When Kraft recently bid $16.7 billion for Cadbury, Cadbury’s market value rose, but Kraft’s market value fell by more. What does this tell you about the value-creating potential of the deal?
> 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?
> Principal-agent relationships a. reduce monitoring costs. b. occur because managers have good information about employees. c. are not related to asymmetric information. d. are subject to moral hazard problems.
> Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your costs decrease by $6. The first unit costs you $64 to produce. If you receive a request for proposal (RFP) on a p
> A multi concept restaurant incorporates two or more restaurants, typically chains, under one roof. Sharing facilities reduces costs of both real estate and labor. The multi concept restaurants typically offer a limited menu, compared with full-sized, sta
> To conduct an experiment, AMC increased movie ticket prices from $9.00 to $10.00 and measured the change in ticket sales. Using the data over the following month, they concluded that the increase was profitable. However, over the subsequent months, they
> George has been selling 5,000 T-shirts per month for $8.50. When he increased the price to $9.50, he sold only 4,000 T-shirts. What is the demand elasticity? If his marginal cost is $4 per shirt, what is his desired markup and what is his initial actual
> An end-of-aisle price promotion changes the price elasticity of a good from –2 to –3. If the normal price is $10, what should the promotional price be?
> Why do bars offer free peanuts?
> In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will only be ab
> Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $2.5 million for a plastic injection molding machine (which can be sold for $2.0 million) and $100,000 in plastic injection molds specifically for the
> A university spent $1.8 million to install solar panels atop a parking garage. These panels will have a capacity of 500 kw, have a life expectancy of 20 years and suppose the discount rate is 10%. a. If electricity can be purchased for costs of $0.10 per
> Probably the most important source of capital is human capital. For example, most medical doctors spend years learning to practice medicine. Doctors are willing to make large investments in their human capital because they expect to be compensated for do
> A good incentive-compensation scheme a. maximizes the agent's utility. b. anticipates how an agent will game the scheme. c. does not subject a risk-averse agent to risk. d. accompanies centralized decision-making authority.
> A firm sells 1,000 units per week. It charges $70 per unit, the average variable costs are $25, and the average costs are $65. a. What should the firm do in the short run? Why? b. What should the firm do in the long run? Why? c. At what price would the
> Suppose an initial investment of $100 will return $50/year for three years (assume the $50 is received each year at the end of the year). Is this a profitable investment if the discount rate is 20%?
> George’s T-Shirt Shop produces 5,000 custom printed T-shirts per month. George’s fixed costs are $15,000 per month. The marginal cost per T-shirt is a constant $4. What is his break-even price? What would be George’s break-even price if he were to sell 5
> Your insurance firm processes claims through its newer, larger high-tech facility and its older, smaller low-tech facility. Each month, the high-tech facility handles 10,000 claims, incurs $100,000 in fixed costs and $100,000 in variable costs. Each mont
> Your company is contemplating bidding on an RFP (Request For Proposal) for 100,000 units of a specialized part. Why might the amount be more than the requesting company actually wants?
> You run a game day shuttle service for parking services for the local ball club. Your costs for different customer loads are 1: $30, 2: $32, 3: $35, 4: $38, 5: $42, 6: $48, 7: $57, and 8: $68. What are your marginal costs for each customer load level? If
> Identify which of the following are extent decisions. a. Decide whether to expand an existing product into a new region. b. What discount should be given on products during the upcoming holiday sale? c. Should the advertising budget be changed for the up
> A copy company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two copiers, and output increased by 100,000 pages per day. One month ago, they added five workers, and productivity also incre
> Children in poor neighborhoods have bleak outlooks on life and do not see much gain to studying. A recent experiment is paying children in poor neighborhoods $100 for each “A” they earn in a six-week grade reporting cycle. How does this affect behavior?
> You were able to purchase two tickets to an upcoming concert for $100 apiece when the concert was first announced three months ago. Recently, you saw that StubHub was listing similar seats for $225 apiece. What does it cost you to attend the concert?
> Your notebook computer’s hard drive recently crashed, and you decide to take it to a local repair technician to have it fixed. In this relationship, a. you are the agent. b. the technician is the principal. c. the technician is the agent. d. no principal
> You won a free ticket to see a Bruce Springsteen concert (assume the ticket has no resale value). U2 has a concert the same night, and this represents your next-best alternative activity. Tickets to the U2 concert cost $80, and on any particular day, you
> Starbucks is hoping to make use of its excess restaurant capacity in the evenings by experimenting with selling beer and wine. It speculates that the only additional costs are hiring more of the same sort of workers to cover the additional hours and cost
> A business incurs the following costs per unit: labor $125/unit, materials $45/unit, and rent $250,000/month. If the firm produces 1,000,000 units a month, calculate the following: a. Total variable costs b. Total fixed costs c. Total costs
> Students doing poorly in courses often consider dropping the courses. Many universities will offer a refund before a certain date. Should this affect a student’s drop decision?
