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Suggested Solution

1. Principle 1: People must make choices because

resources are scarce. Neither money nor time is

unlimited; they are both scarce resources. Priceline

caters to customers who have chosen to sacrifice some

have earned from the next best use of that seat or

bed—namely, the revenue earned from a paying

Likewise, how much more a customer is willing to

pay for a ticket purchased well in advance of his travel

exploiting opportunities to make themselves better

off. Priceline was successful because its customers—

travelers, airlines, and hotels—were exploiting opportu–

from using Priceline’s networks of hotels to find a

hotel rather than doing the research themselves. They

Principle 6: Because people respond to incentives,

markets move toward equilibrium. Expedia and Orbitz

moved into the online travel service industry in order

to exploit opportunities that had been pioneered by

Priceline. In this way, the market for online travel

services will move toward equilibrium until there

are no more opportunities for new travel service

companies to exploit.

Principle 7: Resources should be used efficiently

trade, markets usually lead to efficiency. It is ineffi-

cient to have planes flying with empty seats and hotels

with unoccupied beds. Thus, introducing a market for

fail because of the public’s temporary fear of flying.

Vast resources would have been wasted as pilots and

support staff lost their jobs, planes were mothballed,

income. In the aftermath of the attacks of September

2001, as people stopped spending on items like travel,

exceeded its spending.

Principle 12: Government policies can change spend-

1. What is the opportunity cost associated with having

a worker wander across the factory floor from task to

task or in search of tools and parts?

BCS-2 SuggeSted SolutionS for BuSineSS CaSe QueStionS for thought

Suggested Solution

1. The opportunity cost of a worker wandering across the

factory floor is forgone output—the output that worker

Suggested Solution

2. Lean production (also known as lean manufactur-

switch to producing more of the types of cars that

3. Before lean manufacturing innovations, Japan mostly

sold consumer electronics to the United States. How

did lean manufacturing innovations alter Japan’s com-

parative advantage vis-à-vis the United States?

Suggested Solution

3. Before the innovations in lean production, Japan had

a comparative advantage vis-à-vis the United States in

consumer electronics. After the innovations, Japan’s

4. How do you think the shift in the location of Toyota’s

production from Japan to the United States has altered

the pattern of comparative advantage in automaking

between the two countries?

Suggested Solution

4. The shift in the location of Toyota’s production from

Japan to the United States means that it is likely that

Japan will no longer have a clear comparative advan-

tage in automaking vis-à-vis the United States.

CHAPTER 3

1. What accounts for the fact that before Uber’s arrival,

there were typically enough taxis available for every-

one who wanted one on good weather days, but not

enough available on bad weather days?

Suggested Solution

1. Before Uber’s arrival fares were set by city regulators.

If everyone who wanted a taxi during good weather

could get one, then we can imply that the price set by

shift of the demand curve) as more people want rides,

and a decrease in supply as more taxi drivers want

to stay warm and dry at home (a leftward shift of

2. How does Uber’s surge pricing solve the problem?

Assess Kalanick’s claim that the price is set to leave as

few people possible without a ride.

2. Uber’s surge pricing solves this problem because it

Kalanick’s claim is true: at any price lower than the

equilibrium price there is a shortage of taxis—more

people want rides than are available.

3. Use a supply and demand diagram to illustrate how

Uber drivers can cause prices to surge by taking coor-

dinated breaks. Why is this strategy unlikely to work

in New York, a large city with an established fleet of

taxis?

3. By taking coordinated breaks, Uber drivers in San

Diego reduce the quantity supplied at every price.

That is, they shift the supply curve leftward. As a

result, more riders want rides than are available, and

surge pricing kicks in. This is unlikely to work in a

large city with an established fleet of cars like New

York City. First, because it would be too difficult to

coordinate a large enough group of Uber drivers to

affect the price. And second, taxi drivers would take

the fares when Uber drivers took breaks, preventing a

surge in the Uber price.

Price

(dollars per

mile)

S (during break time)

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CHAPTER 4

1. Use the concepts of consumer surplus and producer

surplus to analyze the exchange between Jay-Z and

Beyoncé and their fans in the absence of ticket resell–

ers. (That is, assume that everyone buys a ticket directly

and goes to the concert.) Draw a diagram to illustrate.

Suggested Solution

1. By pricing tickets below the market equilibrium

price, Jay–Z and Beyoncé transfer some of their pro–

librium allocation.

