ECO 550 WEEK 9 CHAPTER 16 PROBLEMS 4, 6(A, C), 9

Chapter 16: Problems 4, 6(a, c), 9

4. What are the incentives to innovate for a monopoly firm’s as compared with a firm in a competitive market if patent protection is not available.

6. The industry demand function for bulk plastics is represented by the following equation:

Where Q represents millions of pounds of plastics

The total cost function for the industry, exclusive of a required return on invested capital, is

+ 500Q +10Q2

Where Q represents millions of pounds of plastic

(a) If this industry acts like a monopolist in the determination of price and output, compute the profit –maximizing level of price and output

(b) What are total profits at this price and output level?

© Assume that this industry is composed of many (500) small firms, such that the demand function facing any individual firm is

P=$620

Compute the profit-maximizing level of price and output under these conditions (the industry’s total cost function remain unchanged)

9. Branding Iron Products, a specialty steel fabricator, operates a plant in the town of West Star, Texas. The town has grown rapidly because of recent discoveries of oil and gas in the area. Many of the new residents have expressed concern at the amount of pollution (primary particulate matter in the air and waste water in the town’s river) emitted by Brandon Iron. Three proposals have been made to remedy the problem:

(a) Impose a tax on the amount of particulate matter and the amount of waste water emitted by the firm.

(b) Prohibit pollution by the firm

( c) Offer tax incentives to the firm to clean up its production processes.

Evaluate each of these alternatives from the perspectives of economic efficiency, equity, and the likely long-term impact on the firm.

ECO 550 WEEK 8 DQS.

"Contracting" Please respond to the following:

From the e-Activity, propose a methodology for assessing the risk in business contracts. Assess the economic impact this methodology may have for the organization. Analyze a situation in which both parties entering into a contract could benefit, economically or otherwise, from slightly ambiguous language contained in the contract. Provide specific examples to support your response.

"Organization Form" Please respond to the following:

Analyze the potential downfalls of any team effort and make at least one recommendation for minimizing risk. Provide specific examples to support your response. Evaluate the organization form that would be most efficient in minimizing the principal-agent problem. Provide a rationale with your response

ECO 550 WEEK 8 CHAPTER 15 PROBLEMS 2, 5, AND 6

Chapter 15: Problems 2, 5, and 6

2. If contract promises were not excused because of acts of war, would the clearing and settlements clients of Bank of New York change their behavior? If so,how?What reliance behavior would be considered efficient? What reliance behavior would be considered excessive?

5. Would warehouse operators insist on owning their own trucking companies?

Why or why not? What coordination and control problems and contractual hazards would these companies encounter?6. What organizational form would warehouse operators and truck hauling companies adopt?

ECO 550 WEEK 7 DQS.

"Game Theory" Please respond to the following: • Demand for airline tickets fluctuates throughout the year, which affects the price of an airline ticket. Suggest the type of game that may be most appropriate for a specific airline to play to address the differences in demand and elasticity and the resulting impact on profitability. Provide support for your reply. • From the first e-Activity, propose a short-term and long-term pricing strategy for the product or service you researched including how the strategies would be implemented. Assess how your proposal ultimately maximizes profits

"Pricing Techniques" Please respond to the following:

From the second e-Activity, propose the new target market segment for the product and its accompanying pricing strategy (for example, bundling and couponing). Provide a rational for why you feel the new target market and pricing strategy would be successful and the likely impact to the profitability of the firm. The pharmaceutical industry often has the luxury of implementing pricing strategies that appear high to consumers. Take a position on the fairness of the industry’s approach to pricing pharmaceutical products including offering an alternative strategy that may be more palatable to consumers. Provide a rationale with your position

ECO 550 WEEK 7 CHAPTER 13 AND CHAPTER 14 PROBLEMS

Chapter 13: Problems 2, 13, and 15 

2. Consider the following payoff matrix:
a. Does Player A have a dominant strategy? Explain why or why not.
b. Does Player B have a dominant strategy? Explain why or why not.
13. Analyze the following sequential game and advise Kodak about whether they should introduce the new product, Picture CD.

