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INSTRUCTOR’S MANUAL MANAGERIAL ECONOMICS Twelfth Edition Mark Hirschey University of Kansas SOUTH-WESTERN CENGAGE Learning assign the end-of-chapter questions and problems to my own students, and then use them as the basis for our discussion of the material. A large number […]

(financial, technical, marketing, and so on). People directly involved include stockholders, managers, workers, suppliers, and customers. Businesses use scarce resources that would otherwise be available for other purposes, pay income and other taxes, provide employment opportunities, and are responsible for […]

A. how macroeconomic forces affect the organization. B. goals of the organization. C. ways to efficiently achieve the organization’s goals. D. microeconomic consequences of managerial behavior. A. assignment of decision rights. B. matching of worker incentives with managerial motives. C. […]

CHAPTER 10—COMPETITIVE MARKETS Key 1. If P = $8 and MC = $5 + 0. 2Q, the competitive firm’s profit-maximizing level of output is: 2. In the long run, firms will offer supply at the point where P = MR […]

Table10.1 Competitive Firm Profits Are Maximized When Marginal Revenue Equals Marginal Cost Units Price Total Revenue Fixed Cost Variable Costs Average Variable Cost Total Cost Average Total Cost Total Profit (TR-TC) Marginal Revenue Marginal Cost Marginal Profit (MR-MC) (1) (2) […]

$60 $70 $80 $90 Market Supply is the Sum of Firm Supply Across all Competitors Firm 2 Supply Firm 1 Supply Q1= -12,500 + 2,500P drawn as P = $5 + $0.0004Q1 Market supply is the total amount supplied by […]

Chapter 10 COMPETITIVE MARKETS QUESTIONS AND ANSWERS Q10.1 Historically, the Regional Bell Operating Companies (RBOCs) had a monopoly on the provision of local voice phone service. Regulation has now been eased to permit competition from Competitive Local Exchange Carriers (CLECs), […]

40. Long-run Competitive Firm Supply. Calvin’s Barbershop is a popularly-priced hair cutter on the south side of Chicago. Given the large number of competitors, the fact that barbers routinely tailor services to meet customer needs, and the lack of entry […]

304 Chapter 10 P10.4 Long-run Firm Supply. The retail market for unleaded gasoline is fiercely price competitive. Consider the situation faced by a typical gasoline retailer when the local market price for unleaded gasoline is $1.80 per gallon and total […]

39. Regulation Costs. Kingston Components, Inc., produces electronic components for cable TV systems. Given vigorous import competition, prices are stable at $4,500 per unit in this dynamic and very competitive market. Kingston’s annual total cost (TC) and marginal cost (MC) […]

Performance and Strategy in Competitive Markets 339 Natural Gas Equilibrium $7 $8 $9 $10 Supply P = $2.5 + $0.00125QS B. The value of consumer surplus is equal to the region under the market demand curve that lies above the […]

CHAPTER 11—PERFORMANCE AND STRATEGY IN COMPETITIVE MARKETS Key 1. In competitive market equilibrium, social welfare is measured by the: 2. No externalities exist when: A. private costs exceed social costs. B. private costs and benefits equal social costs and benefits. […]

Chapter 11 PERFORMANCE AND STRATEGY IN COMPETITIVE MARKETS QUESTIONS AND ANSWERS Q11.1 Your best income-earning opportunity appears to be an offer to work for a local developer during the month of June and earn $2,000. However, before taking the job, […]

Table 11.2 High Profit Margins Indicate Competitive Advantages Company Name Industry P/E Ratio (5- year avg.) Return on Equity (%) Profit Margin (Return on Sales, %) Total Asset Turnover Leverage Ratio Altria Group Cigarettes 14.0 33.5 12.7 0.9 3.1 American […]

Performance and Strategy in Competitive Markets 355 B. With a $2.50 government price support, the value of producer surplus is equal to the region above the market supply curve at the market price of $2.50. Because the area of such […]

Monopoly and Monopsony 389 P12.6 Deadweight Loss From Monopoly. The Onondaga County Resource Recovery (OCRRA) system assumed responsibility for solid waste management on November 1, 1990, for thirty-three of the thirty-five municipalities in Onondaga County, New York. OCRRA is a […]