In the accompanying diagram, the supply curve for

tickets is drawn as a vertical line: the supply of tickets

for a concert is fixed at the number of seats available

at the venue, here QE. The demand curve is downward-

sloping as lower ticket prices encourage more fans to

buy tickets. The market equilibrium is at point E, with

a market price of PE and a quantity bought and sold

of QE. Pricing tickets at a price PC that is below the

QE Quantity of tickets

Shortage

2. Using the diagram drawn in response to question 1,

explain the effects of resellers on the allocation of con-

sumer surplus and producer surplus among Jay-Z and

Beyoncé and their fans.

Suggested Solution

2. If all fans bought tickets from resellers, then the

price of tickets would rise to the market equilibrium

price of PE. Look again at the diagram accompanying

solution 1. As the price rises from PC to PE, consumers

CHAPTER 5

1. How did lenders benefit from the restriction on the

number of New York City taxi medallions?

Suggested Solution

1. Lenders benefit from the restriction on the number

of taxi medallions because as the price of taxi medal-

2. Use a graph to illustrate the effect of the entry of Uber

on the incomes of taxicab drivers. Assume that Uber

cars cannot pick up fares hailed from the street and

that there are some people who prefer to hail cabs

rather than use an app. How does your graph change

if that restriction is lifted?

Suggested Solution

2. To devise your graph, take Figure 5.9 as it is, then

add to it a vertical line at 9 million rides, and arrows

showing a horizontal shift from the vertical line at

BCS-4 SuggeSted SolutionS for BuSineSS CaSe QueStionS for thought

lines from the vertical axis to points C and D. Label

the shift “Uber Effect” with a balloon.

6 7 90 8 10 11 1312 14

6.00

5.00

4.00

3.50

3.00

quota rent that medallion holders still receive because

some people still prefer to hail taxicabs rather than use

Uber cars, and the number of taxicabs is still restricted.

However, if the rules are changed and Uber cars are

also allowed to pick up fares hailed from the street, the

market will move to equilibrium E because the quan–

3. Why has the fight between Uber and the taxicab indus–

try turned political?

Suggested Solution

taxicab industry turned political because restrictions

the quota so it can operate.

CHAPTER 6

1. How would you describe the price elasticity of demand

for airline flights given the information in this case?

Suggested Solution

1. The price elasticity of demand for airline flights is

inelastic. We know this because airlines were able to

2. Using the concept of elasticity, explain why airlines

ticket depending on when it is purchased and the day

are willing to spend time shopping for deals as well as

Suggested Solution

2. By creating such variations in prices, the airline indus–

try is trying to appeal to customers who have a high

price elasticity of demand as well as charge higher

prices to those with a low price elasticity of demand.

3. Using the concept of elasticity, explain why airlines

have imposed fees on things such as checked bags.

Why might they try to hide or disguise fees?

Suggested Solution

3. Because airlines know that travelers have a low

disguise these fees to prevent travelers from making

substitutions, like choosing a different airline that

doesn’t charge for such services.

4. Use an elasticity concept to explain under what condi-

4. The airline industry will be able to maintain its profits

if price elasticity of supply is low—that is, if airlines

do not respond to an increase in travel demand by

greatly increasing quantity supplied. If price elasticity

of supply is high, airlines will increase quantity sup–

plied dramatically when demand increases, prices will

fall, and their profits will fall as well.

CHAPTER 7

1. To save energy and reduce carbon emissions, why do

you think that Microsoft instituted a tax rather than

issue a company-wide directive?

Suggested Solution

1. The use of a tax is likely to be more effective in

generating savings and reducing carbon emissions than

2. How is Microsoft behaving like a government? Why is

this preferable to business units acting independently?

Suggested Solution

much like a government collects taxes and spends

units acting independently will only want to fund

projects that benefit their own bottom lines.

3. What is a possible downside to the internal carbon tax

scheme? What trade–offs should Microsoft consider in

determining the size of the carbon tax?

Suggested Solution

3. A possible downside of the tax is that it may distort

business decisions by excessively discouraging energy

use: for example, employees may limit their business

travel, causing the company to miss out on business

opportunities that are in Microsoft’s interests. In

deciding how high the tax should be, Microsoft

must trade off the benefits of energy saving and

carbon-emissions reduction with the costs of discour-

aging energy use when making business decisions.

