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Fixed costs, sunk costs, merger, profit sharing plan

9. To open a new business, a manager must obtain a license from the city for $20,000. The license is transferable, but only $3,000 is refundable in the event the firm does not use the license.
a. What are the firm's fixed costs? Sunk costs?
b. Suppose the manager obtains a license but then decides against opening the business. If another firm offers the manager $2,000 for the license, should the manager accept the offer?

10. In 1995 the U.S. Justice Department sued to block a merger between Microsoft and Intuit, the producer of the nation's best-selling business software. The Justice Department argued that the merger would lessen competition and raise prices of business software. Is there an economic argument that the merger might actually result in lower prices? Explain.

11. According to Industry Week, a shoe manufacturer recently had a production run that resulted in 100,000 pairs of defective shoes. Workers on the production line knew the shoes were defective as they were being produced, but did nothing to fix the problem. Do you think a profit sharing plan for workers would mitigate future problems? Explain.

12. As a manager of the WeDoWell Corporation, you have negotiated with several vendors and are on the verge of signing an eight-year contract with Bolts Enterprises. Under the contract, they would ship to you 2,000 titanium bolts per month at a price of $1,000 per bolt. Your assistant has just brought you an article from a trade publication that indicates another company has developed a new technology that reduces the cost of producing the titanium bolts. How would this information affect the optimal length of your contract with Bolts Enterprises? Explain.

13. In many online information markets, we have observed in recent years greatly increased concentration in each market sector. What is the primary reason for the emergence of a dominant firm in each market?

14. Omega Travel competes in the travel market. Consumers know that Omega has the best agents in the industry and offers superior service. Nonetheless, Omega earns zero economic profits because numerous competitors have entered the market over the last few years. Based on this information, what market structure does Omega operate in? Explain briefly.

15. Art-R-Us makes hand-painted art reproductions. The owner-manager wishes to hire another artist, and is considering paying a fixed wage plus either (1) a share of the profits from each painting sold or (2) a fixed payment for each piece produced. Which plan would you choose if you were the owner? Which plan would you favor if you were the artist? Explain.

16. In a 1998 press release, Boeing Commercial Airplane Group (BCAG) announced that it was signing a 10-year contract with distributor Thyssen Inc. - a distributor of raw aluminum - valued at approximately $300 million. The contract reflects Boeing's effort to reduce costs and production bottlenecks resulting from supply shortages. The contract specifies prices and guarantees quantities of raw aluminum to be delivered to BCAG's suppliers. If you were the production manager at BCAG, how would you justify the long-term nature of the contact with Thyssen Inc.?

Solution Preview

9. a. Firm's fixed cost is the cost of license, which is $20,000
Sunk costs are $17,000 as only $3000 is recoverable incase the firm requires to transfer the license
b. No, the manager should not accept the offer. This is because $2000 which is offered is less than the recoverable portion of the license which is $3000.

10. In a perfect competition, prices are decided by the market. However, if the merger between Microsoft and Intuit were to happen, the software market would have been dominated by the merged entity. As a result, the entity would reap the benefits of monopoly due to lack of any major competitor. Hence the price would be set at a higher limit so as to maximize the profit and in return accept a level of output determined by the market.

11. Since workers are daily or monthly wage earners, they have no personal interest in the success of the firm they work for. They are just concerned with finishing their job and earning money. If workers had taken measures to fix the defective pairs of shoes, it would have led to extra time spend on the repair in addition to working on the production line for the stipulated number of hours. Hence ...

Solution Summary

Fixed costs, sunk costs, merger and profit sharing plans are examined.