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 profits from delaying generic drug competition for one year, consider cost and demand relationships for an important brand-name drug set to lose patent protection: TR = $10.25Q - $0.01Q2 MR = ∂TR/∂Q = $10.25 - $0.02Q TC = $625 + $0.25Q + $0.0025Q2 MC = ∂TC/∂Q = $0.25 + $0.005Q where TR is total revenue, Q is output, MR is marginal revenue, TC is total cost, including a risk-adjusted normal rate of return on investment, and MC is marginal cost. All figures are in thousands. a. Set MR = MC to determine the profit-maximizing price/output solution and economic profits prior to the expiration of patent protection. b. Calculate the firm’s competitive market equilibrium price/output solution and economic profits following the expiration of patent protection and onset of generic competition.
> 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?
> “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
> “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
> 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?
> Cite some ways for increasing productivity growth in the United States.
> Powerful unions like the AFL-CIO are staunch advocates for increasing the federal minimum wage despite the fact that highly-trained and experienced AFL-CIO workers tend to earn far more than the minimum wage. Can you give an economic rationale for the AF
> “Oregon’s minimum wage increased from $4.75 in 1996 to $5.50 in 1997, to $6 in 1998, and to $6.50 in 1999. According to a study by the Oregon Center for Public Policy, the minimum wage increases in Oregon did not harm welfare recipients’ opportunities to
> Clarify how profits are maximized and the optimal level of employment is achieved in a competitive labor market when the price of labor PL = MRPL.
> Explain why the MP/P relation is deficient as the sole mechanism for determining the optimal level of resource employment.
> “Hourly wage rates are an anachronism. Efficiency requires incentive-based pay tied to performance.” Discuss this statement.
> Indicate whether each of the following statements is true or false and explain why. a. In competitive market equilibrium, social welfare is measured by the net benefits derived from consumption and production as measured by the difference between consum
> Commission-based and piece-rate-based compensation plans are commonly employed by businesses. Use the concepts developed in the chapter to explain these phenomena.
> “Output per worker is expected to increase by 10 percent during the next year. Therefore, wages can also increase by 10 percent with no harmful effects on employment, output prices, or employer profits.” Discuss this statement.
> Is use of least-cost input combinations a necessary condition for profit maximization? Is it a sufficient condition? Explain.
> Discuss important differences between centralized and decentralized allocations of decision authority within an organization. Are these methods of decision authority allocation mutually exclusive?
> Describe three basic needs that must be met in the design of any organization.
> Executive stock options are often seen as a simple and effective solution to the “other people’s money” problem that can occur when managers with little ownership interest mismanage firm investment opportunities. Can you foresee any advantages and/or pot
> In a typical corporation, who are the “principals” and who are the “agents”? What is the firm’s agency problem?
> What is the Coase Theorem, and why is it important in managerial economics?
> Cite three important categories of transactions costs encountered within the firm, and give some examples.
> The personal computer has evolved from a tool for computation to an Internet-cantered communications device. Is this likely to change corporate structures by increasing the efficiency of smaller, more nimble corporations?
> Power Brokers, Inc. (PBI), a discount brokerage firm, is contemplating opening a new regional office in Providence, Rhode Island. An accounting cost analysis of monthly operating costs at a dozen of its regional outlets reveals average fixed costs of $4,
> Describe four essential components of an effective decision management and control system.
> Describe the difference between vertical and horizontal business relationships.
> Describe the difference between limit pricing and predatory pricing strategies.
> The typical CEO of a major U. S. corporation is 56-58 years old and gets paid $3-5 million per year. From a game-theory perspective, explain why corporate governance experts advise that such executives be required to hold common stock worth 7-10 years of
> Instructors sometimes use quizzes to motivate students to adequately prepare for class. However, preparing and grading quizzes can become time-consuming and tedious. Moreover, if students prepare adequately for class, there is no need for quizzes. What d
> Define the Nash equilibrium concept.
> Does game theory offer a strategy appropriate for situations in which no strategy results in the highest payoff to a player regardless of the opposing player=s decision?
> Explain how the Prisoner’s Dilemma example shows that rational self-interested play does not always result in the best solution for all parties.
> Would a linear regression model of the advertising/sales relation be appropriate for forecasting the advertising levels at which threshold or saturation effects become prevalent? Explain.
> In prepared remarks before Congress in mid-2007, Federal Reserve Chairman Ben Bernanke testified: "The principal source of the slowdown in economic growth … has been the substantial correction in the housing market. [and] The near-term prospects for the
> The Walt Disney Company is a diversified worldwide entertainment company with operations in four business segments: media networks, parks and resorts, studio entertainment and consumer products. The media networks segment consists of the company's televi
> Explain why revenue and profit data reported by shippers such as FedEx Corp. and United Parcel Service Inc. can provide useful information about trends in the overall economy.
> "Interest rates were expected to increase by 85% of all consumers in the May 2004 survey, more than ever before," said Richard Curtin, the Director of the University of Michigan’s Surveys of Consumers. "More consumers in the May 2004 survey cited the adv
> Blue Chip Financial Forecasts gives the latest prevailing opinion about the future direction of the economy. Survey participants include 50 business economists from Deutsche Banc Alex Brown, Banc of America Securities, Fannie Mae, and other prominent cor
> Forecasting the success of new product introductions is notoriously difficult. Describe some of the macroeconomic and microeconomic factors that a firm might consider in forecasting sales for a new teeth whitening product.
> Discuss some of the microeconomic and macroeconomic factors a firm must consider in its own sales and profit forecasting.
> Do the U.S. antitrust statutes protect competition or competitors? What is the difference?
> Explain why state tax rates on personal income vary more on a state-by-state basis than do corresponding tax rates on corporate income.
> When will an increase in the minimum wage increase employment income for unskilled laborers? When will it cause this income to fall? Based on your experience, which is more likely?
> Antitrust statutes in the United States have been used to attack monopolization by big business. Does labor monopolization by giant unions have the same potential for the misallocation of economic resources?
> Given the difficulties encountered with utility regulation, it has been suggested that nationalization might lead to a more socially optimal allocation of resources. Do you agree? Why or why not?
> Oh, Lord, Won’t You Buy Me a Mercedes-Benz (Factory)?1 In 1993, Alabama emerged victorious as the site of Mercedes-Benz AG’s first U.S. car plant. States like Alabama are vying more desperately than ever to lure new industrial jobs and hold on to those
> Give an example of monopoly in the labor market. Discuss such a monopoly's effect on wage rates and on inflation.
> Why are both industry and firm demand curves downward sloping in monopoly markets?
> From a social standpoint, what is the problem with monopoly?
> Describe the economic effects of countervailing power, and cite examples of markets in which countervailing power is observed.
> Describe the monopoly market structure and provide some examples.
> What are the main characteristics of accurate forecasts?