CHAPTER 8

1. Why do you think it was profitable for Li & Fung to

many countries?

Suggested Solution

1. By sourcing inputs from various suppliers across

many countries, Li & Fung was able to allocate

production to where it is most cost effective.

2. What principle do you think underlies Li & Fung’s

decisions on how to allocate production of a good’s

inputs and its final assembly among various countries?

Suggested Solution

2. Comparative advantage is the principle that under-

lies Li & Fung’s decisions. Inputs that require more

skill or are more capital-intensive can be produced

in countries that have relatively higher-skilled work–

3. Why do you think a retailer prefers to have Li & Fung

arrange international production of its jeans rather

than purchase them directly from a jeans manufac–

turer in mainland China?

Suggested Solution

facturer in mainland China would not benefit from

4. What is the source of Li & Fung’s success? Is it based

on human capital, on ownership of a natural resource,

or on ownership of capital?

Suggested Solution

4. The source of Li & Fung’s success is human capital.

The company understands how to use the principle

of comparative advantage to exploit gains from trade

in the production process. In addition, it is skilled in

providing quality control and logistics.

CHAPTER 9

1. Give an example of a type of rational decision making

illustrated by this case and explain your choice.

Suggested Solution

1. J.C. Penney customers were using the anchoring

behavioral strategy, which is a form of bounded

rationality. They looked to the pre–sale price as a

benchmark to estimate the value of the good and,

therefore, the real savings they were getting once

2. Give an example of a type of irrational decision

making illustrated by this case and explain your

choice.

Suggested Solution

2. J.C. Penney customers who followed the sales-and-

BCS-6 SuggeSted SolutionS for BuSineSS CaSe QueStionS for thought

3. What purpose does Walmart’s price-match guarantee

serve? What do you predict would happen if it dropped

Suggested Solution

3. Walmart’s price-match guarantee means that its

customers can be assured that Walmart’s prices are

indeed low and therefore they do not need to search

for an anchor to verify this. As a result, the local

supermarket or K-Mart would lose their customers

CHAPTER 10

1. How does the McPick 2 promotion resemble a

consumer’s optimal choice problem?

Suggested Solution

1. The $2 price for the McPick 2 resembles a budget con–

straint. And the choice of two items resembles how a con–

2. What feature of this case study illustrates diminishing

marginal utility at work?

Suggested Solution

2. We see diminishing marginal utility illustrated by the

declining popularity of McCafe beverages. For exam-

good mentioned in this case. Cite examples of income

and substitution effects from the case.

Suggested Solution

3. A normal good is a good for which demand rises as

income rises; a meal at a fast casual restaurant like

Chipotle is an example of a normal good. An inferior

good is a good for which demand rises as income

tion effect: consumers substituted meals from other

sources—whether home–cooked meals or meals at

competing, lower priced fast-food chains—in response

to the rise in prices at McDonald’s. The income effect is

illustrated by the increase in demand for meals at fast

run or long-run cost curve? What are the relevant

returns to scale in Amazon’s operations?

Suggested Solution

1. By substituting robots for human workers, Amazon

has reduced its variable costs (labor) and increased its

2. What are the pros and cons of Amazon’s strategy?

Suggested Solution

2. On the “pro” side of Amazon’s strategy is that it

achieves increasing returns to scale and therefore

lower average total cost as sales increase. On the “con”

side, the strategy requires very large up-front (fixed)

costs. Therefore it can cover its total costs only if it

3. What advantage does a robotic system give Amazon over

its rivals? How likely is it that they will catch up with

Amazon? What market factors does it depend upon?

Suggested Solution

Walmart to invest in robotics and make enough sales

that it could reduce its average total cost to the same

level as Amazon? That is the question!

CHAPTER 12

1. From the evidence in the case, what can you infer about

Suggested Solution

1. The retail market for electronics did not satisfy the

conditions for perfect competition because stores like

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ing on competition in the retail market for electronics?

On the profitability of brick-and-mortar retailers like

Best Buy? What, on average, will be the effect on the

consumer surplus of purchasers of these items?

Suggested Solution

2. The introduction of these apps will make the retail

market for electronics much more competitive, which

3. Why are some retailers responding by having manu–

facturers make slightly modified or exclusive versions

of products for them? Is this trend likely to increase

or diminish?

