Answers to Back-of-the-Chapter Problems
1. Managerial economics is the analysis of important management
2. i) Multinational Production and Pricing. The global automobile
ii) Market Entry. The office stores not only need information on local
market demand, they also need information on the ability and
iii) Building a New Bridge. The authority should estimate usage of
the bridge over its useful life, the likely cost of building and
iv) A Regulatory Problem. Before deciding whether to promote the
oil-to-coal conversion, government regulators need information on how
v) Oil Exploration. Some of the information BP needs – such as
current oil prices, rig worker wages, and other operating costs – is
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vi) An R&D Decision. The pharmaceutical company should quiz its
scientists on the chances of success (and the timetable for completion)
vii) David Letterman. Dave must carefully assess what he wants
from a new contract (in particular how much he values the earlier time
3. The six steps might lead the soft-drink firm to consider the following
questions. Step 1: What is the context? Is this the firm’s first such soft
drink? Will it be first to the marketplace, or is it imitating a competitor?
Step 2: What is the profit potential for such a drink? Would the drink
achieve other objectives? Is the fruit drink complementary to the firm’s
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4. Decision vignettes
a. A couple who buy the first house they view have probably sampled too
few houses. Housing markets are notoriously imperfect. Houses come
in various shapes, sizes, conditions, neighborhoods, and prices.
Personal preferences for houses also vary enormously. The couple is
likely to get a “better” house for themselves if they view a dozen, two
b. The company seems to be launching the product to avoid “wasting” the
$6 million already spent in development. This “sunk” cost is irrelevant
and should be ignored. What does matter for the reinvestment decision
are the future revenues and costs of continuing. (Reinvest if the net
c. It’s in the individual motorist’s best interest to drive on. (Stopping is
risky and inconvenient). But it’s in the collective interest of all the
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d. Allowing the use of thalidomide had a disastrous outcome and more
importantly was a bad decision (besides its potential risk, the drug was
e. The frantic couple should choose separate lines to take advantage of
f. To the extent that his actions and behavior were responsible for his
g. The cost per life saved is $400,000/20 = $20,000 for the ambulance
service. It is $1,200,000/40 = $30,000 for the highway program. Based
on these average measures, it seems strange that the ambulance budget
h. FEMA’s prediction of the potential hurricane risk to New Orleans was
timely and prescient. However, the warning was not emphasized by the
i. According to the counts of pros and cons, the individual prefers: Home
over Beach, Beach over Mountains, but Mountains over Home. We
have a cycle (i.e. intransitive preferences). The individual is left going
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j. Compared to these extreme outcomes (abject surrender to terrorism or
being a global policeman) any option looks good. This is hardly an
Discussion Question
The six listed options for the Kendall School range from the status quo
to the most radical option of razing the building and selling off the land.
Options d, e, and f mean that the town will no longer own and control
the site. The best option for the town depends both on economics and
the town’s particular objectives. A purely economic objective might
mean maximizing the sum of money the town receives for the school
The board may also have non-economic objectives in mind:
promoting the arts, maintaining open land in the town, retaining the
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