Residual 25 14.55731383 0.582292553 Total 29 24.7108583 X Variable 1 0.040715935 0.023348058 1.74386821 0.093468301 -0.007370289 0.08880216 -0.007370289 0.08880216 X Variable 2 0.018445501 0.059838549 0.308254484 0.760442545 -0.104794296 0.141685299 -0.104794296 0.141685299 X Variable 3 -0.421068706 0.294884208 -1.427912021 0.165691018 -1.028394097 0.186256685 -1.028394097 0.186256685 […]

CHAPTER 12—MONOPOLY AND MONOPSONY Key 1. In long-run equilibrium, monopoly prices are set a level where: 2. For a monopoly in equilibrium: A. MR = MC B. MC £ AC C. MR £ AC D. P ³ AC 3. The […]

Chapter 12 MONOPOLY AND MONOPSONY QUESTIONS AND ANSWERS Q12.1 Describe the monopoly market structure and provide some examples. Q12.1 ANSWER Monopoly is a market structure characterized by a single seller of a highly differentiated product. Because a monopolist is the […]

48. Monopoly Regulation. The Redwood Cable Company, a CATV utility serving customers in Eugene, Oregon, is currently engaged in a rate case with the regulatory commission under whose jurisdiction it operates. At issue is the monthly rate the company will […]

42. Tariffs. The Nippon Switch Corporation is an importer and distributor of Japanese-made packet switches, special routing devices that direct data traffic to various computers on a large private telecommunications network for companies like GM, Sears and 3M. The U.S. […]

41. Cartel Pricing. An illegal cartel has been formed by the three leading catering services companies in Colorado Springs, Colorado. Each are large enough to handle parties and food service for groups of over 100 persons. Total production costs for […]

CHAPTER 13—MONOPOLISTIC COMPETITION AND OLIGOPOLY Key 1. For a firm in monopolistically competitive market equilibrium: 2. In oligopoly equilibrium: A. MC = AC B. MC > AC C. MR = MC D. MC < AC 3. A perfectly functioning cartel […]

Monopolistic Competition and Oligopoly 423 and P = AC = $200(20-1) + $6 + $0.5(20) = $26 million π = P  Q – TC = $26(20) – $200 – $6(20) – $0.5(202) = $0 C. If the high-price/low-output equilibrium […]

Chapter 13 MONOPOLISTIC COMPETITION AND OLIGOPOLY QUESTIONS AND ANSWERS Q13.1 Describe the monopolistically competitive market structure and give some examples. Q13.1 ANSWER Monopolistic competition is a market structure quite similar to perfect competition in that vigorous price competition among a […]

TABLE 13.5 Profit Margin and Market Structure Data for Columbia Drug Stores, Inc. Store No. Profit-Margin Market Share Concentration Capital Intensity Advertising Intensity Growth Superstore (S = 1 if present) 17 15 30 50 7.5 12.5 5.0 1 18 20 […]

Game Theory and Competitive Strategy 451 prohibition, potential conspirators face practical problems in any overt or tacit attempt at collusion. To illustrate the problems encountered, consider the following profit payoff matrix faced by two potential conspirators in a one-shot, simultaneous-move […]

Chapter 14 GAME THEORY AND COMPETITIVE STRATEGY QUESTIONS & ANSWERS Q14.1 From a game theory perspective, how would you characterize the bargaining between a customer and a used car dealer? Q14.1 ANSWER This type of bargaining situation can be characterized […]

A. cooperative game. B. positive-sum game. C. negative-sum game. D. zero-sum game. A. cooperative game. B. positive-sum game. C. zero-sum game. D. nonstrategic game. A. cooperative games. B. positive-sum games. C. negative-sum games. D. zero-sum games. A. look ahead and […]

39. Markup on Cost. Stinging Pesticides, Inc., provides scorpion control services, to residential and business customers in the El Paso area. The company recently raised its service price from $70 to $80 per annual treatment. As a result, sales fell […]