15.A math graduate student explains to her friend how to approach a group of smartattractive guys who have brought along famous actor Russell Crowe. What shouldher friend do? Ignore Russell Crowe or fixate on Russell Crowe? Explain the equilibrium reasoning underlying your answer. (Note: Best payoff—date with R.C., Better—date with other guys, Worse—no date tonight, Worst—nodate ever with any of these guys.)

Chapter 14: Problems 3(b, c, d), 5(a, b, c), and 8(a, b, c)


3. American Export-Import Shipping Company operates a general cargo carrier service between New York and several Western European ports. It hauls two majorcategories of freight: manufactured items and semi manufactured raw materials.

b. . What are the profit-maximizing levels of price and output for the twofreight categories?

c. At these levels of output, calculate the marginal revenue in each market.

5. Phillips Industries manufactures a certain product that can be sold directly to retail outlets or to the Superior Company for further processing and eventual sale asa completely different product. The demand function for each of these markets is

Retail Outlets: P1 = 60 − 2 Q1

Superior Company: P2 = 40 − Q2

whereP1 and P2 are the prices charged and Q1 and Q2 are the quantities sold inthe respective markets.

Phillips’ total cost function for the manufacture of thisproduct + 8(Q1 + Q2)5.

a. Determine Phillips’ total profit function.

b. What are the profit-maximizing price and output levels for the product inthe two markets?

c. At these levels of output, calculate the marginal revenue in each market.

8. The Pear Computer Company just developed a totally revolutionary new personal computer. It estimates that it will take competitors at least two years to produce equivalent products. The demand function for the computer is estimated to be ,500 − 0.0005Q

The marginal (and average variable) cost of producing the computer is $900.

a. Compute the profit-maximizing price and output levels assuming Pear acts as a monopolist for its product.

c. Calculate the contribution to profit and overhead for each of the 10 time periods and prices.

ECO 550 WEEK 6 DQS.

"Monopolies" Please respond to the following:

From the first e-Activity, imagine this company acting as a monopoly was to have a new competitor arrive in the marketplace. Assess how the monopoly would likely change its pricing strategy to compensate for the new competition.From the first e-Activity, speculate how the monopolist could be more efficient in the long-run considering new competition has entered the marketplace

"Oligopoly" Please respond to the following:

From the second e-Activity, assess the marketing and pricing strategies, for example rebates, to determine the goal(s) of the marketing and pricing strategies for one of the companies you researched. Make one recommendation for changes that the company should make to better maximize profits. The Internet has made shopping for airline tickets efficient for the consumer. As a result, the industry overall is price sensitive. Suggest how the airlines can maximize profits while avoiding price wars.

ECO 550 WEEK 6 CHAPTER 11 AND CHAPTER 12 PROBLEMS

Chapter 11

2. Ajax Cleaning Products is a medium-sized firm operating in an industry dominated by one large firm Tile King. Ajax produces a multi-headed tunnel wall scrubber that is similar to a model produced by Tile King. Ajax decides to charge the same price as Tile King to avoid the possibility of a price war. The price charged by Tile King is $20,000.

Ajax has the following short-run cost curve:

,000 - 5,000Q + 100Q2.

A. Computer the marginal cost curve for Ajax.

B. Given Ajax’s pricing strategy, what is the marginal revenue function for Ajax?

4. Unique Creations holds a monopoly position in the production and sale of manometers. The cost function facing Unique is estimated to be

TC = $100,000 + 20Q

A. What is the marginal cost for Unique?

C. What is the marginal revenue at the price computed in Part (b)?

6. Wyandotte Chemical Company sells various chemicals to the automobile industry. Wyandotte currently sells 30,000 gallons of polyol per year at an average price of $15 per gallon. Fixed costs of manufacturing polyol are $90,000 per year and total variable costs equal $180,000. The operations research department has estimated that a 15 percent increase in output would not affect fixed costs but would reduce average variable costs by 60 cents per gallon. The marketing department has estimated the arc elasticity of demand for polyol to be –2.0.