Suggested Solution

ers can foil mobile-app comparison shoppers because

no other store will have the same product. This trend

is likely to increase for two reasons: (1) It is a way to

CHAPTER 13

1. What is the source of surplus in this industry? Who

generates it? How is it divided among the various

agents (author, publisher, and retailer)?

Suggested Solution

1. To understand the source of the surplus in this indus–

try, note that the production is the writing of books

by authors. Surplus is created by trade between

authors who write books and readers who enjoy read–

authors write well enough that their books c ommand

a price that allows them to capture some of the market

surplus (and like Douglas Preston, to live a comfort-

able lifestyle). Moreover, efforts by publishers in the

form of editing, advertising, etc., can increase the

share of the surplus going to the author by raising

readers’ willingness to pay for a given book. Total

surplus is higher here than in the fictional world in

which all the books are the same because readers

one), and the retailer.

2. What are the various sources of market power here?

What is at risk for the various parties?

Suggested Solution

2. Successful authors produce a unique product that is

protected by copyright laws. Hence they hold some

market power that allows them to command higher

Amazon has acquired this capacity through its

immensely costly investments in its website and its

delivery system. The ultimate source of Amazon’s

market power is its investors who have bankrolled

these investments on the promise of future profits.

Amazon also has market power through economies

of scale.

As Amazon attempts to capture a larger share

of the market surplus, successful authors and their

publishers are at risk of losing surplus to Amazon.

Moreover, if publishers are at risk of being forced out

of business, successful authors fear that a source of

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CHAPTER 14

Suggested Solution

1. They may have wanted to collude because it was rea-

sonable to fear that if one of them raised its price, the

2. How would you determine whether illegal behavior

actually occurred? What might explain these events

other than illegal behavior?

Suggested Solution

2. For the airlines’ actions to have been illegal, it would

have been necessary for the two companies to make

an agreement to coordinate price increases. If one

imposed the surcharge and the other merely followed

suit, their actions would not have been illegal.

3. Explain the dilemma facing the two airlines as well as

their individual executives.

Suggested Solution

a prisoners’ dilemma because the first to confess would

gain immunity. As the defense lawyer said, it was best

CHAPTER 15

1. What explains the complexity of and high rate of

innovation in razors by Gillette and Schick?

Suggested Solution

1. The complexity of razors and pace of innovation in

their features are a reflection of the intense non-price

competition between Schick and Gillette.

2. Why is the razor business so profitable? What explains

the size of the advertising budgets of Schick and

Gillette?

Suggested Solution

2. The business is so profitable because Schick and

cartridges. Schick and Gillette have large advertising

3. What explains the popularity of the Dollar Shave Club?

Suggested Solution

3. The popularity of the Dollar Shave Club can be

explained by its lower prices. For customers who find

that these cheaper models can cannibalize sales of the

newer, more complex ones. But if Schick and Gillette

don’t expand their offerings to include an inexpen–

sive online service, a competitor could, and very well

might, undercut them.

CHAPTER 16

1. What type of externality is present in social networking

platforms, or SNPs? Explain why Friendster and

were unlikely to both survive. Explain why the loser,

Friendster, declined so quickly.

Suggested Solution

1. A social networking platform, or SNP, is an example

of a network externality: the desirability of its use

staying of all other users of that network will fall.

So there will be a cascade of departures.

2. Explain how, in the past few years, the nature of the

externality has been altered by privacy concerns,

especially among teens. Why does this change lead

to greater fragmentation of users across the different

platforms?

Suggested Solution

grandmother, or your future employer, may see your

posts. This ultimately disadvantages Facebook relative

to SNPs that preserve privacy, like Instagram and

Snapchat. Thus, at some point bigger is no longer

better, leading to fragmentation across platforms in

3. Why do SNPs face a persistent dilemma in generating

SuggeSted SolutionS for BuSineSS CaSe QueStionS for thought BCS-9

Suggested Solution

3. SNPs can generate revenue only by using pop–up ads.

form ultimately needs to generate revenue because it

cannot operate indefinitely on borrowed money.

CHAPTER 17

1. Using the concepts you learned in this chapter, explain

the economic incentives behind the huge losses in

Kenyan wildlife.

Suggested Solution

1. Unprotected African wildlife and their grazing areas

grazing area for them. Without some economic incen–

tive to conserve the wildlife and their grazing lands,

2. Compare the economic incentives facing John Hume

with those facing a Kenyan rancher.