CHAPTER 15—PRICING PRACTICES Key 1. The competitive market pricing rule-of-thumb for profit maximization is to set: 2. A 50% markup on cost is equivalent to a markup on price of: A. 25% B. 33% C. 50% D. 100% 3. A […]

Chapter 15 PRICING PRACTICES QUESTIONS AND ANSWERS Q15.1 Express the markup on cost formula in terms of the markup on price, and use this relation to explain why a 100% markup implies a 50% markup on price. Q15.1 ANSWER The […]

480 Chapter 15 The profit contribution earned by the company is: π = PWQW + PRQR – AVC(QW + QR) = $12,500(500) + $30,000(1,000) – $10,000(500 + 1,000) = $21,250,000 B. Yes, the point price elasticity of demand for each […]

514 Chapter 16 A. Strategy 1: Consumer-Oriented Promotion Probability Outcomes (Sales) Profit Expected Profit (1) (2) (3) = (2) × 0.5 (4) = (3) × (1) 0.32 $250,000 $125,000 $40,000 Strategy 2: Distributor-Oriented Promotion Probability Outcomes (Sales) Profit Expected Profit […]

37. Certainty Equivalent Method. Saddie Hawkins, a management analyst with Mobile Telephone Services, Inc., has collected the following information about three investment projects undertaken by the firm during the past six month period. Hawkins wishes to use this information as […]

CHAPTER 16—RISK ANALYSIS Key 1. Economic risk is a situation where: 2. The chance of loss associated with a given managerial decision is: A. market risk. B. inflation risk. C. credit risk. D. business risk. 3. The difficulty of selling […]

y = 0.9588x + 0.0026 R² = 0.3615 6.00% 8.00% 10.00% FIGURE 16.8: Stock-price Beta Estimation for Google, Inc. (GOOG) -8.00% -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% -8.00% -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00% GOOG Weekly Return (%) Nasdaq […]

Chapter 16 RISK ANALYSIS QUESTIONS AND ANSWERS Q16.1 In economic terms, what is the difference between risk and uncertainty? Q16.1 ANSWER Economic risk is the chance of loss because all possible outcomes and their probability of happening are unknown. Actions […]

550 Chapter 17 C. Should the company have relatively abundant capital resources, or at least $5,000,000 available for investment, both services should be initiated. However, when capital resources are scarce, use of the PI criterion, and initiation of the Long […]

CHAPTER 17—CAPITAL BUDGETING Key 1. Holding all else equal, the profitability index will fall following an increase in the: 2. The discount rate that equates present value of cash inflows and outflows is called the: A. component cost of capital. […]

Chapter 17 CAPITAL BUDGETING QUESTIONS AND ANSWERS Q17.1 “The decision to start your own firm and go into business can be thought of as a capital budgeting decision. You only go ahead if projected returns look attractive on a personal […]

Figure 17.4 NPV Model Sensitivity to Capex, Opex, and Netex Annual price reduction 25% Elasticity 2.25 25% Discount rate $200 Initial Price 8,500,000 Initial Demand General Input Capital Expenses $190 Initial Capex per incremental unit Initial infrastructure cost $10,000,000,000 (c) […]

E(CFA) = $50,000(0.18) + $75,000(0.64) + $100,000(0.18) = $75,000 sA = $15,000 VA = sA/E(CFA) = 0.2 Project B E(CFB) = $100,000(0.245) + $150,000(0.510) + $200,000(0.245) = $150,000 sB = $35,000 VB = sB/E(CFB) = 0.23 B. Project B has […]

Assume that: (1) The company’s marginal city-plus-state-plus-federal tax rate is 40%, (2) each product is expected to have a three-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 20%, (5) the products have the […]

Chapter 18 ORGANIZATION STRUCTURE AND CORPORATE GOVERNANCE QUESTIONS AND ANSWERS Q18.1 Describe the difference between vertical and horizontal business relationships. Q18.1 ANSWER A vertical relation is a business connection between companies at different points along the production-distribution chain from raw […]

