CHAPTER 22
Cases
ANSWERS TO EXERCISES
Is Management Necessary?
EXERCISES
1. What was the role of the manager in the factory type firm? What does the manager do in the
firms that require cooperation from large numbers of diverse people?
2. Is the corporate form becoming inefficient? Are transaction costs being reduced to the point
the firm won’t be more efficient than the market?
3. What is the 20th Century firm; the 21st Century?
Passing Along Costs
QUESTIONS:
1. Suppose the price of coffee beans increases by $0.20 per pound. What is the effect of this raw
material price increase on the demand for roasted coffee? If one pound produces 50 cups of
coffee, would the price of a cup of coffee rise by $.01? Explain
2. The article reports that J.M. Smucker Co. plans to increase its coffee prices by 9%.
If Smucker has a lot of rivals but has a brand name that has value, will this 9% increase in
retail prices imply that profit will rise by 9%?
3. Is it optimal for a firm to slash prices to retain market share? Is cutting prices during
a recession and then raising them in a recovery a good strategy?
Competition in the Information Economy
1. Why does Google give away its Android operating system to handset manufacturers?
2. What is the effect of a well-established gmail and calendar account on a Google user‘s
willingness to switch to another provider’s services? How does Google benefit from these
services?
3. When Google is telling customers where products are located or reminding them that they
should pick up some milk, brand names be more or less valuable?
4. Should the federal government regulate how Google can use the personal information that the
company acquires about its users?
5. Will Google’s network externalities lead it to be a monopoly?
6. What will net neutrality, relations with China, and antitrust scrutiny mean for Google?
The Yen and the Dollar
1. What does a strong yen mean?
2. What could cause the yen to strengthen?
3. Why might Japan not want a strong yen?
4. With the various sectors fighting each other in order to influence Japanese policymakers,
what is likely to happen to the yen?
5. What is the reason the yen has strengthened even though the Japanese economy has been in a
very sluggish growth pattern for a decade?
New Retail Strategy
1. Why don’t the stores raise prices to increase revenue?
2. What costs is Abercrombie cutting?
3. Why would stores wage price wars in a declining economy?
4. Is cost cutting in a recession a good strategy? What does it mean when a recovery takes
place?
The Black Swan
1. What is a Black Swan event?
2. Does it ever make sense a priori to devote resources to preventing a black swan event?
Explain
3. Does it ever make sense a priori to devote resources to containing a black swan event should
one occur? Explain
4. Is human error different than a Black Swan event? Can human error lead to a Black Swan
event?
5. If you were BP’s executive and you were looking at the cost of a blowout, loss of 87% market
value, possible bankruptcy, etc., and determining whether to spend several million dollars
providing redundancies – relief wells drilled at same time as main well – how would you
decide whether to spend the money or not?
108 Chapter 22: Cases
Privatizing Public Activities
1. What are the incentives of government bureaucrats who run the water services, the parking
services, and airports? Do these incentives differ from those of private companies in running
these services?
2. If a business has terrible cash flow but has assets of value, how does the business avoid
bankruptcy?
3. Why would the general public want government to provide water rather than a private for–
profit company?
4. Why does government do so much more than protecting private property rights?
Job Sharing
1. What do you think of this proposal to share jobs? Explain whether it would work.
2. What would a firm do if law was enacted restricting each employee to 35 hours per week?
3. Would it make sense to require people to retire at age 50 in order to let younger people have
their jobs? Would that reduce unemployment?
How to Nurture the Entrepreneur
1. Do you agree with the viewpoint expressed here? Explain why or why not.
2. Can the government increase entrepreneurship by providing subsidies and other benefits for
entrepreneurs?
Chapter 22: Cases 109
3. Do you agree with President Obama that free enterprise is a corporate culture rife with inside
dealing; questionable accounting practices and short–term greed? Explain
4. Which would create more entrepreneurship, central planning or freedom, free markets, and
competition? Explain
Private Equity Firms
1. Do you agree with the viewpoint expressed in this piece? Explain why or why not.
2. Is the private equity firm doing something wrong by cutting expenses, increasing efficiency, and
driving up stock prices? Is there a tradeoff between the short run policy of increasing profit and a
long run policy of increasing profit?
3. What is a fundamentally sound company? If it has taken on too much debt is it fundamentally
sound? Explain
4. What do the critics of the private equity firms actually want?
Corporate Governance
1. If contracts are incomplete, would allocating some control rights to employees be an efficient way
to induce employees to develop firm-specific human capital? Explain
2. Since the government introduced codetermination by law and shareholders did not voluntarily
choose it, is codetermination beneficial to shareholders?
