You are a management consultant for a 30-year-old partner in a large law firm. In a meeting, your client says: “According to an article in The New York Times, 57 percent of large law firms have a mandatory retirement age for partners in the firm. Before they retire, partners are paid directly for the work that they do, and, as owners, they are entitled to a share of the profits of the firm. Once they retire, partners do not receive either form of compensation. In light of this, I think we should eliminate mandatory retirement in order to gain a ‘competitive advantage’ in attracting high-quality lawyers to work for our firm. Of course, you are the expert.” What do you recommend? Explain.
> Use the accompanying graph to answer the questions that follow. a. Suppose this monopolist is unregulated. (1) What price will the firm charge to maximize its profits? (2) What is the level of consumer surplus at this price? b. Suppose the firmâ
> You are the manager in a market composed of eight firms, each of which has a 12.5 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of its competitors. a. Calculate the premerger Herfinda
> The Federal Trade Commission (FTC) issued a complaint against Nestlé and Ralston Purina alleging that a proposed merger between the two companies would violate, among other things, section 7 of the Clayton Act. While these two companies sell many product
> A monopolist’s inverse demand function is estimated as P = 150 − 3Q. The company produces output at two facilities; the marginal cost of producing at facility 1 is MC1(Q1) = 6Q1, and the marginal cost of producing at facility 2 is MC2(Q2) = 2Q2. a. Provi
> Moses Inc. is a small electric company that provides power to customers in a small rural area in the Southwest. The company is currently maximizing its profits by selling electricity to consumers at a price of $0.15 per kilowatt-hour. Its marginal cost i
> Social Dynamo Corporation earned profits last year of $49 million on sales of $500 million. During the same period, its major competitor—EIO Corp.—enjoyed sales of $490 million and earned profits of $52 million. Currently, Social Dynamo is negotiating a
> Between 1972 and 1981, Texaco sold gasoline to independent Texaco retailers at “retail tank wagon prices” but granted substantial discounts to distributors Gull and Dompier. Gull resold the gas under its own name. Dompier resold the gas under the Texaco
> The fighters of the Ultimate Fighting Championship (UFC) filed suit against the UFC, alleging that the UFC unlawfully monopolized the output and input markets in mixed martial arts. In particular, the fighters claimed that UFC used long-term exclusive co
> On November 18, 2012, Nintendo released its eighth-generation video game console, the Wii U. In November 2013, Microsoft and Sony followed suit by releasing the Xbox One and PlayStation 4, respectively. Although these three video game consoles have domin
> A firm is considering building a two-way network that links 12 users. The cost of building the network is $10,000. a. How many potential connection services does this network provide? b. If each user is willing to pay $150 to connect to the network, will
> Bank 1 and Bank 2 are considering entering a compatibility agreement that would permit the users of each bank’s automated teller machines (ATMs) access to the other bank’s ATMs. Bank 1 has a network of branches and ATMs extending from Connecticut to Flor
> During the dot-com era, mergers among some brokerage houses resulted in the acquiring firm paying a premium on the order of $100 for each of the acquired firm’s customers. Is there a business rationale for such a strategy? Do you think these circumstance
> During the early days of the Internet, most dot-coms were driven by revenues rather than profits. A large number were even driven by “hits” to their site rather than revenues. This all changed in early 2000, however, when the prices of unprofitable dot-c
> Consider the following simultaneous move game: 1In working this problem, note that the positive integers consist of the numbers {1, 2, 3, 4, . . .}, and “infinity” is not an integer. a. What is the maximum amount playe
> The elasticity of demand for a firm’s product is –4 and its advertising elasticity of demand is 0.32. a. Determine the firm’s optimal advertising-to-sales ratio. b. If the firm’s revenues are $30,000, what is its profit-maximizing level of advertising?