A. market extension merger. B. conglomerate merger. C. horizontal merger. D. vertical merger. A. market extension merger. B. conglomerate merger. C. horizontal merger. D. vertical merger. A. coordination expenses. B. search outlays. C. information costs. D. charges tied to contractual […]

578 Chapter 18 P18.5 Coase Theorem. According to the Coase Theorem, resource allocation will be efficient so long as transaction costs remain low and property rights can be freely assigned and exchanged. A. Does the Coase Theorem imply that government […]

608 Chapter 19 Hospitals Long-run implications can be inferred by considering the profit implications of implementing OSHA standards. Total economic profits = PL × QL + PH × QH – TC = $10,500(360) + $8,000(2,000) – $5,000,000 – $5,000(360 + […]

Chapter 19 GOVERNMENT IN THE MARKET ECONOMY QUESTIONS & ANSWERS Q19.1 Air pollution costs the U.S. billions of dollars per year in worker absenteeism, healthcare, pain and suffering, and loss of life. Discuss some of the costs and benefits of […]

38. Nonexclusion Concept. Many public goods display the attribute of being nonexclusionary in consumption. A. Explain the nonexclusion concept. B. Do educational TV broadcasts display both the nonrival and nonexclusion attributes? C. With the emergence and popularity of cable TV, […]

CHAPTER 19—GOVERNMENT IN THE MARKET ECONOMY Key 1. Water pollution is a familiar type of: 2. At the socially efficient price-output level: A. external costs equal zero. B. marginal social benefit equals marginal private benefit. C. marginal social cost equals […]

Chapter 2 ECONOMIC OPTIMIZATION QUESTIONS & ANSWERS Q2.1 In 2007, Chrysler Group said it would cut 13,000 jobs, close a major assembly plant and reduce production at other plants as part of a restructuring effort designed to restore profitability at […]

30 Chapter 2 C. Given this time allocation, Grey’s maximum commission income is State Sales Washington (5 days) $60,000 Oregon (3 days) 22,500 Idaho (2 days) 17,500 Total $100,000 × Commission rate × 0.08 $ 8,000 per month P2.5 Marginal […]

CHAPTER 2—ECONOMIC OPTIMIZATION Key 1. An equation is: 2. Inflection is: A. a line that touches but does not intersect a given curve. B. a point of maximum slope. C. a measure of the steepness of a line. D. an […]

Case 2 EOQ Estimation for the Neighborhood Pharmacy Quantity (Q) Total Cost (TC) Price (P) Use Requirement (X) Order Cost θ Carrying Cost (C) 0 4 5,000 $50 $0.50 100 $22,525 4 5,000 50 0.50 200 21,300 4 5,000 50 […]

39. Profit Maximization: Equations. Woodland Instruments, Inc. operates in the highly competitive electronics industry. Prices for its R2-D2 control switches are stable at $100 each. This means that P = MR = $100 in this market. Engineering estimates indicate that […]

TABLE 3.4 Sunbest Demand and Supply Conditions Operating Environment for Demand Price of Sunbest (P) Price of Soda (PS) Disposable Income (Y) Temperature (T) Operating Environment for Demand Demand if All Factors Change (QD) Quantity Demanded if Price Chgs. Only(QD) […]

Chapter 3 DEMAND AND SUPPLY QUESTIONS AND ANSWERS Q3.1 What key ingredients are necessary for the creation of economic demand? Q3.1 ANSWER Two basic conditions must be met before economic demand is created. First, there must Q3.2 Memory chip maker […]

Demand and Supply 63 B. During the summer month of July, the variable S = 1. Therefore, assuming that price- related values remain as before, the firm demand curve is: P3.7 Supply Function. A review of industry wide data for […]

90 Chapter 4 P4.3 Indifference Curves. Suggest briefly whether each of the following statements about indifference curves that show preferences between goods and services is true or false and defend your answer. A. Consumers prefer higher indifference curves that represent […]

Chapter 4 DEMAND ANALYSIS QUESTIONS & ANSWERS Q4.1 “The utility derived from consumption is intangible and unobservable. Therefore, the utility concept has no practical value.” Discuss this statement. Q4.1 ANSWER The utility derived from consumption is intangible, and therefore unobservable. […]

