2. Explain several dimensions of the shareholder-principal conflict

 

2. Explain several dimensions of the shareholder-principal conflict with manager-agents known as the principal-agent problem. To mitigate agency problems between senior executives and shareholders, should the compensation committee of the board devote more to executive salary and bonus (cash compensation) or more to long-term incentives? Why? What role does each type of pay play in motivating managers?

3. Corporate profitability declined by 20 percent from 2008 to 2009. What performance percentage would you use to trigger executive bonuses for that year? Why? What issues would arise with hiring and retaining the best managers?

6. In the context of the shareholder wealth-maximization model of a firm, what is the expected impact of each of the following events on the value of the firm? Explain why.

Chapter 2: Exercises 1, 5, and 6

1. For each of the determinants of demand in Equation 2.1, identify an example illustrating the effect on the demand for hybrid gasoline-electric vehicles such as the Toyota Prius. Then do the same for each of the determinants of supply in Equation 2.2. In each instance, would equilibrium market price increase or decrease? Consider substitutes such as plug-in hybrids, the Nissan Leaf and Chevy Volt, and complements such as gasoline and lithium ion laptop computer batteries.

5. Two investments have the following expected returns (net present values) and standard deviation of returns:

PROJECT EXPECTED RETURNS STANDARD DEVIATION

A $ 50,000 $ 40,000

B $250,000 $125,000

6. The manager of the aerospace division of General Aeronautics has estimated the price it can charge for providing satellite launch services to commercial firms. Her most optimistic estimate (a price not expected to be exceeded more than 10 percent of the time) is $2 million. Her most pessimistic estimate (a lower price than this one is not expected more than 10 percent of the time) is $1 million. The expected value estimate is $1.5 million. The price distribution is believed to be approximately normal.

ECO 550 Week 2 Chapter 3 and 4

ECO 550 Week 2 Chapter 3(P-3,4,7) and 4(P-5,6,7)

Chapter 3: Problems 3, 4, and 7

3. The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1,500/day to 1,800/day. Compute the arc price elasticity of demand over this price and consumption quantity range.

4. The subway fare in your town has just been increased from a current level of 50 cents to $1.00 per ride. As a result, the transit authority notes a decline in rider-ship of 30 percent.

a. Compute the price elasticity of demand for subway rides.

b. If the transit authority reduces the fare back to 50 cents, what impact would you expect on the ridership? Why?

7. In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is ?1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenues?

Chapter 4: Problems 5, 6, and 7

5. General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped, sugar-coated breakfast cereal for children. The following (multiplicative exponential) demand function is being used:

6. The demand for haddock has been estimated as log + b log P + c log I + d log Pm

where of haddock sold in New England per pound of haddock

measure of personal income in the New England region

index of the price of meat and poultry

a. Determine the price elasticity of demand.

b. Determine the income elasticity of demand.

c. Determine the cross price elasticity of demand.

d. How would you characterize the demand for haddock? Apparently the Haddock is plentiful since it a white fish. New England has lots of ocean access to fish.

e. Suppose disposable income is expected to increase by 5 percent next year.

7. An estimate of the demand function for household furniture produced the following results:

1.08 .16 -.48

Y R P

where expenditures per household

personal income per household

of private residential construction per household

of the furniture price index to the consumer price index

a. Determine the point price and income elasticities for household furniture.

b. What interpretation would you give to the exponent for R? Why do you suppose R was included in the equation as a variable?

c. If you were a supplier to the furniture manufacturer, would you have preferred to see the analysis performed in physical sales units rather than dollars of revenue? How would this change alter the interpretation of the price coefficient, presently estimated as ?0.48?

ECO 550 Week 3 Chapter 5 and 6

ECO 550 Week 3 Chapter 5 (1,5,6,9) & Chapter 6 (2,7,9,10)

Chapter 5

1. The forecasting staff for the Prizer Corporation has developed a model to predict sales of its air-cushioned-ride snowmobiles. The model specifies that sales S vary jointly with disposable personal income Y and the population between ages 15 and 40, Z, and inversely with the price of the snowmoblies P. Based on past data, the best estimate of this relationship is *YZ/P where k has been estimated (with past data) to equal 100.

a. If Y = $11,000, Z = $1,200, and P = $20,000, what value would you predict for S ?

b. What happens if P is reduced to $17,500?

c. How would you go about developing a value for k?

d. What are the potential weaknesses of his model?

