60,000 0.2
> You sell bicycle theft insurance. If bicycle owners do not know whether they are high- or low-risk consumers, is there an adverse selection problem?
> Moe Green estimates the cost of future projects for a large contracting firm. Mr. Green uses precisely the same techniques to estimate the costs of every potential job, and formulates bids by adding a standard profit markup. For some companies to whom th
> When a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, representatives of other museums that have no chance of winning are actively wooed by the auctioneer to attend anyway. Why?
> In Sweden, firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder. (There is no reorganization through Chapter 11 bankruptcy.) The current managers are often the high bidders for the company. Why?
> Consider the problem above, but now each bidder has a value of either $60 or $80. What reserve price should the auctioneer set, and what is the expected revenue from auctioning the item with and without a reserve price?
> You own a retail establishment run by a store manager who receives a flat salary of $80,000. If you set up another store as a franchise with incentive compensation to the franchisee, what would be a reasonable total compensation range that the franchisee
> A reserve price is a minimum price set by the auctioneer. If no bidder is willing to pay the reserve price, the item is unsold at a profit of $0 for the auctioneer. If only one bidder values the item at or above the reserve price, that bidder pays the re
> You hold an auction among three bidders. You estimate that each bidder has a value of either $16 or $20 for the item, and you attach probabilities to each value of 50%. What is the expected price? If two of the three bidders collude, what is the price?
> You are offered the following gamble based on coin flips. If the first heads occurs on the first flip, you get $2. If the first heads occurs on the second flip you get $4, and so on so that if the first head is on the Nth flip, you get $2N. The game cont
> To test the effectiveness of a two Web advertising agencies, you increase your ad purchase with agency A by 50% without changing your purchase through agency B. The referrals to your website from agency A increased by only 34% but the referrals from agen
> In the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million dollars to $2 million dollars. If they are wrong, their prize is decreased to $500,000. The contestant thinks his guess will be right 50% of
> The HR department is trying to fill a vacant position for a job with a small talent pool. Valid applications arrive every week or so, and the applicants all seem to bring different levels of expertise. For each applicant, the HR manager gathers informati
> Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for a possible future product and estimates that the reservation value is $250,0
> Robert G. Flanders Jr., the state-appointed receiver for Central Falls, RI, said his city’s declaration of bankruptcy had proved invaluable in helping it cut costs. Before the city declared bankruptcy, he said, he had found it impossible to wring meaning
> You’ve entered into a contract to purchase a new house, and the closing is scheduled for next week. It’s typical for some last-minute bargaining to occur at the closing table, where sellers often try to tack on extra fees. You have three options for the
> American Airlines and British Airways are proposing to merge. If British pilots and American pilots are represented by different unions, how would this merger affect airline costs?
> A firm faces two kinds of employees, those able to sell 10 units/year, and those able to sell 5 units/year. High-productivity employees are willing to work for $100/year while low-productivity employees are willing to work for only $50/year. To screen ou
> Two equal-sized newspapers have overlap circulation of 10% (10% of the subscribers subscribe to both newspapers). Advertisers are willing to pay $10 to advertise in one newspaper but only $19 to advertise in both, because they’re unwilling to pay twice t
> Your pharmaceutical firm is seeking to open up new international markets by partnering with various local distributors. The different distributors within a country are stronger with different market segments (hospitals, retail pharmacies, etc.) but also
> Every year, management and labor renegotiate a new employment contract by sending their proposals to an arbitrator who chooses the best proposal (effectively giving one side or the other $1 million). Each side can choose to hire, or not hire, an expensiv
> The below figure represents the potential outcomes of your first salary negotiation after graduation: Employer Low Salary Offer High Salary Offer Employee Walks Employee Accepts Employee Walks Employee Accepts Employer gets 0 Employee gets 0 Employe
> Microsoft and a smaller rival often have to select from one of two competing technologies. The rival always prefers to select the same technology as Microsoft (because compatibility is important), while Microsoft always wants to select a different techno
> Suppose Mr. and Mrs. Ward agreed not to vote in tomorrow’s election. Would such an agreement improve utility? Would such an agreement be an equilibrium?
> Mr. and Mrs. Ward typically vote oppositely in elections and so their votes “cancel each other out.” They each gain two units of utility from a vote for their positions (and lose two units of utility from a vote against their positions). However, the bot
> In the text, we considered a sequential-move game in which an entrant was considering entering an industry in competition with an incumbent firm (Figure 15-1). Consider now that the entrant, if fought, has the possibility of withdrawing from the industry
> At a student café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price di
> Decentralization of decision-making authority is consistent with which of the following? a. A trend of stronger, more active CEOs. b. Shrinking costs of computing bandwidth, which allows information to be inexpensively aggregated from geographically dive
> The pricing model for iTunes has been to price songs individually. Instead, Spotify opted to offer unlimited song playing for a monthly fee. Would Spotify’s pricing model likely yield more profit than pricing songs individually?
> A manufacturer of microwaves has discovered that male shoppers, on average, have lower values for microwave ovens than female shoppers. Additionally, male shoppers attribute almost no extra value to an auto-defrost feature, while female shoppers, on aver
> Your family business produces a secret recipe salsa and distributes it through both smaller specialty stores and chain supermarkets. The chains have been demanding sizable discounts but you do not want to drop your prices to the specialty stores. When ca
> German brothels recently began offering a monthly subscription service for multiple purchasers if you wished to reduce the incidence of prostitution, would you consider this pricing plan to be a desirable change?
> Why might Mattel set a much lower margin on its Barbie dolls than on the accessories for the dolls?