> Tom Jackson has been running a successful steakhouse that specializes in serving upscale steak dinners. His current marketing campaign targets residential households. Recently, it was announced that a new conference hotel was to open near his steakhouse,
> You are the manager of 3D Designs—a large imaging company that does graphics and web design work for companies. You and your only competitor are contemplating the purchase of a new 3-D imaging device. If only one of you acquires the device, that firm wil
> In the following game, determine the maximum amount you would be willing to pay for the privilege of moving (a) first, (b) second, or (c) third: There are three players, you and two rivals. The player announcing the largest integer gets a payoff of $10,
> The market for taxi services in a Midwestern town is monopolized by firm 1. Currently, any taxi services firm must purchase a $40,000 “medallion” from the city in order to offer its services. A potential entrant (firm
> Two firms compete in a Cournot fashion. Firm 1 successfully engages in an activity that raises its rival’s marginal cost of production. a. Provide two examples of activities that might raise rivals’ marginal costs. b. In order for such strategies to be b
> Discuss how price discrimination can enhance the effectiveness of predatory pricing and strategies that raise rivals’ costs.
> Evaluate the following: “Since a rival’s profit-maximizing price and output depend on its marginal cost and not its fixed costs, a firm cannot profitably lessen competition by implementing a strategy that raises its rival’s fixed costs.”
> The CEO of a regional airline recently learned that its only competitor is suffering from a significant cash-flow constraint. The CEO realizes that its competitor’s days are numbered but has asked whether you would recommend the carrier significantly low
> In 2015 Qualcomm Inc., an American multinational semiconductor company, came under scrutiny for its business practices by the United States and the European Union. It was argued that Qualcomm was paying a major customer to exclusively use its chips. In a
> Argyle is a large, vertically integrated firm that manufactures sweaters from a rare type of wool produced on its sheep farms. Argyle has adopted a strategy of selling wool to companies that compete against it in the market for sweaters. Explain why this
> As a newly hired manager at your firm, you decide to start your tenure by assessing the sensibility of your current advertising expenditure. To do this, you ask your analytics team to collect useful data on the quantity of your product sold, the price, a
> A number of professional associations, such as the American Medical Association and the American Bar Association, support regulations that make it more costly for their members (e.g., doctors and lawyers) to practice their services. While some of these r
> Between 1995 and 1997, American Airlines competed in the Dallas/Ft. Worth Airport against several other low-cost carriers. In response to these low-cost carriers, American Airlines reduced its price and increased service on selected routes. As a result,
> You are the manager of an international firm headquartered in Antarctica. You are contemplating a business tactic that will permit your firm to raise prices and increase profits in the long run by eliminating one of your competitors. Do you think it woul
> Two firms compete in a homogeneous product market where the inverse demand function is P = 20 − 5Q (quantity is measured in millions). Firm 1 has been in business for one year, while firm 2 just recently entered the market. Each firm has a legal obligati
> Suppose that, prior to other firms entering the market, the maker of a new smart phone (Way Cool Inc.) earns $80 million per year. By reducing its price by 60 percent, Way Cool could discourage entry into “its” market, but doing so would cause its profit
> A monopolist earns $30 million annually and will maintain that level of profit indefinitely, provided that no other firm enters the market. However, if another firm enters the market, the monopolist will earn $30 million in the current period and $15 mil
> A potential entrant can produce at the same cost as the monopolist illustrated in the accompanying figure. The monopolist’s demand curve is given by DM, and its average cost curve is AC. a. What level of output does the monopolist have
> Discuss how price discrimination can enhance the effectiveness of a limit pricing strategy.
> Barnacle Industries was awarded a patent over 15 years ago for a unique industrial strength cleaner that removes barnacles and other particles from the hulls of ships. Thanks to its monopoly position, Barnacle has earned more than $160 million over the p
> Describe how a manager who derives satisfaction from both income and shirking allocates a 10-hour day between these activities when paid an annual, fixed salary of $110,000. When this same manager is given an annual, fixed salary of $110,000 and 6 percen
> As a manager in a monopolistically competitive industry, you are trying to determine the optimal price for your product. You’ve asked the analysts in your firm to determine as closely as possible the inverse demand curve for your produc
> Canada’s forestry industry (composed mainly of those involved in the lumber industry) directly employs about 370,000 workers and indirectly employs an additional 510,000 people in support services. Forestry products account for nearly 3 percent of Canada
> Identify the type of specialized investment that each of the following situations requires. a. You hire an employee to operate a machine that only your company uses. b. An aerosol canning company designs a filling line that can be used only for a particu
> Explain why automobile manufacturers produce their own engines but purchase mirrors from independent suppliers.