A. How much would Wyandotte have to reduce the price of polyol to achieve a 15 percent increase in the quantity sold?

B. Evaluate the impact of such price cut on (i) total revenue, (ii) total costs, and (iii) total profits.

Chapter 12

1. Assume that two companies (C and D) are duopolists that produce identical products. Demand for the products is given by the following linear demand function:

– Qc- Qd

Where Qc and Qd are the quantities sold by the respective firms and P is the selling price. Total cost functions for the two companies are

,000 + 100Qc

,000 + 125Qd.

Assume that the firms act independently as in the Cournot model (i.e., each firm assumes that the other firm Â’s output will not change).

A. Determine the long-run equilibrium output and selling price for each firm.

B. Determine the total profits for each firm at the equilibrium output found in Part (a). This is answer for part (a).

2. Assume that two companies (A and B) are duopolists who produce identical products. Demand for the products is given by the following linear demand function:

– Qa - Qb

Where Qa and Qb are the quantities sold by the respective firms and P is the selling price. Total cost functions for the two companies are:

,500 + 55Qa + Q^2a

,200 + 20Qb + 2Q^2b .

Assume that the firms act independently as in the Cournot model (i.e., each firm assumes that the other firm Â’s output will not change).

B. Determine Firm A, Firm B, and total industry profits at equilibrium solution found in Part (a).

5. Alchem (L) is the price leader in the polyglue market. All 10 other manufacturers (follower [F] firms) sell polyglue at the same price as Alchem. Alchem allows the other firms to sell as much as they wish at the established price and supplies the remainder of the demand itself. Total demand for polyglue is given by the following function ( +QF):

,000 – 4 QT

Alchem marginal cost function for the manufacturing and selling polyglue is

,000 + 5QL

The aggregate marginal cost function for the other manufacturers of polyglue is

?,000 + 4QF

B. What is the total market demand for polyglue at the price established by Alchem in Part (a)? How much of total demand do the follower firms supply?

ECO 550 WEEK 5 MIDTERM QUIZ 2

1). The different methods by which the sellers inform their potential buyers about the product is called:

2). Jane regularly sends funds to organizations seeking to save endangered animal species. This is an example of:

3). Carla had received very low annual return from her investment portfolio comprising of stocks of five companies for two years. Her decision to continue holding the same portfolio of assets will be an example of:

4). In the example of Ireland described in the text, the country’s production set shifted outward over time because:

5). Suppose Zia spends her time picking berries and apples. Her production set is described by the equation , where is the number of berries and y the number of apples. Which of the following statements will be true?

6). When the slope of a country’s production set declines, it implies:

7). Bankers supported the Federal Reserve Board’s Regulation Q because:

8). Suppose the adoption of a new software reduces the marginal cost of publishing books. For a given demand curve for books, this will be represented by:

9). Starting from a pure exchange equilibrium, an increase in the demand for a commodity will result in:

10). Let the marginal product of capital (MPK ) be 6; the marginal product of labor (MPL) be 2; the price of labor is given by $10. What will be the price of capital such that the isocost and the isoquant are tangent to each other?

11). Which of the following is a property of an isoquant?

12). Refer to Figure 4-1. If the firm produces 2,000 dolls per month when the market price is $4: Figure 4-1 The following figure shows the marginal cost curve (MC) for a firm producing fancy dolls for children. The market price for a doll is $4 per unit.

13). Refer to Figure 5-1. Which of the following points represents the long-run equilibrium price-output combination? In the figure given below MC denotes the marginal cost and AC denotes the average cost of a firm under perfect competition. Figure 5-1

14). Which of the following conditions define the short-run for any industry?

15). Suppose beer producers in Munich became aware of the low price of one barrel of beer in the domestic market relative to that in the United States. What will be the impact of this price difference?

16). Refer to Figure 6-2. What would be the consumer surplus if this remained a perfectly competitive market? A group of firms in competitive market produced 20 units of a good when the market price was $2. They incurred no marginal cost. Eventually they realized the benefits they could get by teaming up and acting as a monopolist. The following figure shows the demand curve and marginal revenue curve for this profit maximizing monopolist. Figure 6-2

17). Refer to Figure 6-4. Calculate the profit earned by the monopolist when the marginal cost of production is $15 per unit. The following figure depicts the demand, marginal revenue (MR), and marginal cost (MC) for a monopolist. Figure 6-4

18). Which of the following is a possible explanation for the fall in prices after an industry is monopolized by combining a group of competitors?