CASE 4: The Optimal Level of Advertising Quantity Price Advertising Ad/Sales Sales Revenue 5,500 $0 $25.000 —– $0.00 5,570 5 28.125 10.10% 27,851.56 5,631 10 31.250 5.55% 56,312.50 5,683 15 34.375 4.03% 85,242.19 5,725 20 37.500 3.28% 114,500.00 5,758 25 […]

A. understand how much more one product is preferred over another product. B. rank order the desirability of various goods and services. C. need not know that one product is preferred to another product. D. understand how much less preferred […]

CHAPTER 5—DEMAND ESTIMATION Key 1. If P1 = $5, Q1 = 10,000, P2 = $6 and Q2 = 5,000, then a linear estimate of the demand curve is: 2. If P1 = $5, Q1 = 10,000, P2 = $6 and […]

Chapter 5 DEMAND ESTIMATION QUESTIONS & ANSWERS Q5.1 Describe some of the limitations of market experiments. Q5.1 ANSWER Market experiments have several serious shortcomings. They are expensive and usually undertaken on a scale too small to allow high levels of […]

TABLE 5.3 Mrs. Smyth’s Gourmet Frozen Fruit Pie Regional Market Demand Data, 2006-1 to 2007-4 Year- Quarter Unit Sales (Q) Price ($) Advertising Expenditures ($) Competitors’ Price ($) Income ($) Population Time Variable 2006-3 321,972 7.82 34,367 6.23 51,751 9,542,755 […]

Demand Estimation 121 P5.5 Linear Demand Curve Estimation. Xerox Corporation develops, manufactures, and services document equipment and software solutions worldwide. Assume the company offered $75 off the $1,475 regular price on the Phaser 6360, a durable high-speed color copier, and […]

39. Standard Error of the Estimate. Body Fit, Inc., runs a California-based chain of health clubs featuring aerobic exercise, racket sports, swimming and weight training facilities. An in-house study of monthly sales by three outlets during the past year (a […]

A. The exponents of multiplicative demand functions are elasticity estimates. Therefore, motorcycle demand is elastic with respect to price provided: or . For testing purposes, the null hypothesis one wishes to reject is: where: meaning one can reject H0 with […]

CHAPTER 6—FORECASTING Key 1. A 5% growth trend with annual compounding: 2. A forecast method based on the informed opinion of several individuals is called: A. personal insight. B. panel consensus. C. the Delphi method. D. qualitative analysis. 3. A […]

$30,000 $35,000 $40,000 Figure 6.2 Linear Trend in Microsoft Corp. Sales 1985-2004 S t = -$8,937.7 + $1,908.5t R2= 87.2% -$10,000 -$5,000 $0 $5,000 $10,000 $15,000 $20,000 $25,000 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Sales […]

Chapter 6 FORECASTING QUESTIONS AND ANSWERS Q6.1 Discuss some of the microeconomic and macroeconomic factors a firm must consider in its own sales and profit forecasting. Q6.1 ANSWER The better a company can assess future demand, the better it can […]

Forecasting 153 P6.4 Cost Forecasting. Dorothy Gale, a quality-control supervisor for Wizard Products, Inc., is concerned about unit labor cost increases for the assembly of electrical snap-action switches. Costs have increased from $80 to $100 per unit over the previous […]

38. Sales Forecast Modeling. Consulting Associates, Ltd., would like to generate a sales forecast based on the assumption that next year sales are a function of current income, advertising, and advertising by a competing retailer: A. Write an equation for […]

CHAPTER 7—PRODUCTION ANALYSIS AND COMPENSATION POLICY Key 1. The production function Q = 0.25X0.5Y exhibits: 2. The law of diminishing returns: A. deals specifically with the diminishing marginal product of fixed input factors. B. states that the marginal product of […]

Production Analysis and Compensation Policy 185 Although a commission-based plan will result in an efficient relative salary P7.6 Optimal Input Mix. The First National Bank received 3,000 inquiries following the latest advertisement describing its 30-month IRA accounts in the Boston […]