3. How might shareholders attempt to allocate capital to minimize the influence of employees?
4. What are the incentives of the employees on the board? What are the incentives of outside
directors? Are they in conflict?
5. Would you argue that less wage dispersion and more stable wages over the business cycle is
good or harmful to the company, to the employees, to society in general?
The Regulatory Origins of the Flash Crash
1. Could it be possible that a government regulation led to the flash crash? Explain.
2. What does it mean “it’s like a balloon”? What is like a balloon? Why is it like a balloon?
3. Explain why government regulations to restrict some activity occurring in a free market
typically end up making matters worse.
4. Who supported the Dodd-Frank bill? Who opposed it?
Dead Heads
1. If the Grateful Dead were protected by copyright laws, why did they tend to give away their
concerts?
more effective way to market relative to other marketing medium that limit access.
2. Under what conditions does the “economics of free” seem to apply most readily?
3. Under what conditions does it make sense to cut out the middlemen in a transaction?
4. The band has had 19 gold albums, 6 platinum albums, and 4 albums that have gone
multiplatinum. How could this occur if the band was giving its music away free?
5. Explain why the Dead supports anyone who sells band merchandise. How does it resemble
Amazon’s affiliate program?
6. What is the likely cost structure faced by the band in producing its albums and CDs?
The cost structure is based on an initial high cost for the first unit and then a near zero
The Coffin Cartel
1. What rationale might the funeral homes have used to get the legislature to pass a law providing
them a monopoly in selling caskets?
2. How much money would the funeral homes devote to fighting the monks?
3. Why would the funeral homes attack the monks but not go after Costco and Walmart?
4. Most crematories require that the body at least be enclosed and in an acceptably rigid container. This
container or casket must be strong enough to assure the protection of the health and safety of the
operator. It should provide a proper covering for the body and meet reasonable standards of respect and
dignity. Why would crematories require the body be enclosed in “an acceptably rigid container”?
5. Explain how a small group like the funeral home directors can get government to provide them
monopoly rights to various transactions.
Business Myths
Several blogs have pointed out what they called “business myths.” Some of these are:
1. To be successful you have to be first. This is also sometimes reworded as “the first in,
2. To be successful, you have to be cheaper. Take an SBA (Small Business Administration)
3. I’m a good cook so I should start a restaurant. “Hey, this meal is fantastic! You should
4. The customer is always right. You should never tell a customer that you don’t want them as
a customer any more?
5. I’ll just open my store and people will stream in off the sidewalks and buy from me. This
is also known as the “If you build it, they will come” approach to business.
6. It‘s a cool idea. Everyone will love this. Often focus groups provide such input to
marketers – we love the idea.
8. Adding more people to the project will make it go faster. This is a very common view in
the software world.
9. Failure is bad. Failure is the opposite of success. This is why dodge ball has been banned
11. Cash flow is what really matters in business. Profit can just be a trick of accounting
12. Having more customers is better than having fewer customers. Would you believe that
some companies go out of business because they have too many customers or too much
demand for their product?
1. Are these myths? Explain why each is either true or a myth.
2. Is it true that: You Can Win Customers Just by Lowering Your Prices? Explain
3. Would you say that you should never Form a Partnership or new business with Close Friends?
Explain
Creative Destruction
1. How can corporations be as dynamic and responsive as the market itself if they are not markets?
2. Does the argument of the book make any sense? How can corporations learn to be as dynamic as
markets without experiencing creative destruction as well as creatively destroying?
Chapter 22: Cases 113
3. Can a company be an entrepreneur? Explain
4. What does the following mean?
5. Can any firm “sustain superior returns and thrive over the long term”?
Does Management Theory Offer Anything New?
1. Is management a science?
2. Would you say that management theories come from management scholars or gurus? If so
why would they rechannel proposals over and over again?
3. Would you say that management theories are the result of competition in the marketplace –
the result of success? If so why would the same theories keep coming back, then being
replaced only to appear again?
4. What does Stewart mean when he says “all economic organizations involve at least some
degree of power...”? Why would this irritate people?
Capitalism and Morality
Business Ethics and Capitalism
1. Define a moral action. Define an immoral action.
2. How can capitalism be a moral system if some people have a great deal of wealth and others
very little wealth?
3. What does it mean to act morally? To act immorally?
4. How could capitalism be moral when it leaves some people with so much and others with so
little?
5. How can capitalism be moral when greed prevails, individuals stab other individuals in the
back, businessmen alter books, embezzle, and otherwise take advantage of others?
6. Is the BP oil well blowup moral or immoral? Is the government’s taking of $20 billion from
BP to redistribute to the gulf moral or immoral?