> Identify whether each of the following transactions involves spot exchange, contract, or vertical integration. a. Barnacle Inc. has a legal obligation to purchase 2 tons of structural steel per week to manufacture conveyor frames. b. ExxonMobil uses the
> Discuss the optimal method for procuring a modest number of standardized inputs that are sold by many firms in the marketplace. What are the primary advantages and disadvantages of using this method to acquire inputs? Give an example not used in the text
> Discuss the optimal method for procuring inputs that have well-defined and measurable quality specifications and require highly specialized investments. What are the primary advantages and disadvantages of acquiring inputs through this means? Give an exa
> Recently, the owner of a Trader Joe’s franchise decided to change how she compensated her top manager. Last year, she paid him a fixed salary of $65,000, and her store made $120,000 in profits (not counting payment to her top manager). She suspected the
> Jim’s diner is just about to open in Memphis, Tennessee. However, Jim is trying to decide whether he wants to offer Coke or Pepsi soda products. He determines that, to offer either product, he will have to spend $1,800 in sunk costs to purchase and insta
> HomeGrown is a small restaurant that specializes in serving local fruits, vegetables, and meats. The company has chosen to enter into a long-term relationship with Family Farms, a local farming operation. The two parties have decided to enter into a long
> Andrew has decided to open an online store that sells home and garden products. After searching around, he chooses the software company Initech to provide the software for his website since its product required the least amount of specialized investments
> Automated Data Processing (ADP) provides computer software and services to a host of companies, including automobile dealerships. ADP charges dealerships a monthly lease for hardware, software, and support services but does not charge for training the de
> As a manager in a new product market, you are interested in whether or not your competitors actually produce a close substitute for your product. Your analytics team has carefully collected data on prices and quantities for your product, as well as marke
> Business-process outsourcing (BPO) is a type of outsourcing that consists of contracting operations and responsibilities of a specific business process (e.g., human resources) to a third-party service provider. Such outsourcing generally began with manuf
> A few years ago, the Boston Globe reported that the city of Boston planned to spend $14 million to convert the Fleet Center sports arena and entertainment center into an appropriate venue for the Democratic National Convention (DNC). The city engaged Sha
> Recently, Air Liquide signed a long-term contract with Yan’an Energy and Chemical Co., a subsidiary of Yanchang Petroleum Group—one of China’s largest firms engaged in oil and natural gas exploration and production as well as oil refining. The new contra
> Teletronics reported record profits of $100,000 last year and is on track to exceed those profits this year. Teletronics competes in a very competitive market where many of the firms are merging in an attempt to gain competitive advantages. Currently, th
> EFI—a material handling company—pays each of its salespersons a base salary plus a percentage of revenues generated. To reduce overhead, EFI has switched from giving each salesperson a company car to reimbursing them $0.35 for each business-related mile
> Suppose that Honda is on the verge of signing a 15-year contract with TRW to supply airbags. The terms of the contract include providing Honda with 85 percent of the airbags used in new automobiles. Just prior to signing the contract, a manager reads tha
> The Wall Street Journal reported that Juniper Networks Inc.—a maker of company network equipment—plans to offer its more than 1,000 employees the opportunity to reprise their stock options. Juniper’s announcement came at a time when its stock price is do
> The division of a large office services company that makes high-end copiers recently signed a five-year, $25 million contract for IT services from CGI Group, a Canadian information technology company. If you were the manager of the division, how would yo
> The manager of your company’s pension fund is compensated based entirely on fund performance; he earned over $1.2 million last year. As a result, the fund is contemplating a proposal to cap the compensation of fund managers at $100,000. Provide an argume
> Not long ago, the Federal Communications Commission (FCC) implemented “local number portability” rules allowing cellular phone consumers to switch cellular providers within the same geographic area and maintain the same phone number. How would you expect
> DonutVille caters to its retirement population by selling over 10,000 donuts each week. To produce that many donuts weekly, DonutVille uses 1,000 pounds of flour, which must be delivered by 5:00 am every Friday morning. How should the manager of DonutVil
> During the beginning of the twenty-first century, the growth in computer sales declined for the first time in almost two decades. As a result, PC makers dramatically reduced their orders of computer chips from Intel and other vendors. Explain why compute
> Suppose the marginal cost of writing a contract of length L is MC(L) = 40 + 3L. Find the optimal contract length when the marginal benefit of writing a contract is: a. MB(L) = 130. b. MB(L) = 170. c. What happens to the optimal contract length when the
> Suppose the marginal benefit of writing a contract is $100, independent of its length. Find the optimal contract length when the marginal cost of writing a contract of length L is: a. MC(L) = 30 + 4L. b. MC(L) = 40 + 5L. c. What happens to the optimal co
> Discuss the impact of the following factors on the optimal method of procuring an input. a. Benefits from specialization. b. Bureaucracy costs. c. Opportunism on either side of the transaction. d. Specialized investments. e. Unspecifiable events. f. Barg
> Compare the advantages and disadvantages of using spot checks/hidden video cameras in the workplace and pay-for-performance pay schemes as means to influence worker performance.
