Running Head: PROBLEMS: CHAPTERS 1 – 5
Managerial Economics:
Problems: Chapters 1 – 5
Abstract
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PROBLEMS: CHAPTERS 1 - 5
Answer Individual Problems 1-5 (page 12), 2-5 (page 23), 3-4 (page 37), 4-1 (page 49), and 5-4
(page 61). Submit your answers in a single Microsoft Word document and organize your
document using the individual problem numbers (e.g., Individual Problem 1-5).
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PROBLEMS: CHAPTERS 1 - 5
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Individual Problem 1-5 Goal Alignment Between Airlines and Flight Crews
Planes frequently push back from the gate on time, but then wait 2 feet away from the gate until
it is time to queue up for take-off. This increases fuel consumption, and increases the time that
passengers must sit in a cramped plane awaiting take-off. Why does this happen?
ANSWER:
In order to answer this question, I spent an extensive amount of time trying to search for the
answer online. While my answer is rather lengthy, I feel it is also important. I found several
articles related to this topic, but no clear answers to my questions.
The first source I found, actually answered the problem. Not only did it answer the problem, it
was posted on the Managerial Econ blog by the author of our textbook, Mr. Luke Froeb.
In his post, Froeb suggests that, “One look at the wage scale for flight crews tells you why this
occurs.” (Froeb, 2011) Because of the way in which pilots are paid, they are pushing back from
the terminal in order to start their flight pay, so they get paid more. This is based on an
assumption.
First, Mr. Froeb does not provide any sources to indicate the motive of the flight crew
(assumption). Second, not all airlines pay their pilots the same way (fact). Some are paid based
on when the doors are closed, but this is not true for all airlines. Some airlines even pay pilots on
comparable scales for pre-flight duties and for some, taxiing is not considered “in-flight”. While
this may be true on some airlines, it only applies on a case-by-case basis. Thirdly, the question
states that this increases fuel consumption. This is actually false. What is true is that the push
back vehicles are used to push planes back away from the terminal in order to save money on
fuel consumption.
PROBLEMS: CHAPTERS 1 - 5
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The next assumption I stumbled across on several blogs and posts suggested that airlines care
about their on-time static ratings for flights. By pushing back from the gate, the airline considers
this the take off time. However, the ground control tower, who ultimately gives a pilot clearance
to push back is not operated by a single airline, thus the “motive” or presumption given in our
text that individuals act in their own self interest may not be applicable in this case, as the ground
control operator is not paid by the individual airlines directly. You can presume that the pilots,
working for the company, want their airline to have high ratings, and are pressured into pushing
back early, however the ground control has ultimate authority over the pilot. Also, there are
several personal accounts of delays caused by other factors, such as waiting on baggage loading.
So, using the problem solving principles in the text,
1. Who is making the bad decision?
It depends. It could be a combination of the pilot, but ultimately the ground control tower.
2. Does the decision maker have enough information to make a good decision?
Yes. Both the pilot and ground control (jointly) have the information needed to make the
decision.
3. Does the decision maker have the incentive to make a good decision?
It depends. Yes and no depending on the situation. To fully answer this would require
additional study.
My research did lead me to an MIT study regarding airport congestion and push back rate control
that stated, “Airport surface congestion results in significant increases in taxi times, fuel burn and
emissions at major airports. (Simaiakis, et al., 2011)
PROBLEMS: CHAPTERS 1 - 5
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Further more, as a direct result of this study, as reported in the Huffington post earlier this year;
engineers from MIT actually developed an algorithm to reduce passenger wait times. (Moran,
2016)
The real most significant causes of increased fuel consumption and taxiing times was due to
airport congestion. From this we could gather that the ground control needed to more efficiently
manage the taxiing of aircraft. Perhaps it is likely that they did not have the incentive to due so,
but this could also be contributed to a lack of knowledge of the root of the problem, not merely
because the ground control tower personnel were merely acting in their own self interest.
Individual Problem 2-5 Kraft and Cadbury
When Kraft recently bid $16.7 billion for Cadbury, Cadbury’s market value rose, but Kraft’s
market value fell by more. What does this tell you about the value-creating potential of the deal?
Individual Problem 3-4 Opportunity Cost
The expression “3/10, net 45” means that the customers receive a 3% discount if they pay within
10 days; otherwise, they must pay in full within 45 days. What would the seller’s cost of capital
have to be in order for the discount to be cost justified? (Hint: Opportunity Cost)
(The opportunity cost of receiving a late paymnet is the foregone benefit of receiving the money
early. This is determined by a firms cost of captial. A 3% interest rate for 35 dayts corresponds
to an annual rate of about 3%x(365/35)=31% )
PROBLEMS: CHAPTERS 1 - 5
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Individual Problem 4-1 Extent Versus Discrete Problems
Identify which of the following are extent decisions.
a. Decide whether to expand an existing product into a new region.
b. what discount should be given on products during the upcoming holiday sale?
c. Should the advertising budget be changed for the upcoming year?
d. Should you develop a new product for an existing product line?
Individual Problem 5-4 Solar Panel Installation
A university spent $1.8 million to install solar panels atop a parking garage. These panels will
have a capacity of 500 kw, have a life expectancy of 20 years and suppose the discount rate is
10%.
a. If electricity can be purchased for costs of $0.10 per kwh, how many hours per year will the
solar panels have to operate to make this project break even?
b. If efficient systems operate for 2,400 hours per year, would the project break even?
c. The university is seeking a grant to cover capital costs. How big of a grant would make this
project worthwhile (to the university)?
PROBLEMS: CHAPTERS 1 - 5
References
Froeb, L. (2011, 10 7). Hurry up and wait. Retrieved 11 6, 2016, from Managerial Econ:
https://managerialecon.blogspot.com/2011/10/hurry-up-and-wait.html
Moran, L. (2016, 1 18). Sitting On Runway Waiting For Takeoff May Soon Be A Thing Of The
Past. Retrieved 11 6, 2016, from The Huffington Post:
http://www.huffingtonpost.com/entry/tarmac-flight-delays-mitstudy_us_569cb1e3e4b0b4eb759efc4b
Simaiakis, I., Khadilkar, H., Balakrishnan, H., Reynolds, T. G., Hansman, R. J., Reilly, B., &
Urlass, S. (2011, January). DEMONSTRATION OF REDUCED AIRPORT
CONGESTION THROUGH PUSHBACK RATE CONTROL. (M. I. (ICAT), Ed.)
Retrieved 11 05, 2016, from Massachusetts Institute of Technology:
http://web.mit.edu/hamsa/www/pubs/ICAT-2011-2.pdf
Strutner, S. (2014, 3 31). 16 Alarming Airline Secrets That Will Change How You Feel About
Flying. Retrieved 11 5, 2016, from The Huffington Post:
http://www.huffingtonpost.com/2014/03/31/airline-secrets_n_5043463.html
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