5. A firm experienced the demand shown in the following table.

year —— actual demand—- 5 yr moving avg — 3 yr moving avg– exponential smoothing — exponential smoothing ( ) — ( ) _________________________________________________________________________________________________ 2000 | 800 | xxxx | xxxx | xxxx | xxxxx 2001 | 925 | xxxx | xxxx | _____ | __________ 2002 | 900 | xxxx | xxxx | ______ | __________ 2003 | 1025 | xxxx | _____ | ________ | ___________ 2004 | 1150 | xxxx | ______ | _________ | ____________ 2005 | 1160 | _____ | _______ | __________ | _____________ 2006 | 1200 | _______ | _______ | __________ | ____________ 2007 | 1150 | _______ | ________ | ___________ | ____________ 2008 | 1270 | ________ | ________ | ___________ | ____________ 2009 | 1290 | _________ | ________ | ____________ | ___________ 2010 | * | _________ | _________ | ____________ | ____________ Unknown future value to be forecast.

a. Fill in the table by preparing forecasts based on a five- year moving average, a three- year moving average, and exponential smoothing( with a and a ). Note: The exponential smoothing forecasts may be begun by assuming Yt+

b. Using the forecasts from 2005 through 2009, compare the accuracy of each of the forecasting methods based on the RMSE criterion.

c. Which forecast would you have used for 2010? Why?

6. The economic analysis division of Mapco Enterprises has estimated the demand function for its line of weed trimmers as ,000 + 0.4N – 350Pm + 90Ps where of new homes completed in the primary market area of the Mapco trimmer of its competitor’s Surefire trimmer In 2010, 15,000 new homes are expected to be completed in the primary market area. Mapco plans to charge $50 for its trimmer. The Surefire trimmer is expected to sell for $55.

a. What sales are forecast for 2010 under these conditions?

b. If its competitor cuts the price of the Surefire trimmer to $50, what effect will this have on Mapco’s sales?

c. What effect would a 30 percent reduction in the number of new homes completed have on Mapco’s sales ( ignore the impact of the price cut of the Surefire trimmer)?

9. Savings-Mart (a chain of discount department stores) sells patio and lawn furniture. Sales are seasonal, with higher sales during the spring and summer quarters and lower sales during the fall and winter quarters. The company developed the following quarterly sales forecasting model:

+ 0.125t 2.75D1t + 2.25D2t + 3.50D3t

Where sales ($ million) in quarter t

sales ($ million) when

period (quarter) where the fourth quarter of First quarter of , second quarter of ,. . .

for first-quarter observations 0 otherwise

for second quarter observations 0 otherwise

for third-quarter observations 0 otherwise

Forecast Savings-Mart s sales of patio and lawn furniture for each quarter of 2010.

Chapter 6

2. If the U.S. dollar were to appreciate substantially, what steps could a domestic manufacturer such as Cummins Engine Co. of Columbus, Indiana take in advance to reduce the effect of the exchange rate fluctuation on company profitability?

7. If Boeing aircraft prices in dollars increase 20 percent and the yen/dollar exchange rate declines 15 percent, what effective price increase is facing Japan Airlines for the purchase of a Boeing 747? Would Boeing’s margin likely rise or fall if the yen then depreciated and competitor prices were unchanged? Why?

9. If unit labor costs in Spain and Portugal rise, but unit labor costs in Germany decline and other producer prices remain unchanged, what effect should these factors by themselves have on export trade and why?

10. What three factors determine whether two economies with separate fiscal and monetary authorities should form a currency union? Give an illustration of each factor using NAFTA economies.

ECO 550 Week 4 chapters 7 and 8

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?

 

ECO 550 Week 5 Chapter 9 and 10

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 6 Chapter 11 and 12

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 7 Chapter 13 and 14

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 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 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 10 Chapter 17 Problems 1, 5, and 9(c)

1 . A firm has the opportunity to invest in a project having an initial outlay of $20,000. Net cash inflows (before depreciation and taxes) are expected to be $5,000 per year for five years. The firm uses the straight-line depreciation method with a zero salvage value and has a (marginal) income tax rate of 40 percent. The firm’s cost of capital is 12 percent.

a. Compute the internal rate of return and the net present value.

b. Should the firm accept or reject the project?

5. The Charlotte Bobcats, a professional basketball team, has been offered the opportunity to purchase the contract of an aging superstar basketball player from another team. The general manager of the Bobcats wants to analyze the offer as a capital budgeting problem. The Bobcats would have to pay the other team $800,000 to obtain the superstar. Being somewhat old, the basketball player is expected to be able to play for only four more years. The general manager figuresthat attendance, and hence revenues, would increase substantially if the Bobcats obtained the superstar. He estimates that incremental returns (additional ticket revenues less the superstar’s salary) would be as follows over the four-year period:

9. The state of Glottamora has $100 million remaining in its budget for the current year. One alternative is to give Glottamorans a one-time tax rebate. Alternatively, two proposals have been made for state expenditures of these funds