> A manager hires labor and rents capital equipment in a very competitive market. Currently the wage rate is $9 per hour and capital is rented at $10 per hour. If the marginal product of labor is 50 units of output per hour and the marginal product of capi
> An economist estimated that the cost function of a single-product firm is, Based on this information, determine: a. The fixed cost of producing 10 units of output. b. The variable cost of producing 10 units of output. c. The total cost of producing 10 u
> Explain the difference between the law of diminishing marginal returns and the law of diminishing marginal rate of technical substitution.
> A firm’s product sells for $4 per unit in a highly competitive market. The firm produces output using capital (which it rents at $25 per hour) and labor (which is paid a wage of $30 per hour under a contract for 20 hours of labor servic
> In January 2007, XM enjoyed about 58 percent of satellite radio subscribers, and Sirius had the remaining 42 percent. Both firms were suffering losses, despite their dominance in the satellite radio market. In 2008, the DOJ decided not to challenge a mer
> A firm’s analysts estimate that the firm can manufacture a product according to the production function: a. Calculate the average product of labor, APL, when the level of capital is fixed at 81 units and the firm uses 16 units of labor.
> As another matter with Analysts Inc., your team has carefully collected data on output and costs for a software servicing firm. The data are contained in the file called Q05-25.xls available online at www.mhhe.com/baye10e. You’ve decided to model the fir
> As a member of the Analysts Inc. consulting firm, you have carefully collected data on a manufacturing firm’s output, capital and labor. The data are contained in the file called Q05-24.xls available online at www.mhhe.com/baye10e. You believe the firm’s
> You are the manager of a large but privately held online retailer that currently uses 17 unskilled workers and 6 semiskilled workers at its warehouse to box and ship the products it sells online. Your company pays its unskilled workers the minimum wage b
> In the aftermath of a hurricane, an entrepreneur took a one-month leave of absence (without pay) from her $5,000-per-month job in order to operate a kiosk that sold fresh drinking water. During the month she operated this venture, the entrepreneur paid t
> Hyundai Heavy Industries Co. is one of Korea’s largest industrial producers. According to an article in Bloomberg BusinessWeek Online, the company not only is the world’s largest shipbuilder, but also manufactures other industrial goods ranging from cons
> According to The Wall Street Journal, Mitsubishi Motors announced a major restructuring plan in an attempt to reverse declining global sales. Suppose that as part of the restructuring plan Mitsubishi conducts an analysis of how labor and capital are used
> The A-1 Corporation supplies airplane manufacturers with preformed sheet metal panels that are used on the exterior of aircraft. Manufacturing these panels requires only five sheet metal–forming machines, which cost $500 each, and worke
> In the wake of the energy crisis in California in 2000 and 2001, many electricitygenerating facilities across the nation periodically reassess their projections of future demand and capacity for electricity in their respective markets. As a manager at Fl
> A local restaurateur who had been running a profitable business for many years recently purchased a three-way liquor license. This license gives the owner the legal right to sell beer, wine, and spirits in her restaurant. The cost of obtaining the three-
> Del Monte has a long and rich tradition in the American food processing industry. It is perhaps best known for packaging canned fruits and vegetables. Part of its success has involved acquiring other brands of canned fruits and vegetables. Suppose that D
> A Nike women’s-only store in California offers women’s running, training, and sportswear products and also contains an in-store fitness studio for group and personal fitness training sessions. The store consistently earns profits in excess of $500,000 pe