19). Refer to Figure 4-2. Identify the supply curve of the firm. Figure 4-2 The following figure shows the cost curves of a firm producing good X.

20). High barriers to entry protect the market power of existing firms and discourage the formation of firms which:

21). The principle of backward induction proves that in price-fixing oligopoly games:

22). Refer to Figure 7-1. What will be the dominant firm’s profit maximizing output? The figure given below represents the total output and price produced in an oligopoly market characterized by a dominant firm and a fringe. SF represents the supply curve of the fringe, D is the market demand curve, DRES represents the residual demand curve of the dominant firm, MRRES represents the residual marginal revenue curve of the dominant firm, and MCD represents the marginal cost of the dominant firm.

23). In a mixed strategy situation, like the “heads or tails” game, the players can maximize their income by randomly choosing head or tail each with a probability of:

24). Refer to Table 7-3. What will be the Nash equilibrium if there is no interaction between the two students? The following matrix represents the payoffs to two students who have been caught cheating in a class. Table 7-3

25). Which of the following games will have a solution in mixed strategies?

ECO 550 WEEK 5 MIDTERM QUIZ 1

MIDTERM QUIZ

This midterm exam consist of 32 multiple choice questions and covers the material in Chapters 1 through 8. There are four questions from each chapter.

1). The flat-screen plasma TVs are selling extremely well. The originators of this technology are earning higher profits. What theory of profit best reflects the performance of the plasma screen makers?

2). To reduce Agency Problems, executive compensation should be designed to:

3). Economic profit is defined as the difference between revenue and ____.

4). Which of the following will increase (V0), the shareholder wealth maximization model of the firm:

5). A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.

6). The closest example of a risk-free security is

7). The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:

8). The ____ is the ratio of ____ to the ____.

9). If demand were inelastic, then we should immediately:

10). Producers' goods are:

11). Marginal revenue (MR) is ____ when total revenue is maximized.

12). Suppose we estimate that the demand elasticity for fine leather jackets is ‑.7 at their current prices. Then we know that:

13). The method which can give some information in estimating demand of a product that hasn’t yet come to market is:

14). The standard deviation of the error terms in an estimated regression equation is known as:

15). All of the following are reasons why an association relationship may not imply a causal relationship except:

16). Demand functions in the multiplicative form are most common for all of the following reasons except:

17). The variation in an economic time-series which is caused by major expansions or contractions usually of greater than a year in duration is known as:

18). The forecasting technique which attempts to forecast short-run changes and makes use of economic indicators known as leading, coincident or lagging indicators is known as:

19). The type of economic indicator that can best be used for business forecasting is the:

20). An example of a time series data set is one for which the:

21). The optimal currency area involves a trade-off of reducing transaction costs but the inability to use changes in exchange rates to help ailing regions. If the US, Canada, and Mexico had one single currency (the Peso-Dollar) we would tend to see all of the following EXCEPT:

22). Trading partners should specialize in producing goods in accordance with comparative advantage, then trade and diversify in consumption because

23). In an open economy with few capital restrictions and substantial import-export trade, a rise in interest rates and a decline in the producer price index of inflation will

24). Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, an increase in US INFLATION RATES would

25). The following is a Cobb-Douglas production function: Q = 1.75K0.5∙L0.5. What is correct here?

26). Which of the following is never negative?

27). If the marginal product of labor is 100 and the price of labor is 10, while the marginal product of capital is 200 and the price of capital is $30, then what should the firm?

28). In a production process, an excessive amount of the variable input relative to the fixed input is being used to produce the desired output. This statement is true for:

29). What method of inventory valuation should be used for economic decision-making problems?

30). ____ are defined as costs which are incurred regardless of the alternative action chosen in a decision-making problem.

31). If TC = 321 + 55Q - 5Q2, then average total cost at Q = 10 is:

32). According to the theory of cost, specialization in the use of variable resources in the short-run results initially in

ECO 550 WEEK 5 DQS.