Suggested Solution

2. Hume’s ownership of a large ranch and the animals

on it means that he now has property rights on the

3. What regulations should be imposed on a rancher who

sells opportunities to trophy hunt? Relate these to the

concepts in the chapter.

Suggested Solution

3. Regulations should ensure that the rancher, like John

Hume, is committed to the long-term care of the

CHAPTER 18

1. What pattern would you expect to see in the size and

number of newly created companies after 2014 and the

implementation of the ACA?

Suggested Solution

1. After the implementation of the ACA, there should

created companies. Because new companies tend to

be small in any event, the United States should see an

2. Historically, smaller companies and entrepreneurs

have been more innovative than larger companies.

What does this imply for the rate of innovation in the

United States before the ACA? After the ACA?

Suggested Solution

2. With a higher number of small companies created,

and more entrepreneurs freed to follow their objec–

tives, the rate of innovation in the United States should

be higher after the ACA than before its implementa-

tion. The evidence on job/entrepreneur lock indicates

that innovation was diminished in the United States

CHAPTER 19

1. Use the marginal productivity theory of income

poverty line.

Suggested Solution

1. The marginal productivity theory of income distri-

bution is consistent with a low wage—one that falls

below the poverty rate—if workers have a low value of

average Walmart worker had a low value of marginal

product because she had not acquired job skills or

experience.

same labor market can end up being paid different

2. Both Costco and Walmart are hiring workers with a

similar skill set. But that doesn’t mean each worker

is paid the same, even in equilibrium. The quantity

of labor demanded by each firm is a function of

worker productivity within each company. Costco

has recognized that paying above equilibrium wages,

or efficiency wages, has resulted in a more produc–

tive labor force. The equilibrium wage corresponds

to marginal productivity of the last worker hired, not

all workers. By raising wages, Walmart is inducing

BCS-10 SuggeSted SolutionS for BuSineSS CaSe QueStionS for thought

wage will result in sufficient improvement in customer

service, store cleanliness, and the high turnover rate, to

3. Some politicians want to encourage more companies

to adopt a high-wage strategy. What are the possible

positive and negative effects of such a policy?

Suggested Solution

3. If government policy encourages more companies to

act like Walmart, paying higher wages to induce work–

works, the economy as a whole would become more

productive and richer. There are two possible down–

sides. First, what apparently works for Walmart might

not work for everyone, so costs would rise—and this

cost increase would be passed on in the form of higher

CHAPTER 20

1. What is one example of moral hazard by homeowners

in hurricane-prone areas? Explain.

Suggested Solution

1. Homeowners who purchase homes in hurricane-prone

areas under the assumption that their potential losses

would be covered by insurance are engaging in moral

hazard. That is, they took a risky action (purchasing in

such a location) that they may not have undertaken if

they had to incur the losses from hurricane damage on

their own. Another example of moral hazard is offered

by homeowners living in hurricane-prone areas who fail

to invest adequately in hurricane–proofing their homes

2. How does the case illustrate market failure due to

adverse selection?

Suggested Solution

2. Market failure occurred when insurance companies

reduced the number of insurance policies they were

writing in Florida’s hurricane-prone areas. Adverse

selection arose because they were unable to differenti–

ate houses according to the expected cost of a claim—

they couldn’t tell a house that was expected to with–

stand a hurricane with little loss from one that might

incur a high loss. As a result, they couldn’t adjust their

premiums to accurately reflect the risk. Rather than

3. What were the sources of Buchmueller’s innovation

that allowed him to succeed in the presence of moral

hazard and adverse selection?

Suggested Solution

3. Buchmueller innovated by acquiring information

that were verified as hurricane-proof, he did not have

to ascertain whether or not a homeowner had been

underinvesting in hurricane defenses. This avoided

the moral hazard problem. Likewise, by studying

the history of claims, he discovered what were good

risks (newly built, high-value, hurricane-proof homes)

4. Why did Buchmueller purchase insurance policies

from big, global insurance companies to cover up

to 75% of his own losses? What principal does this

illustrate?

Suggested Solution

might have otherwise, allowing him to lower his cost

of capital. This illustrates the principle of diversi–

fication. Because the big insurance companies had

large portfolios that were diversified globally, they

could treat the risk of Florida hurricane losses as

small. Thus they were willing to sell insurance to

Buchmueller’s company at a price Buchmueller was

willing to pay.

