Managerial Economics - Eighth Edition, Authors Christopher R. Thomas and S. Charles Maurice.
Chapter Five Questions:
1. Gigi has a limited income and consumes only wine and cheese; her current consumption choice is four bottles of wine and 10 pounds of cheese. The price of wine is $10 per bottle and the price of cheese is $4 per pound. The last bottle of wine added 50 units to Gigi's utility, while the last pound of cheese added 40 units. A) Is Gigi making the utility-maximizing choice? Why or why not? B) If not, what should she do instead? Why?
2. Increasingly, employees are being allowed to choose benefit packages from a menu of items. For instance, workers may be given a package of benefits that include basis and optional items. Basics might include modest medical coverage, life insurance equal to a year's salary, vacation time based on length of service, and some retirement pay. But then employees can use credits to choose among such additional benefits as full medical coverage, dental and eye care, more vacation time, additional disability income, and higher company payments to the retirement fund. How do you think flexible benefits packages would affect an employee's choice between higher wages and more benefits.
3. On April 23, 1991, the Air Force awarded a $93 billion (or more) contract to a group led by Lockheed, Boeing and General Dynamics t build the new fighter plane for the 21st century, the YF-22 Lightning 2. A group headed by Northrop and McDonnell Douglas which had spent more than $1 billion on development for their alternative YF-23, lost out on the contract. That evening on CNN's Crossfire, the Secretary of Defense explained that the Lockheed group got the contract because their "quality for the price per plane was higher." Hi didn't elaborate. In terms of the theory set forth in this chapter (chapter 5), did he mean a) The Lockheed quality was higher? b) The Lockheed price was lower? If neither, what did he mean?
Chapter Six Questions:
4. In an article about the financial problems of USA Today, Newsweek reported that the paper was losing about $20 million a year. A Wall Street analyst said that the paper should raise its price from 50 cents t o75 cents, which he estimates would bring in an additional $65 million a year. The paper's publisher rejected the idea, saying that circulation could drop sharply after a price increase; citing The Wall Street Journal's experience after it increased its price t o75 cents. What implicit assumptions are the publisher and the analyst making about price elasticity?
5. U.S. cigarette makers face enormous punitive damage penalties after losing a series of class-action lawsuits that heaped penalties amounting to several hundreds billion dollars on the tobacco industry. In spite of the huge penalties, The Wall Street Journal reported, "The damage (to cigarette makers) is generally under control." What action do you suppose the cigarette companies took to avoid bankruptcy? Why did this action succeed?
6. The demand curve for haircuts at Terry Bernard's Hair Design is: P=15-0.15Q where Q is the number of cuts per week and P is the price of a haircut. Terry is considering raising her price above the current price of $9. Terry is unwilling to raise price if the price hike will cause revenues to fall. A.) Should Terry raise the price of haircuts above $9? Why or why not? B) Suppose demand for Terry's haircuts increases to P=22-0.22Q. At a price of $9, should Terry raise the price of her haircuts? Why or why not?
7. Movie attendance dropped 8 percent as ticket prices rose a little more that 5 percent. What is the price elasticity of demand for movie tickets? Could price elasticity be somewhat overestimated from these figures? That is, could other things have changed, accounting for some of the decline in attendance?
What is the price elasticity of demand for movie tickets? Could price elasticity be somewhat overestimated from these figures? That is, could other things have changed, accounting for some of the decline in attendance?