"Applications of Cost Theory" Please respond to the following:

Imagine you are a manager of a chemical company. An accident has occurred in which chemicals leaked into the ground water nearby, the community is unaware. Assess the costs involved in cleaning up the water immediately (confessing) versus hiding the fact and possibly paying more in the future. Discuss the impact on profitability in both situations. From the first e-Activity, assess the factors involved in conducting a break-even analysis. Determine the conditions that may exist for a manager of this good or service may decide to move forward with operations even with the initial costs of operations is more than the potential revenue

"Prices, Output and Strategy" Please respond to the following:

Pick a good or service you are familiar. Speculate how the price for that good or service may have been set and how well this price maximizes profit for the company and determine what shifts the company should made in its pricing strategy. Provide support for your recommendations. From the second e-Activity, discuss how the company you selected should increase its competitive stance in the marketplace and how management would implement the recommendations. Provide specific examples to support your response

ECO 550 WEEK 5 CHAPTER 9 AND CHAPTER 10 PROBLEMS

Chapter 9

3. A study of the costs of electricity generation for a sample of 56 British firms in 1946-1947 yielded the following long-run cost function:

+ .003Q + .0000029Q^2 - .000046QZ - .026Z + .00018Z^2

where variable cost measured in pence per kilowatt-hour. (A pence was a British monetary unit equal, at that time to 2 cents U.S.)

measured in millions of kWh per year

size, measured in thousands of kilowatts

A. Determine the long-run variable cost function for electricity generation.

B. Determine the long-run marginal cost function for electricity generation.

C. Holding plant size constant at 150,000 kilowatts, determine the short-run average variable cost and marginal cost functions for electricity generation.

D. For a plant size equal to 150,000 kilowatts, determine the output level that minimizes short-run average variable costs.

E. Determine the short-run average variable cost and marginal cost at the output level obtained in Part (D).

4. Assuming that all other factors remain unchanged, determine how a firm’s breakeven point is affected by each of the following:

A. The firm finds it necessary to reduce the price per unit because of competitive conditions in the market.

B. The firm’s direct labor costs increase as a result of a new labor contract.

C. The Occupational Safety and Health Administration requires the firm to install new ventilating equipment in its plant. (Assume that this action has no effect on worker product

5. Cool-Aire Corporation manufactures a line of room air conditioners. Its break even sales level is 33,000 units. Sales are approximately normally distributed. Expected sales next year are 40,000 units with a standard deviation of 4,000 units.

A. Determine the probability that Cool-Aire will incur an operating loss.

B. Determine the probability that Cool-Aire will operate above its break-even point.

Chapter 10

2. Television channel operating profits vary from high as 45 to 55 percent at MTV and Nickelodon down to 12 to 18 percent to NBC and ABC. Provide a Porter Five Forces analysis of each type of network. Why is MTV so profitable relative to major networks?

6. Assume that a firm is a perfectly competitive industry has the following total cost schedule

Outputs (units)

Total Cost ($)

10

$110

15

$150

20

$180

25

$225

30

$300

35

$385

40

$480

A. Calculate a marginal cost and an average cost schedule for the firm.

B. If the prevailing marketing price is $17 per unit, how many units will be produced and sold? What are the profits per unit? What are the total profits?

C. Is the industry in long-run equilibrium at this price?

10. Which of the following products and services are likely to encounter adverse selection problems: golf shirts at traveling pro tournaments, certified gemstones from Tiffany’s graduation gift travel packages, or mail-order auto parts? Why or why not?

ECO 550 WEEK 4 DQS.

"Production Economics" Please respond to the following:

From the e-Activity, determine the environmental variable most likely to affect the short-run production over the next 12 months. Determine what managers can do to prepare for the possible change in short-run production. Pick a real or fictitious business. Create a scenario around this business in which a manager would decide to either stop operations in the short-run or going out of business in the long-run. Provide a rationale with your response

"Cost Analysis" Please respond to the following:

Pick a good or service. Distinguish between the short-run and the long-run production and cost function for that good or service. Discuss how price plays a role in short-run and the long-run decisions and how managers are likely to respond in each case.Using the same good or service from above. Identify the fixed and variables costs are for the good or service. Based upon the costs identified, recommend whether to produce or not produce the good or service. Provide a rationale with your response