> In 2005, Clear Channel (an owner of multiple popular radio stations) spun off concert promoter Live Nation into an independent company. How would this affect prices for concert tickets or rates for radio programming?
> Concert prices have increased coincidentally with illegal downloading of music off the Internet. Why?
> When the Macintosh computer was introduced in 1982, Apple made it difficult for third party software developers to develop software for the platform. In contrast, Apple makes it relatively easy for third-party developers to make applications that run on
> Some high-end retailers place their most expensive products right in the entryway of the store, where consumers will see them first, and place their more popular, better-selling items further back. Why?
> What would efficient revenue management imply for the pricing of the Cowboys Stadium parking lot on typical game days? How about for the Super Bowl? How about for the many smaller events that fill less than half the lot?
> In order to create an effective incentive compensation scheme, you must have a. adequate performance measures. b. unlimited funds. c. a flat management structure. d. none of the above.
> Suppose your elasticity of demand for your parking lot spaces is –2, and price is $8 per day. If your MC is zero, and your lot is 80% full at 9 A.M. over the last month, are you optimizing?
> Explain the effect of a dollar depreciation on domestic firms and domestic consumers for goods with less than 100% domestic content.
> Explain the effects of the pound devaluation on: (1) Imports and tourism to Great Britain; and (2) Profits of US banks with European trading subsidiaries in London (which earn profit in pounds).
> When Great Britain voted to leave the Eurozone, the pound depreciated 17% against the dollar. It also raised fears that the Eurozone would fall apart. Explain how this fear would affect the dollar/euro exchange rate.
> In 2014, the euro was trading at $1.35 on the foreign exchange market. By 2015, the rate had fallen to $1.10, due to falling European interest rates. Explain the fall in the price of a euro using supply and demand curves, and in words.
> How will a dollar devaluation affect businesses and consumers in the twin cities of El Paso, the United States, and Juarez, Mexico?
> If market participants expect the krona to appreciate relative to the dollar, what will happen?
> Most of the appliances that Whirlpool sells in the UK are built in the EU. What is the effect of a pound depreciation on Whirlpool’s profit margin?
> Examine the U.S. passenger airline industry using the Five Forces. Is this an attractive industry? Why or why not?
> The smartphone market has been dominated by Apple, but recently the Droid has been able to leverage Google’s information services into market gains while Blackberry, known for its secure business-oriented network, has attempted to become more attractive
> Principal-agent problems a. occur when firm managers have more incentive to maximize profit than shareholders do. b. would be reduced if firm owners had better information about the actions of the firm’s managers. c. are made worse when executives own st
> Salon owners have recently started offering teeth whitening services to clients in addition to their more standard services. In a number of states, regulators have ordered the salon owners to stop, claiming that this service constitutes the practice of i
> Why might intangible resources like human capital and intellectual assets be a more likely source of sustainable competitive advantage than tangible resources?
> To increase a company’s performance, a manager suggests that the company needs to increase the value of its product to customers. Describe three ways in which this advice might be incorrect (Hint: Think about what else might or might not change that affe
> For each category, indicate which condition is associated with higher rivalry among competitors. Number of Firms High Low Fixed Costs High Low Level of Product Differentiation High Low Industry Growth High Low Buyer Switching Costs
> Relative to managers in more monopolistic industries, are managers in more competitive industries more likely to spend their time on reducing costs or on pricing strategies?
> Suppose that new entry decreased your demand elasticity from –2 to –3 (made demand more elastic). By how much should you adjust your price of $10?
> Snack food venders and beer distributors earn some monopoly profits in their local markets but see them slowly erode from various new substitutes. When California voted on legalizing marijuana, which side would you think that California beer distributors
> At a university faculty meeting in 2012, a proposal was made to increase the housing benefits for new faculty to keep pace with the high cost of housing. What will likely be the long-run effect of this proposal? (Hint: Think indifference principle.)
> Describe an important difference in the way an economist and a businessperson might view a monopoly.
> Describe the difference in economic profit between a competitive firm and a monopolist in both the short and long run. Which should take longer to reach the long-run equilibrium?
> All of the costs associated with a principal interacting with an agent are called a. opportunity costs b. agency costs c. monitoring costs d. sunk costs
> Indicate whether the following changes would cause a shift in the demand curve for Product A and, if so, the direction of the shift. Change Demand Curve Shift? Direction of Shift? Increase in price of complementary product Yes No Increase, Decre
> a. In the accompanying diagram (which represents the market for chocolate candy bars), the initial equilibrium is at the intersection of S1 and D1. Circle the new equilibrium if there is an increase in cocoa prices. b. In the same diagram, the initial eq
> Due to the H1N1 flu outbreak, the demand for hand sanitizer tripled. Should Johnson & Johnson increase production of their Purell hand sanitizer? Should it invest in doubling production capacity?
> The “A” index is a proxy for the world price of cotton. From January 2010 to October of 2010, the price reflected by the “A” index increased about 80%. a. Provide two separate explanations for this price increase using shifts in supply or demand. b. W
> On Valentine’s Day, the price of roses increases by more than the price of greeting cards. Why? (Hint: Consider what makes roses and cards different and how that difference might affect supply’s responsiveness to price.)
> The widget market is competitive and includes no transaction costs. Five suppliers are willing to sell one widget at the following prices: $30, $29, $20, $16, and $12. Five buyers are willing to buy one widget at the following prices: $10, $12, $20, $24,
> Describe the change in average costs and the relationship between marginal and average costs under the following three conditions as quantities produced increase:
> The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour (and $18,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of $8,000). Does this productio
> Suppose Nike’s managers were considering expanding into producing sports beverages. Why might the company decide to do this under the Nike brand name?
> What is the difference between economies of scale and economies of scope?