> The expression “3/10, net 45” means that the customers receive a 3% discount if they pay within 10 days; otherwise, they must pay in full within 45 days. What would the seller’s cost of capital have to be in order for the discount to be cost justified? (
> Because of the housing bubble, many houses are now selling for much less than their selling price just two to three years ago. There is evidence that homeowners with virtually identical houses tend to ask for more if they paid more for the house. What fa
> In 2013, France’s labor unions won a case against Sephora to prevent the retailer from staying open late, and forcing its workers to work “antisocial hours”. The cosmetic store does about 20 percent of its business after 9 p.m., and the 50 sales staff wh
> The U.S. government subsidizes flood insurance because those who want to buy it live in the flood plain and cannot get it at reasonable rates. What inefficiency does this create?
> How will commercial airlines respond to the threat of new $27,500 fines for keeping passengers on the tarmac for more than three hours? What inefficiency will this create?
> One of the basic functions of the budgeting process is a. assigning decision rights. b. transferring information. c. evaluating managerial performance. d. implementing structural change.
> All of the following provide a motive for vertical agreements EXCEPT a. effective execution of price discrimination b. elimination of free-riding among retailers c. quality control d. diversification
> Two similar surgeries, breast reconstruction and breast augmentation, have different prices. Breast augmentation is cosmetic surgery not covered by health insurance. Patients who want the surgery must pay for it themselves. Breast reconstruction followin
> I recently sold my used car. If no new production occurred for this transaction, how could it have created value?
> In 2008, the Labour party in Britain promised that patients would have to wait for no more than four hours to be seen in an emergency room. How is the National Health Service meeting this performance goal?
> 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
> 1,800 New York City teachers who lost their jobs earlier this year have yet to apply for another job despite the fact that there are 1,200 openings. Why not?
> The owners of a small manufacturing concern have hired a manger to run the company with the expectation that he will buy the company after five years. Compensation of the new Vice President is a flat salary plus 75% of the first $150,000 profit, then 10%
> The owners of a small manufacturing concern have hired a manger to run the company with the expectation that he will buy the company after five years. Compensation of the new Vice President is a flat salary plus 75% of the first $150,000 profit, then 10%
> The owners of a small manufacturing concern have hired a manger to run the company with the expectation that he will buy the company after five years. Compensation of the new Vice President is a flat salary plus 75% of the first $150,000 profit, then 10%
> Why might a supermarket advertise low prices on certain high profile items and sell them at a loss? a. It is a way for companies to be charitable. b. The store will sell other groceries to the same customers, often at a markup. c. They would not. d. Thi
> What might happen if a car dealership is awarded a bonus by the manufacturer for selling a certain number of its cars monthly, but the dealership is just short of that quota near the end of the month? a. It may sell the remaining cars at huge discounts
> Which of the following actions is consistent with a manager whose compensation depends on meeting a budget goal and who does not believe he can make that goal? a. Asking a vendor to pre-ship and invoice materials for the following year. b. Discovering a
> Why might a “bonus cap” for executives be a bad policy for the company? a. It isn’t. Executives shouldn’t make more than a certain amount. b. It would sew discontent. c. It would encourage shirking after the executives reached the cap. d. The cap cou
> Why might welfare for low income households reduce the propensity to work? a. It will not. b. It reduces the incentive to work. c. It is unfair. d. It encourages jealousy.
> The problem-solving principles analyze firm problems, a. from the organization’s point of view. b. from the manager’s point of view. c. from the worker’s point of view. d. from society’s point of view.
> The rational-actor paradigm assumes the people do NOT a. Act rationally. b. Use rules of thumb. c. Act optimally. d. Act self-interestedly.
> Why might it be bad for hotels to not charge higher prices when rooms are in higher demand? a. Arbitrageurs might establish a black market by reserving rooms and then selling the reservations to customers. b. Rooms may be rationed. c. Without the prof
> Which of the following is NOT one of the three problem solving principles laid out in Chapter 1? a. Under whose jurisdiction is the problem? b. Who is making the bad decision? c. Does the decision maker have enough information to make a good decision?
> What is a possible consequence of a performance compensation reward scheme? a. It creates productive incentives. b. It creates harmful incentives. c. Both a and b d. Neither a nor b
> Why might performance compensation caps be bad? a. Different pay rates promote dissent. b. Compensation caps can discourage employees from being productive after the cap. c. Compensation caps can discourage employees from being productive before the ca
> Voluntary transactions a. Always produce gains for both parties b. Produce gains for at least one party c. Always increase wealth for everyone d. Are inefficient
> A consumer values a car at $525,000 and a seller values the same car at $485,000. If sales tax is 8% and is levied on the seller, then the seller’s bottom line price is (rounded to the nearest thousand) a. $527,000 b. $524,000 c. $525,000 d. $500,000
> Which of the following organizational forms requires the strongest management oversight to ensure coordination of functions? a. Profit centers b. Functional organizations c. M-form organizations d. Functional and M-form organizations likely require simi
> A consumer values a car at $20,000 and it costs a producer $15,000 to make the same car. If the transaction is completed at $18,000, the transaction will generate a. no surplus b. $5,000 worth of seller surplus and unknown amount of buyer surplus c.