Chapter 7 PRODUCTION ANALYSIS AND COMPENSATION POLICY QUESTIONS AND ANSWERS Q7.1 Is use of least-cost input combinations a necessary condition for profit maximization? Is it a sufficient condition? Explain. Q7.1 ANSWER Employment of least-cost input combinations is a necessary but […]

C. The commission-based compensation plan will result in more efficient compensation for sales personnel. Under this plan, Brisco, Van Buren’s staff attorney salary costs average 10%, irrespective of which member of the staff generates a given dollar of sales. Each […]

Residual 26 23002441028 884709270.3 Total 29 2.23351E+11 SUMMARY OUTPUT Regression Statistics Multiple R 0.947107156 Observations 30 ANOVA df SS MS F Significance F Regression 3 2.00348E+11 66782724549 75.48550331 5.83499E-13 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower […]

216 Chapter 8 C. Because fixed costs do not vary with respect to changes in the number of books sold, they should be ignored. Variable costs per copy are $92, but note that $25 of this cost represents bookstore discounts. […]

Chapter 8 COST ANALYSIS AND ESTIMATION QUESTIONS AND ANSWERS Q8.1 What advantages or disadvantages do you see in using current costs for tax and stockholder reporting purposes? Q8.1 ANSWER Theoretically, it would be preferable to use current costs for income […]

42. Degree of Operating Leverage. Ion Generating, Inc., produces ion generators and control (detection) devices for industrial applications such as chemical labs. It is contemplating an expansion into the home security market by producing a smoke detector based off of […]

CHAPTER 8—COST ANALYSIS AND ESTIMATION Key 1. The foregone value associated with the current rather than next-best use of a given asset is called: 2. Sunk costs: A. typically involve multiple units of output. B. do not vary across decision […]

23 309.04 0.40 0.84 3.46 0.50 1 24 406.94 0.29 0.72 3.85 0.65 0 25 317.12 0.14 0.91 2.74 0.29 0 26 369.23 0.15 0.80 3.73 0.72 1 27 300.31 0.31 0.75 3.12 0.26 0 28 402.08 0.37 0.72 2.76 […]

Chapter 9 Linear Programming QUESTIONS AND ANSWERS Q9.1 Give some illustrations of managerial decision situations in which you think the linear programming technique would be useful. Q9.1 ANSWER Linear programming can be used for solving any type of constrained optimization […]

(1) 6QA + 3QB + 2QC + SL = 15 (Labor constraint) (2) QA + 3QB + 4Q C + SP = 5 (Production facility constraint) QA, QB, QC, SL, SP ³ 0 Here QA, QB and QC represent output […]

250 Chapter 9 unskilled labor. Each home involves framing (F), roofing (R), and finish carpentry (FC). During recent months, A crews have demonstrated a capability of framing one home, roofing two, and doing finish carpentry for no more than four […]

Linear Programming 269 Alternatively, an addition to secretarial staff would make production possible at point E. Using the rules for forming the dual linear program, the dual can be written using the equality form of the constraint conditions as: Minimize […]

CHAPTER 9—LINEAR PROGRAMMING Key 1. When an LP objective function is to maximize profits: 2. If X > 0 in the primal solution: A. the marginal value of inputs just equals the marginal value of output in X production. B. […]

CASE 9 A LP Retirement Income Funding Model Before-tax After-tax Capital Amount Percent Before-tax After-tax Asset yield yield Appreciation invested invested income income Common Stocks 3.50% 2.45% 6.50% $125,000 50.00% $4,375 $3,063 Constraints 1=Yes, 0=No At least 5% in long-term […]

41. Demand Curve Analysis. Papa’s Pizza, Ltd., provides delivery and carryout service to the city of South Bend, Indiana. An analysis of the daily demand for pizzas has revealed the following demand relation: Q = 1,400 – 100P – 2PS […]

CHAPTER 3—DEMAND AND SUPPLY Key 1. If demand increases while supply decreases for a particular good, the: 2. Surplus is a condition of: A. excess supply. B. a deficiency in supply. C. market equilibrium. D. excess demand. 3. The quantity […]