> You are a manager at Glass Inc.—a mirror and window supplier. Recently, you conducted a study of the production process for your single-side encapsulated window. The results from the study are summarized in the following table, and are
> Recently, the Boeing Commercial Airline Group (BCAG) recorded orders for more than 15,000 jetliners and delivered more than 13,000 airplanes. To maintain its output volume, this Boeing division combines efforts of capital and more than 90,000 workers. Su
> You are a manager for Herman Miller, a major manufacturer of office furniture. You recently hired an economist to work with engineering and operations experts to estimate the production function for a particular line of office chairs. The report from the
> You were recently hired to replace the manager of the Roller Division at a major conveyor- manufacturing firm, despite the manager’s strong external sales record. Roller manufacturing is relatively simple, requiring only labor and a machine that cuts and
> In an effort to stop the migration of many of the automobile manufacturing facilities from the Detroit area, Detroit’s city council is considering passing a statute that would give investment tax credits to auto manufacturers. Effectively, this would red
> A firm produces output according to the production function Q = F(K, L) = 4K + 8L. a. How much output is produced when K = 2 and L = 3? b. If the wage rate is $60 per hour and the rental rate on capital is $20 per hour, what is the cost-minimizing input
> A firm produces output according to a production function Q = F(K, L) = min {4K, 4L}. a. How much output is produced when K = 2 and L = 3? b. If the wage rate is $60 per hour and the rental rate on capital is $40 per hour, what is the cost-minimizing inp
> Explain the difference between fixed costs, sunk costs, and variable costs. Provide an example that illustrates that these costs are, in general, different.
> A multiproduct firm’s cost function was recently estimated as, a. Are there economies of scope in producing 10 units of product 1 and 10 units of product 2? b. Are there cost complementarities in producing products 1 and 2? c. Suppose t
> In 2006, the five leading suppliers of digital cameras in the United States were Canon, Sony, Kodak, Olympus, and Samsung. The combined market share of these five firms was 60.9 percent. The leading firm was Canon, with a market share of 18.7 percent. Th
> A firm’s fixed costs for 0 units of output and its average total cost of producing different output levels are summarized in the following table. Complete the table to find the fixed cost, variable cost, total cost, average fixed cost,
> In the answer to Demonstration Problem 4–2 in the text, we showed a situation in which a gift certificate leads a consumer to purchase a greater quantity of an inferior good than he or she would consume if given a cash gift of equal value. Is this always
> A consumer must divide $600 between the consumption of product X and product Y. The relevant market prices are Px = $10 and Py = $40. (LO2) a. Write the equation for the consumer’s budget line. b. Illustrate the consumer’s opportunity set in a carefully
> A consumer is in equilibrium at point A in the accompanying figure. The price of good X is $5. (LO2, LO3) a. What is the price of good Y? b. What is the consumer’s income? c. At point A, how many units of good X does the consumer purcha
> A consumer has $300 to spend on goods X and Y. The market prices of these two goods are Px = $15 and Py = $5. (LO2) a. What is the market rate of substitution between goods X and Y? b. Illustrate the consumer’s opportunity set in a carefully labeled diag
> When trying to assess differences in her customers, Claire—the owner of Claire’s Rose Boutique—noticed a difference between the typical demand of her female versus her male customers. In particular, she found her female customers to be more price sensiti
> A large Coca-Cola vendor recently hired some economic analysts to assess the effect of a price increase in its 16-ounce bottles from $1.00 to $2.00. The analysts determined that, on average, the vendor’s customers spend about $15.00 on
> Recently, an Internet service provider (ISP) in the United Kingdom implemented a “ no-strings U.S.-style flat-rate plan” whereby its commercial subscribers can send and receive unlimited volume (measured in gigabytes) up to a cap of 10,000 gigabytes (per