> Taxes a. impede the movement of assets to higher valued uses. b. reduce incentives to work. c. decrease the number of wealth-creating transactions. d. All of the above.
> A price ceiling a. Is a government-set maximum price. b. Is an implicit tax on producers and an implicit subsidy to Consumers. c. Will create a surplus. d. Causes an increase in consumer and producer surplus.
> Which of the following are examples of a price floor? a. Minimum wages b. Rent controls in New York c. Both a and b d. None of the above.
> Which of these actions creates value? a. Buying a struggling firm and selling off its assets for more than the purchase price. b. A baseball slugger drawing paying fans into the ballpark. c. A student increasing his decision-making ability with an MBA.
> Wealth creating transactions are more likely to occur a. with private property rights b. with strong contract enforcement c. with black markets d. All of the above
> The biggest advantage of capitalism is that a. it allows the market to self-regulate b. it allows a person to follow his self-interest c. it allows voluntary transactions which creates wealth d. All of the above
> When a firm ignores the opportunity cost of capital when making investment or shutdown decisions, this is a case of a. Fixed-cost fallacy b. Sunk-cost fallacy c. Hidden-cost fallacy d. None of the above
> The U.S. Government bought 112,000 acres of land in southeastern Colorado in 1968 for $17,500,000. The cost of using this land today exclusively for the reintroduction of the black-tailed prairie dog a. is zero, because they already own the land. b.
> All the following are examples of variable costs, except a. Hourly labor costs b. Cost of raw materials c. Accounting fees d. Electricity cost
> Which of the following provides an example of divisions based on a functional organizational structure? a. Americas, Africa, Asia, Europe b. Research and development, production, finance, marketing c. Youth products, teen products, senior products d. Bus
> Mr. D's Barbeque of Pickwick, TN, produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D's fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total cost per slab then is a. $7. b. $2. c. $5. d. Impossible
> The fixed-cost fallacy occurs when a. A firm considers irrelevant costs b. A firm ignores relevant costs c. A firm considers overhead or depreciation costs to make short-run decisions d. Both a and c.
> Economic Value Added helps firms avoid the hidden-cost fallacy a. by ignoring the opportunity costs of using capital b. by differentiating between sunk and fixed costs c. by taking all capital costs into account, including the cost of equity d. None o
> After graduating from college, Jim had three choices, listed in order of preference: (1) Move to Florida from Philadelphia, (2) work in a car dealership in Philadelphia, or (3) play soccer for a minor league in Philadelphia. His opportunity cost of movin
> Opportunity costs arise due to a. Resource scarcity b. Lack of alternatives c. Limited wants d. Abundance of resources
> If a firm is earning negative economic profits, it implies a. That the firm’s accounting profits are zero. b. That the firm’s accounting profits are positive. c. That the firm’s accounting profits are negative. d. That more information is needed to dete
> A business owner makes 1000 items a day. Each day she contributes eight hours to produce those items. If hired elsewhere, she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs tot
> Food Fanatics caters meals where its costs of producing an extra meal is $25. Each of its meals sells for $20. At this rate, what should the company do? a. Produce more meals and increase its profit b. Produce fewer meals and increase its profit c. Not
> A company is producing 15,000 units. At this output level, MR is $22 and the MC is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information? a. The company is making a loss. b. The company needs to c
> If a firm’s AC is rising then a. MC is less than AC. b. MC is rising. c. MC is greater than AC d. the firm is making an economic profit.
> Which type of organizational form has the benefit of closer coordination to serve a particular product or geographic area? a. Profit centers. b. Functional organizations. c. M-form organizations. d. Functional and M-form organizations have the same ben
> A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire twelve workers, a wage rate of $7 per hour is sufficient. What is the MC of the 13th worker? a. $117. b. $9. c. $33. d. $84.
> A firm is thinking of hiring an additional worker to their organization who can increase total productivity by 100 units a week. The cost of hiring him is $1,500 per week. If the price of each unit is $12, a. the MR of hiring the worker is $1,500 b. The
> Suppose your firm adopts a technology that allows you to increase your output by 15%. If the elasticity of demand is -3, how should you adjust price if you want to sell all of your output? a. 5% lower. b. 0.5% lower. c. 15% higher. d. 15% lower.
> A bakery currently sells chocolate chip cookies at a price of $16/dozen. The MC is $8/dozen. The cookies are becoming more popular with customers and so the bakery owner is considering raising the price to $20/dozen. What percentage of customers must b
> Which of the following is the reason for the existence of consumer surplus? a. Consumers can purchase goods that they “want” in addition to what they “need.” b. Consumers can occasionally purchase products for less than their production cost. c. Some