CHAPTER 21

1. Why was it profitable for Montgomery Ward to close

some of its stores during the Great Depression?

Suggested Solution

1. It was profitable to close some of its stores because the

not profitable to incur the costs of maintaining stores

in which few sales were made.

2. Use Figure 21–1 to compare the nature of the Great

Depression to the Great Recession. What about the

Great Depression made Montgomery Ward’s deci-

sion not to expand during the 1940s appear rational?

Would the same decision be rational today, in the

aftermath of the Great Recession? Explain.

Suggested Solution

2. Figure 21-1 shows that although the U.S. economy in

and began to recover. In contrast, five years after the

beginning of the Great Depression, world industrial

SuggeSted SolutionS for BuSineSS CaSe QueStionS for thought BCS-11

be rational today given that recessions have been of

shorter duration, as shown by the recovery after the

Great Recession. So, today, the company would be

better off spending its cash instead of holding it. But

instead of opening new stores, Montgomery Ward

could use the cash to invest in new technologies in an

effort to expand sales.

3. The National Retail Federation provides various kinds

of economic data on its website, http://research

.nrffoundation.com. Click on the link “Retail and

Suggested Solution

3. The information supplied in the five categories helps

a better job determining how to respond to the eco–

nomic situation in the 1940s.

(1) Economic Landscape: contains data on consumer

confidence and on GDP, the total value of the

economy’s output. Consumer confidence data gives

(2) Employment Environment: contains a graph of

U.S. employment over time. The strength of the

employment environment indicates whether or not

consumers will have income to spend on retail and

how confident their spending will be.

(3) Unemployment Environment: contains graphs of

the U.S. unemployment rate over time, as well as

graphs of the unemployment rate broken down by

(4) Consumer Income and Savings: contains informa-

tion on the change in income earned by American

consumers. The more income they have, the more

resources they have to spend. A rising income level

means that it is safe for retailers to expand, while a

falling income level means they should cut back.

CHAPTER 22

1. Why would an economic downturn cause problems for

Chinese companies that borrowed heavily?

Suggested Solution

income in the economy declines. This includes income

in the form of wages, profits, interest, and rents. A

Chinese companies were expecting when they bor-

rowed heavily. With lower than expected profit, the

firms will find it difficult to pay back their debt, which

could lead some of them to fail. Companies that fail

2. How do the three statistics that Li Keqiang cited fit

into the three different ways to calculate GDP?

Suggested Solution

2. Railway shipments measure goods being sent to

customers, so they are related to GDP as measured by

3. What business problems might China’s untrustworthy

numbers create?

Suggested Solution

3. It’s hard for governments and businesses to plan

long-term when they don’t have reliable and accurate

information about the state of the economy. Businesses

CHAPTER 23

1. How is the matching of job-seekers and employers

through services like TaskRabbit likely to affect

frictional unemployment?

Suggested Solution

1. Frictional unemployment is created because as people

quit or are let go from their jobs, it takes time to find

new employment. Services like TaskRabbit can fill that

down time and may lead to two possible outcomes.

First, when people can easily find jobs through a ser–

vice such as TaskRabbit, they find work faster and

2. What is the likely effect of such services on the num-

ber of people considered to be in the labor force?

Suggested Solution

2. Services like TaskRabbit provide employment oppor-

These individuals are likely to include discouraged

workers, marginally attached workers, and others.

As these workers move back into the labor force and

find jobs as Taskers, the size of the labor force will

increase.

3. Some analysts suggest that most freelancers have

other jobs, and only do gig economy work on the side.

How does that statement help explain the lack of clear

evidence for a growing gig economy?

Suggested Solution

3. Official employment statistics count an individual

worker only once. If many people work in the gig

economy as a side job, only their primary jobs will

be counted and the employment statistics will not

reflect the gig economy jobs. And as long as many gig

expect employment statistics to reflect an increase in

the size of the gig economy.

CHAPTER 24

retailing. How did this alter the retailing production

function? What would a similar amount of investment

have accomplished without the new technology?

Suggested Solution

1. Bar-code technology resulted in an upward shift of

bar-code technology, investment would have resulted

2. The spread of bar codes was delayed in the United

States because everyone was waiting for someone

else to move. What policy could have been adopted to

address this? Would it have been a good idea?

Suggested Solution

2. A government policy to subsidize the adoption of

bar-code technology could have accelerated its adop–

3. Use the case to explain why international growth

rates var y.

