Question: Why might intangible resources like human capital

> 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

> 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 wi

> 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

> 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?

> 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?