ECO 550 WEEK 4 CHAPTER 7 AND CHAPTER 8 PROBLEMS

Chapter 7

In the deep creek mining company described in this chapter table 7.1 suppose again that labor is the variable input and capital is the fixed input. Specifically, assume that the firm owns a piece of equipment having a 500-bhp rating. A. Complete the following tableLabor input L(#of workers

Total production TPL (=Q)

Marginal Product (MPL)

Average Product APL

1

2

3

4

5

6

7

8

9

10

`

B. Plot the (i) total product, (ii) marginal product, (iii) average product functions.

C. Determine the boundaries of these three stages of production.

6. Consider the following short-Run production function (where input, ): 

A. Determine the marginal product
B. Determine the average product function
C. Find the value of L that maximizes Q
D. Find the value of L at which the marginal product function takes on its maximum value
E. Find the value of L at which the average product function takes on its maximum value.

8. Based on the production function parameter estimates reported in Table 7.4:

A. Which industry (or industries) appears to exhibit decreasing returns to scale? (Ignore the issue of statistical significance.)

B. Which industry comes closest to exhibiting constant returns to scale?

C. In which will a given percentage increase in capital result in the largest percentage increase in output?

D. In what industry will a given percentage increase in production workers result in the largest percentage increase in output?

9. Consider the following Cobb- Douglas production function for the bus transportation system in a particular city:

Q= ?L ^?1 F^?2 K^?3

Where L is the labor input in worker hours;

F is the fuel input in gallons;

K is the capital input in number of buses;

Q is the output measured in millions of bus miles 

Suppose that the parameters (a,? 1, ?2, ?3) of this model were estimated using annual data for the past 25 years. The following results were obtained:

?= 0.0012;?; ?; ?

A. Determine the (i) labor, (ii) fuel, and (iii) capital input production elasticities.

B. Suppose that labor input (worker hours) is increased by 2 percent next year (other inputs held constant). Determine the approximate percentage change in output.

C. Suppose the capital input (number of buses) is decreased by 3 percent next year (when certain older buses are taken out of service). Assuming that the other inputs are held constant, determine the approximate percentage change in output.

D. What type of return to scale appears to characterize this bus transportation system? (Ignore the issue of statistical significance.)

E. Discuss some of the methodological and measurement problems one might encounter in using time-series data to estimate the parameters of this model. 

Chapter 8

2. Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a current market value of $4M. Bowen owes his local bank $3M. Last year Bowen sold $5M worth of cotton. His variable operating costs were $4.5M; accounting depreciation was $40,000, although the actual decline in value of Bowen's machinery was $60,000 last year. Bowen paid himself a salary of $50,000, which is not considered part of his variable operating costs. Interest on his bank loan was $400,000. If Bowen worked for another farmer or a local manufacturer, his annual income would be about $30,000. Bowen can invest any funds that would be derived, if the farm were sold to earn 10% annually.(Ignore taxes)

A. Compare Bowen's accounting profits.

4. From your knowledge of the relationships among the various production functions, complete the following table:

Q

TC

FC

VC

ATC

AFC

AVC

MC

0

125

10

5

20

10.50

30

110

40

255

50

3

60

3

70

5

80

295

6. The Blair Company has three assembly plants located in California, Georgia and New Jersey. Currently the company purchases a major subassembly, which becomes part of the final product, from an outside firm. Blair has decided to manufacture the subassemblies within the company and must now consider whether to rent one centrally located facility, where all the subassemblies would be manufactured or to rent three separate facilities, each located near one of the assembly plants, where each facility would manufacture only the subassemblies needed for the nearby assembly plant. A single, centrally located facility, with a production capacity of 18,000 units per year, would have fixed costs of $900,000 per year, and variable costs of $250 per unit. Three separate, decentralized facilities, with production capacities of 8,000, 6,000 and 4,000 units per year, would have fixed costs of $475,000, $425,000 and $400,000, respectively. Variable costs per unit produced in any of these three, decentralized facilities equal $225 (per unit). The current production rates at the three assembly plants are 6,000, 4,500 and 3,000 units per year, respectively. 

A. Assuming that the current production rates are maintained at the three assembly plants, which alternative should management select?