Suggested Solution

3. The case shows how differences in institutions and

government policies affect economic growth, leading to

4. Despite initial barriers, bar codes have spread globally.

What does this imply about differences in economic

growth across countries?

Suggested Solution

convergence in per capita GDP.

CHAPTER 25

1. What market inefficiency is being exploited by

Grameen Bank? What is the source of this inefficiency?

Suggested Solution

1. Grameen Bank is exploiting the inefficiency that arises

from the fact that there are borrowers who want to

2. What tasks of a financial system does microlending

perform?

Suggested Solution

tion costs for people who need funds—for example,

they can borrow from Grameen rather than having

to sell possessions to raise needed funds. It reduces

financial risk, allowing borrowers to overcome

financial uncertainty. And it provides liquid assets,

by allowing lenders to lend to borrowers but in a way

that allows them to get their funds back quickly if they

3. What do you predict is the effect of Grameen Bank’s

SuggeSted SolutionS for BuSineSS CaSe QueStionS for thought BCS-13

Suggested Solution

3. We would expect communities that received Grameen

Bank lending to have a higher growth rate and less

CHAPTER 26

1. Why did a national slump that began with housing

affect companies like General Motors?

Suggested Solution

1. As we learned in the chapter, a fall in current dispos–

consumer spending across America. The broad decline

in consumer spending, in turn, hit auto companies

particularly hard as many Americans decided against

making new car purchases.

2. Why was it reasonable in June 2009 to predict that

auto sales would improve in the nearfuture?

Suggested Solution

2. It was a good bet that things would eventually improve

considerably higher in the future than they were in the

3. How does this story about General Motors help

explain how a slump in housing—a relatively small

part of the U.S. economy—could produce such a deep

national recession?

Suggested Solution

3. The story of GM illustrates how the multiplier process

ers among others. So the story shows how a fall in

investment spending—in this case, housing investment

spending—can have an impact on the economy as a

whole that is larger than the initial decline.

CHAPTER 27

1. Why do you think gas prices rose in the recessions of

the 1970s but fell after the Great Recession?

Suggested Solution

1. The recessions of the 1970s were characterized by

negative supply side shocks from OPEC oil shortages

the recession. Although an increase in oil prices also

preceded the Great Recession, larger negative demand

shocks caused a leftward shift in aggregate demand

placing downward pressure on prices. The decline in

housing prices also caused consumer spending to expe–

rience a substantial decline. In the end, the 1970s were

characterized by negative supply shocks putting upward

pressure on gasoline prices, and the Great Recession

2. What does this say about the causes of the recessions

in each case?

Suggested Solution

2. In both cases, high oil prices were a contributing fac–

tor to the recessions, but in addition to high oil prices,

the Great Recession was largely impacted by a collapse

of the housing bubble. Despite starting with a similar

cause, the effect on the economy depends mostly on

what follows the initial increase. In the case of the

Great Recession, a large negative demand shock caused

3. In the 1970s, Toyota was able to increase its American

sales despite interest rates on auto loans surging as

Suggested Solution

3. Interest rates on car loans reflect both the real interest

rate and future inflation. Because inflation increased

significantly in the 1970s, lenders followed by also

raising rates on car loans. During the Great Recession,

CHAPTER 28

1. How did the political reaction to government funding

for the Solana project differ from the reaction to more

conventional government spending projects such as

roads and schools? What does the case tell us about

how to assess the value of a fiscal stimulus project?

Suggested Solution

1. Unlike roads and schools, the Solana project was con-

BCS-14 SuggeSted SolutionS for BuSineSS CaSe QueStionS for thought

were paid to a non-American firm. Second, the proj-

ect was controversial because the long-term viability

of solar power depended upon future government

discretionary fiscal policy. What does the Solana case

tell us about this issue?

Suggested Solution

2. Solana is a good example of lags in the implemen-

tation of discretionary fiscal policy. Although the

and 2012.

3. Is the depth of a recession a good or a bad time to

undertake an energy project? Why or why not?

Suggested Solution

3. Assuming that a solar plant is a good thing to build, it

was a very good idea to do it while many construction

workers were unemployed and borrowing costs were

very low.

CHAPTER 29

1. Why are gift card owners willing to sell their cards for

a cash amount less than their facevalue?

Suggested Solution

1. A gift card is not as liquid as cash. Cash can be turned

into merchandise in any store; a gift card can be used

only at its issuer.

