Midterm Examination of Managerial Economics
Fall Term 2012, IMBA
I.
Short Answer Questions (12 questions, 60 points)
1. In each of the following instances, discuss whether the horizontal or vertical
boundaries have been changed, and whether they were extended or shrunk.
(1)General Motors divested Delphi Automotive Systems, which manufactures
automotive components, systems, and modules.
(2)Online auction service eBay acquired Skype, a provider of internet telephone
service.
2. A seller with a strong market power can use either package deal or two-part
pricing to leave buyers with zero buyer surpluses. Use both graphical and descriptive
analyses to explain why.
3. In order to raise total revenue, NYC Transit authority raises the price of one trip
ticket, the price of one-day pass, and the price of one-month pass, respectively. On
the other hand, it provides more discount incentives to Mass Transit card holders.
Explain why the NYC transit authority decides to make these fee changes.
4. Please analyze the impacts of the following simultaneous events on the
equilibrium price and equilibrium quantity in the coffee market: consumer’s incomes
decrease due to economic recession, and the price of imported coffee bean rises.
Both graphical and descriptive analyses are required.
5. A perfectly competitive firm currently faces the following conditions:
Price
Marginal
Revenue
Marginal
Cost
Average
Cost
Average
Variable Cost
Average
Fixed Cost
100
100
70
110
80
30
Please show the current conditions in a graph containing cost and revenue curves. As
a consultant of this perfectly competitive firm, what are you going to suggest the firm
to do in the short run?
6. When the annual Valentine’s Day is coming, the demands for rose flower,
chocolate, and love card suddenly increase. Please make comparisons in the change
size of price between these products. Explain your reasoning graphically and
descriptively.
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7. Right after the OPEC reduces the oil production, the world price of gasoline rises
significantly. However, the world price of gasoline will fall gradually over time. Use
the demand-supply diagram to explain why the reduction in oil production would
lead to significant price changes in the short run and insignificant price changes in
the long run.
8. V Cinema has many theaters that are located in different cities of Taiwan. All
branch theaters charge for the same price regardless of their locations. As a result,
there is always a shortage of seats (long queue) at Taipei theaters. However, one the
other hand, there is often a surplus of seats (empty seats) at other theaters in those
relatively less-developed cities. Please analyze the shortage problem in Taipei
theaters and the surplus problem in other theaters. Explain your
reasoning graphically and descriptively.
9. Please use the formula of the profit-maximizing advertising expenditure to answer
how a monopolist should adjust its advertising expenditure if each of the following
events occurs: the price of its product rises; the marginal cost of its production rises;
the advertising elasticity of demand for its product rises.
10. Suppose that you are the manager of a cable company proving two channels.
Your potential customers include two types of households. The following table
summarizes the marginal benefit (value) of a particular type of household from
watching a particular channel.
Household/Channel
News Channel
Entertainment Channel
Type One
200
20
Type Two
110
110
Suppose that the marginal cost of the cable company providing a channel to the
household is 50. Will you provide all channels to all types of household from the
efficiency perspective? What is your optimal pricing strategy from the efficiency
perspective?
11. Managerial economics teaches us that relevant costs should be considered and
irrelevant costs should be ignored while making decisions. Relevant costs may
be hidden and irrelevant costs may be shown in accounts. Please specify a decision
you would like to make and give examples of relevant costs that are hidden and
irrelevant costs that are shown in accounts for this particular decision.
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12. The National Collegiate Athletic Association (NCAA) restricts the amount that
colleges and universities may pay their student athletes. Suppose that there are just
two colleges in the NCAA: Ivy and State. Each must choose between paying athletes
according to NCAA rules and paying more. If both Ivy and State follow the NCAA
salaries, then each would earn $3 million. If one follows the NCAA salaries and the
other pays more than NCAA salaries, then the college paying more can attract better
players and would earn $5 million, while the college following NCAA would earn just
$1 million. If both colleges pay more than NCAA salaries, they would increase their
costs but not get better players, so both would earn $2 million. Construct a game
in strategic form to analyze the choices of Ivy and State, and identify
the equilibrium/equilibria.
II.
Discussion Questions (4 questions, 40 points)
1.The price of Chanel perfume is around $150 per fluid ounce, while the price of
bottled water is $1 per gallon. Tiffany buys 2 fluid ounces of Chanel and 10 gallons of
bottled water a month.
(A).Using relevant demand curves, illustrate Tiffany's choices. Illustrate how the
following changes will affect Tiffany's demand for Chanel perfume: (i) price
increases to $140 per fluid ounce, and (ii) decrease in price of another of Tiffany's
favorite perfumes.
(B).Tiffany spends more money each month on perfume than bottled water. Does
this necessarily mean that water gives her less total benefit than perfume? Use
appropriate demand curves in the graphs to address this question.
2.In January 2005, the world’s total supply of oil tankers amounted to 304.1 million
deadweight tons (dwt). During 2005, 28.0 million dwt of new tankers were
delivered into service, while 5.1 million dwt were scrapped or otherwise removed
from service. Hence, at the end of the year, the world’s total supply was 326.9
million dwt. Among tankers and chemical carriers in operation of 200,000 dwt or
larger, 60% by tonnage was less than 10 years old, 37% was 10–20 years old, and the
remainder was more than 20 years old. Typically, older tankers are more costly to
operate.
(A).Identify the following as either a short- or long-run decision: (i) lay-up (idling the
vessel); (ii) scrapping.
(B).Explain how the owner of a tanker should decide whether to continue to operate,
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lay-up, or scrap a vessel.
(C).The marginal cost of keeping a tanker in service (“lay-up equivalent”) is the
tanker’s operating cost minus the cost of lay-up. When tanker rates fall, identify
which tanker owners would first lay up.
3.Congress and the president decide that the United States should reduce air pollution
by reducing its use of gasoline. They impose a $0.50 tax for each gallon of gasoline
sold.
(A)Should they impose this tax on producers or consumers? Explain carefully using a
supply-and-demand diagram.
(B)If the demand for gasoline were more elastic, would this tax be more effective or
less effective in reducing the quantity of gasoline consumed? Explain with both words
and a diagram.
(C)Are consumers of gasoline helped or hurt by this tax? Why?
4.In 2004, U.S. consumer products manufacturers distributed 27.548 billion coupons
with a face value of over $280 billion, of which a mere 1.2% were redeemed by
consumers. Why do manufacturers spend millions of dollars to distribute coupons
when the redemption rate is so low? Why don’t they manufacturers directly cut the
wholesale prices of the products, which would be much cheaper to administer?
Some say that retailers would absorb a direct wholesale price cut instead of
passing it on to consumers. They argue that, by contrast, retailers cannot absorb the
value of coupons.
(A)Suppose that the retail sector is Monopoly. Compare
the equilibrium in the retail market with (i) a wholesale price cut of
50 cents and (ii) widespread distribution of 50-cent coupons.
(B)Explain how coupons may be used to discriminate among consumers on price.
Compare this explanation to the argument that retailers would absorb a wholesale
price cut.
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