Week 4 Study Questions for Managerial Economics (GRBA 812)

Due Friday of Week 4 at 12:00 midnight CST (Chicago time)

A Couple More Questions from Chapter 7 Material:

1. Suppose Nike’s managers were considering expanding into producing sports beverages. Why
might the company decide to do this under the Nike brand name?

Under economies of scope the cost of producing two outputs jointly is less than the cost of
producing them separately. Therefore the cost of produce new sports beverage under Nike
brand name is less than the cost of building a new brand, which is still under Nike’s
management.

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2. Suppose you have a production technology that can be characterized by a learning curve. Every

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time you increase production by one unit, your costs decrease by $6. The first unit costs you $64

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to produce. If you receive a request for proposal (RFP) on a project for 4 units, what is your

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break-even price? Suppose that if you get the contract, you estimate that you can win another

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project for two more units. What is your break-even price for those 2 extra units (just for those
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extra 2 units, which are units 5 and 6)?
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Quantity MC($) TC($) AC($)
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1 64 64 64
2 58 122 61
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3 52 174 58
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4 46 220 55
5 40 260 52
6 34 294 49
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The break-even price for 4 units is $55.

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The break-even price for units 5 and 6 are (40+34)/2 = $37/unit

Questions from Chapter 8 Material

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3. The widget market is competitive and includes no transaction costs. Five suppliers are willing to
sell one widget at the following prices: $30, $29, $20, $16, and $12. Five buyers are willing to
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buy one widget at the following prices: $10, $12, $20, $24 and $29. What is the equilibrium
price and quantity in a competitive market?

When P=$10, demand=5, supply=0

When P=$12, demand=4, supply=1
When P=$16, demand=3, supply=2
When P=$20, demand=3, supply=3
When P=$24, demand=2, supply=3
When P=$29, demand=1, supply=4
When P=$30, demand=0, supply=5

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 The equilibrium price will be$20 and quantity is 3.

4. The “A” index is a proxy for the world price of cotton. From January to October of 2010, the
price reflected by the “A” index increased about 80%.
5. Provide two separate explanations for this price increase using shifts in supply or demand.

The increasing price could be explained by supply shrinks or increase in demand. When
supply shrinks, there will be leftward shift of supply, which increase equilibrium price.
When demand increases, there will be rightward shift of demand curve, which increases the
equilibrium.
Shift in supply: if there is an increasing price of fertilizer, the supply of A will decrease due
to high COGS, which causes a higher price of A.
Shift in demand: if there is an increasing price of alternative product, such as silk, the
demand of A will increase, which also causes a higher price of A.

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6. What one piece of information would allow you to decide which of the two is a better
explanation?

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The equilibrium quantity. When supply shrinks, the equilibrium quantity decreases. When

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demand curve shift right, there is an increase in equilibrium quantity.
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7. Due to the H1N1 flu outbreak, the demand for hand sanitizer has tripled. Should Johnson &
Johnson increase production of their Purell hand sanitizer? Should it invest in doubling
production capacity?
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No. Increasing production means a more cost on manufacturing, which leads to a higher
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price on selling. The variation of flu virus is rapidly, so there will be other product replacing
Purell hand sanitizer. Therefore, it is possible the company spend large amount money on
manufacturing but the product is out of date. It is not a good decision to increase
production or doubling production capacity.
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Questions from Chapter 9 Material

8. Snack food vendors and beer distributors earn some monopoly profits in their local markets but
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see them slowly erode from various new substitutes. When Colorado voted to legalize marijuana,
which side would you think that Colorado beer distributors were on? What about snack food
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vendors? Why?

If marijuana becomes legal, demand for beers would decrease, because compared with
snack food, beers seem more like a substitute for marijuana and vice versa. The legalization
of marijuana leads to less profit of beer distributors.
Marijuana and snack foods are quite different products but sometimes people buy them for
relax on meeting or party. Here we could think that legalization of marijuana will increase
demand for snack food vendors and thus increase their profits.

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 9. Suppose that new entry decreased your demand elasticity from -2 to -3 (made your demand more
elastic). By how much should you adjust your price of $10, if that was the optimal price
associated with an elasticity of -2?

(P-MC)/P=1/|e|
($10-MC)/$10=0.5, MC=$5
(P - 5)/ P = 1/3, P= $7.5

10. Relative to managers in more monopolistic industries, are managers in more competitive
industries more likely to spend their time on reducing costs or on pricing strategies?

Managers are more likely to spend time on reducing costs. They are focus on low prices
because of the high elasticity of demand. In more competitive industries firms have many
close substitutes in products, many rivals than monopoly companies, and lower entry and
exit barriers.

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Questions from Chapter 10 Material

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11. To increase a company’s performance, a manager suggests that the company needs to increase the

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value of its product to customers. Describe three ways in which this advice might be incorrect
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(hint: think about what else might or might not change that affects profits).

The prices of products do not increase, but costs are constant, which cause less profit.
The costs of products also increase, even though prices are higher than before, as a result,
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profits do not increase.

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Both prices and costs increase, but competitors provide same value of product but with
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lower price. Therefore there are fewer customers than before, which leads to less profits.

12. Why might intangible resources like human capital and intellectual assets be a more likely source
of sustainable competitive advantage than tangible resources?
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Because intangible resources are difficult to successfully imitate or substitute. In addition,

intangible assets usually help firms to sell at a higher price and larger quantity in
competition, for example the copyrights, trademarks and goodwill.
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13. Examine the U.S. passenger airline industry using the Five Forces. Is this an attractive industry?
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Why or why not?

Entry barriers: Low to moderate. It is not easy to enter this industry because the large
amount cost on planes and airport.

Bargaining power of buyers: High. Customers are willing to choose different airlines which
provide the lowest price and good service, and the switching costs are low for them.
Bargaining power of suppliers: Moderate to high. There are several kinds of suppliers.
Suppliers of aircraft and airport has most power because they can choose which airline to
sell. Suppliers of labors have less power than previous ones because there are not many
professional requirements of labors, such as knowledge and skill. The only factor is salary.

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 Rivalry among competitors: High. As there are thousands of airline in the United States,
and all of them provide similar route and service, it is difficult to be differentiated from
others. In addition, customers are sensitive about the price. The competition on low price
may result to unfavorable loss. It is a challenge of whole airline industry.

Substitutes of products: High. Transportations such as trains and tourist buses ask for
lower price. Customers will select them if they have enough time.

Tutorials
Please check the box to verify that you have completed each of the following tutorials:

 Supply, Demand and Equilibrium

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