You are the purchasing manager of a company and are responsible for ensuring that necessary inputs are available to keep your factory operating. For each of the three types of purchases identified below, recommend whether your company should use spot purchases, contract purchase, or internal production. Support your answer using economic concepts . To what extent is your decision and any contract terms affected by the variability in the demand for your product and thus your need for the product purchased?
a. A subsystem that is similar to but not exactly the same as subsystems used by competitors; several large companies offer to make modifications to the subsystem to fit your requirements.
b. A part that is unique to your company and requires significant capital investment in order to produce. Your company is the only one using this part but several vendors have offered to manufacture it for you.
c. Light fixtures and light bulbs used to illuminate the factory floor.
Discuss each of the pricing strategies below. What conditions are necessary to make each strategy successful in terms of increasing profits? Explain your answer.
a. A local restaurant/bar offers discounted drinks during "happy hour," from 5 to 6 PM on weeknights.
b. The price Company X charges for its ink cartridges is nearly as much as it charges for a printer.
c. Packs of 5 T-shirts cost $10 while an individual T-shirt costs $4.
d. Coupons for specials at a local grocery store can be downloaded from an online site.
e. Computer and appliance manufacturers promote service contracts.
f. Microsoft Office includes several programs in one package.
Assume the operations manager at the company you own prefers to put in low effort rather than high effort. In order the manager to exert high effort, his expected financial gain must be at least $60,000 higher than if he puts in low effort. You are evaluating three possible compensation packages:
- A flat salary of $300,000
- A payment equal to 5% of the expected profits from the profit center
- A flat payment of $200,000 plus 5% of any profits over $10 million.
a. Discuss the effects of each of the compensation packages on company profits and the behavior of the manager. What assumptions are needed in order to compare the expected values and risks associated with each option?
b. How would a risk averse versus a risk neutral manager view the different compensation packages?
Explain how incomplete information can cause market failure. Give at least one example of this type of market failure and explain how government intervention has been used to correct the problem. How effective has this form of intervention been?
a) Contract purchase: Since, the subsystem is similar but not exactly the same as the subsystems used by competitors, there are several manufacturers who can make the subsystem. Since, there are many suppliers, contract purchases is appropriate.
b) Internal production: Significant capital investment means the contract has to be sole supplier contract.. This means monopoly power with the supplier and we have to pay higher prices.
c), Spot purchases: It is not possible to know when light fixtures and light bulbs will be required. Contracting and carrying stocks will increase inventory costs. There are a large number of suppliers and spot purchases are the best method.
a.) The condition is that all "happy hour" customers should not be those who drink during normal hours. Otherwise the profits will decrease.
b) The conditions are that the printer does not accept ink cartridges made by anyone else. Also, no other cartridge maker can easily make cartridge for this printer.
c) The condition is that two, three, or four customers should not be ...
This 728-word solution explains important issues in labor economics. The sources used are also included in the solution.
Economics problems- 35 Multiple choice questions on economics
Please see the attached file for full problem description.
1. In the long run, a firm is said to be experiencing increasing returns to scale if a 10 percent increase in inputs results in :
A. an increase in output from 100 to 120.
B. a decrease in output from 100 to 90.
C. an increase in output from 100 to 105.
D. a decrease in output from 100 to 85.
2. MC increases because
a. MC naturally increases as firm nears capacity.
b. labor is paid overtime wages when volume increases.
c. in the short run, MC always increases.
d. the law of diminishing returns takes effect.
3. Which of the following relationships help determine the optimal amount of variable input (labor) in the short run?
a. Marginal Product = Marginal Cost
b. Average Product = Marginal Product
c. Marginal Product = 0
d. Marginal Revenue Product = Marginal Labor Cost
4. A company can ship its product by train but there is a chance that product may be damaged while in transit. The dollar cost and the probability of damage and no-damage are as follows:
Dollar cost of shipping Probability
Damage $5000 .5
No damage $4000 .5
The expected value of the cost of shipping by train is
5. The main difference between the price-quantity graph of a perfectly competitive firm and a monopoly is
a. that the competitive firm's demand curve is horizontal, while that of the monopoly is downward sloping.
b. that a monopoly always earns an economic profit while a competitive company always earns only normal profit.
c. that a monopoly maximizes its profit when marginal revenue is greater than marginal cost.
d. that a monopoly does not incur increasing marginal cost.
6. Which of the following cost relationships is not true?
A. AFC = AC - MC
B TVC = TC - TFC
C. the change in TVC/the change in Q = MC
D. the change in TC/the change in Q = MC
7. Which of the following conditions would definitely cause a perfectly competitive company to shut down in the short run?
A. P < MC
C. P = MC < AC
C. P < AVC
D. P = MR
8. The demand curve which assumes that competitors will follow price decreases but not price increases is called
A. an industry demand curve.
B. an inelastic demand curve.
C. a kinked demand curve.
D. a competitive demand curve.
9. The existence of a kinked demand curve under oligopoly conditions may result in
A. price flexibility.
B. price rigidity.
C. competitive pricing.
D. none of the above.
10. If firms are earning economic profit in a monopolistically competitive market, which of the following is most likely to happen in the long run?