2. Why do gift cards for retailers like Walmart sell for a

smaller discount than those for the Gap?

Suggested Solution

2. Retailers like Walmart sell necessities, but the Gap

sells non-necessities. There will be a larger pool of

cards for necessities, which drives their discount down

3. Use your answer from Question 2 to explain why cash

Suggested Solution

3. Cash can be used to purchase any good or service,

necessity or non-necessity; it is accepted everywhere.

4. Explain why retailers prefer to reward loyal customers

with gift cards instead of rebatechecks.

Suggested Solution

4. Most customers who receive a rebate check deposit the

check into their checking account, withdraw the cash,

and use it to pay for purchases. However, those pur-

retailers will prefer gift cards.

5. There are now laws restricting retailers’ ability to

impose fees and expiration dates on their gift cards

and mandate greater disclosure of their terms. Why do

you think Congress enacted this legislation?

Suggested Solution

5. Retailers have an incentive to adopt policies that

increase breakage (the amount of a gift card that

accrues to the retailer rather than the cardholder),

such as imposing fees and expiration dates. Not telling

customers about these policies increases breakage. So

Congress has intervened to restrict these practices.

CHAPTER 30

1. PayPal accounts aren’t counted as part of the money

supply. Should they be? Why or why not?

Suggested Solution

1. It depends on how consumers use their PayPal

accounts. Many consumers use PayPal as a means of

transferring money from a checking account or credit

card to pay for goods and services purchased online.

2. In 2010, only around 25% of mobile phones in the

broader pattern of monetary history?

SuggeSted SolutionS for BuSineSS CaSe QueStionS for thought BCS-15

Suggested Solution

2. PayPal had always been a leader in mobile-phone pay-

when the number of smartphones in use was increas–

ing. The broader pattern of monetary history since

the 1960s shows that improvements in banking tech-

nology are born of innovation, whether credit cards,

debit cards, ATMs, or mobile-banking systems. These

innovations typically followed from years of efforts

3. How might future actions by the Federal Open Market

Committee affect the future of PayPal and similar

services?

Suggested Solution

3. PayPal and other money transmitters do not offer

interest rates on funds stored in their accounts. As

the Federal Open Market Committee gradually raises

interest rates, banks will start offering higher interest

rates on saving accounts. The increased competition

from banks will incentivize customers to transfer

money from PayPal to interest-earning bank accounts.

Because there are no costs in transferring money

between PayPal and bank accounts, it will be relatively

CHAPTER 31

1. What was the relationship between inflation and the

Argentine government’s chronic budget deficits?

Suggested Solution

to manage its budget. Unable to borrow on foreign

capital markets, raise taxes, or cut spending, the gov-

ernment was forced to finance its budget deficit by

printing money. As it became more reliant on printing

money to finance spending, Argentina’s inflation rate

2. What were the implications of Argentina’s inability to

get its government deficits under control for Argentine

businesses?

Suggested Solution

2. The high inflation caused by the Argentine govern-

ment’s attempts to fund its budget deficits through

the inflation tax created uncertainty for Argentine

how much their costs would go up might lose money

and go out of business. Businesses unable to plan for

the future and make investments risked atrophy and

3. Why did the Argentine government try to stop

Argentinians from converting pesos into foreign

currency, such as dollars?

Suggested Solution

3. The Argentine government was trying to collect an

inflation tax by using seigniorage to fund the budget

began converting their pesos into foreign curren–

cies, like the dollar, looking for stability. This in turn

reduced the amount of seigniorage the government

was able to capture, forcing them to print even more

money and leading to an even higher inflation rate.

So in an effort to arrest the downward spiral, the

Argentine government tried to stop citizens from

converting their pesos into foreign currency.

CHAPTER 33

1. Why would Abenomics lead to a weaker yen?

Suggested Solution

ing the demand for foreign exchange. That’s basically

what’s happening here, although Abenomics depends

in part on promises to keep money loose—that is,

to keep interest rates low for longer than previously

expected—rather than just cutting rates now.

2. Why is a weaker yen good for the profits of Japanese

auto companies?

Suggested Solution

2. When a company like Toyota or Subaru exports cars

panies a cost advantage, raising their profits.

3. Why did Subaru gain more than Toyota?

Suggested Solution

3. For Toyota, the benefits of a weaker yen apply only to

the part of its production that is exported from Japan.