A. some firms will leave the market
B. firms will join together to keep others from entering
C new firms will enter the market, thereby eliminating the economic profit
D. firms will continue to earn economic profit
11. A monopoly will usually produce
A. where its demand curve is inelastic.
B. where its demand curve is elastic.
C. where its demand curve is either elastic or inelastic.
D. only when its demand curve is perfectly inelastic.
12. Which of the following indicate when Stage I ends and Stage II begins in the short run production?
A. When AP = 0
B. When MP = 0
C. When MP = AP
D. When MP starts to diminish
13. Which of the following statements best represents a difference between short-run and long-run cost?
A. Less than one year is considered the short run; more than one year the long run.
B. there are no fixed costs in the long run.
C. in the short run labor must always be considered the variable input and capital the fixed input.
D. all of the above are true.
14. The following information is to be used in answering the questions below.
Company A sells its product for $4 per unit, has variable costs per unit of $2.50, and its fixed cost is $50,000 per period.
Company B sells a product similar to A's for $3.80 per unit, has variable costs per unit of $1.80, and its fixed cost is $80,000 per period.
If production reaches 70,000 units per period, then
A. A's profit will be higher than B's.
B. B's profit will be higher than A's.
C. both will earn the same profit.
D. cannot tell which will make the higher profit.
15. Which of the following relationships is correct?
A. A. When marginal product starts to decrease, marginal cost starts to decrease.
B. When marginal cost starts to increase, average cost starts to increase.
C. When marginal cost starts to increase, average variable cost starts to increase.
D. When marginal product starts to decrease, marginal cost starts to increase.
16. Average fixed cost is:
A. AC minus AVC.
B. TC divided by Q.
C. AVC minus MC.
D. TC minus TVC.
17. The four-firm concentration ratio:
A. indicates the total profitability among the top four firms in an industry.
B. is an indicator of the degree of monopolistic competition.
C. indicates the presence and intensity of an oligopoly market.
D. is used by the government as a basis for anti-trust cases.
18. The following is not one of the strengths of the Cobb-Douglas production function:
A. both marginal product and returns to scale can be estimated from it.
B. it can be converted into a linear function for ease of calculation.
C. it shows a production function passing through increasing returns to constant returns and then to decreasing returns.
D. the sum of the exponents indicates whether returns to scale are increasing, constant or decreasing.
19. When a company is faced by a kinked demand curve, the marginal revenue curve
A. will be upward sloping.
B. will be horizontal.
C. will always be zero at the quantity produced.
D. will be discontinuous.
20. Which of the following is not true about the law of diminishing returns?
A It is a short run phenomenon.
B. t refers to diminishing marginal product.
C. It will have an impact on the firm's marginal cost.
D.It divides Stage I and II of the production process.
E. All of the above are true.
21. Which of the following is a reason for economies of scale?
A. fixed costs are spread out as volume increases.
B. the law of diminishing returns does not take effect.
C. input productivity increases as a result of greater specialization.
D. there is greater savings in transportation costs.
22. In finance, risk is most commonly measured by
A. the probability distribution
B. the standard deviation
C. the average deviation
D. the square root of standard deviation
23. When comparing two projects with different returns and different standard deviations, the risk measure which can be used is called the
B. certainty equivalent
C. coefficient of correlation
D. coefficient of variation
24. The company Blue Ribbon has estimated expected cash flows for 1996 to be as follows:
Probability Cash Flow
The expected value of cash flow is
25. If Coefficient of Output Elasticity (E) is greater than 1, it means that a 10% increase in all inputs will lead to ____________________________
A. a 20% increase of output
B. some magnitude of output either increase or decrease which is impossible to know unless we know the production function
C. atmost 10% increase in output
D. a decrease in output by 5%
26. The following production function
A. increasing returns to scale
B. constant returns to scale
C. decreasing returns to scale
D impossible to determine
27. In a perfectly competitive industry, if P (price) is greater than ATC(average total cost), in the long run:
A. firms would leave the industry to seek higher returns elsewhere
B. new firms will enter the industry resulting in lower price and elimination of excess profit
C. price will increase as the industry achieves long run equilibrium
D. none of the above
28. In which of the markets will the firm be facing the most elastic demand curve?
A. Perfect competition
C. Monopolistic Competition
29. The Herfindahl -hirschman Index provides
A. nfo regading price interaction of oligopolistic firms
B. info regarding concentration of market share by the larger companies in an industry
C. info regarding price elasticity of demand
D. info regarding cost side of oligopolistic firms
30. A monopolist's demand, revenue and cost curves are given as:
Demand: Q d = 1000 -2P
Total Cost: TC = 5000 + 50Q
Marginal Revenue: MR = 500 -Q
Marginal Cost: MC = 50
The profit maximizing output for the monopolist is:
A. 500 units
B. 450 units
C. 1000 units
D. impossible to determine
31. Given the total cost function
the fixed cost per unit produced (Average Fixed Cost) when Q = 10 is given by:
E. none of the above
Refer to the above diagram for a monopolistically competitive firm. Long-run equilibrium output will be:
A. greater than OE.
33. Suppose the Herfindahl Indexes for industries A, B, and C are 1,200, 5,000, and 7,500 respectively. These data imply that:
A. market power is greatest in industry A.
B. market power is greatest in industry B.
C. market power is greatest in industry C.
D. industry A is more monopolistic than industry C.
34. Monopolistically competitive firms:
A. realize normal profits in the short run but losses in the long run.
B. incur persistent losses in both the short run and long run.
C. may realize either profits or losses in the short run, but realize normal profits in the long run.
D. persistently realize economic profits in both the short run and long run.
35. Given the total cost function of a firm as TC = 100 +60Q +3Q^2,
The functional form of average variable cost (AVC) is:
A. AVC = 60Q +3Q^2
B. AVC = 100/Q + 60 +3Q
C. AVC = 60 + 3Q
36. Given production function
Q = 7X2 </SUP - .2X3
the marginal production at X =10 is
E. none of the above