EC 515 Managerial Economics Module 1

The vice president has the option to purchase the company after five years. The purchase price for the company is set at 4 times earnings (profit), computed as average annual profitability over the next five years. In five years, the company is expected to be worth $10 million. On the following graph, use the green points (triangle symbols) to plot the vice president's expected profit from buying the company, for average annual profitability levels of $0, $500,000, $1,000,000, $1,500,000, and $2,000,000.

$0____________ $0_____________________________________ $10 mil $500,000__ $2,000,000__________________________ $8 mil ________________($500,000 X 4)________ ($10 mil - $2 mil) $1,000,000___ $4,000,000________________________ $6 mil $1,500,000____$6,000,000_______________________ $4 mil $2,000,000___$8,000,000________________________$2 mil

The vice president has the option to purchase the company after five years. The purchase price for the company is set at 4 times earnings (profit), computed as average annual profitability over the next five years. In five years, the company is expected to be worth $5 million. On the following graph, use the green points (triangle symbols) to plot the vice president's expected profit from buying the company, for average annual profitability levels of $0, $250,000, $500,000, $750,000, and $1,000,000.

$0____________ $0_____________________________________ $5 mil $250,000__ $1,000,000__________________________ $4 mil ________________($250,000 X 4)________ ($5 mil - $1 mil) $500,000___ $2,000,000________________________ $3 mil $750,000____ $3,000,000_______________________ $2 mil $1,000,000___$4,000,000________________________$1 mil Since the vice president's expected profit from the purchase decreases as average annual company profit goes up, this contract does not align the incentives of the vice president with the profitability goals of the company.

A consumer values a car at $20,000 and it costs a producer $15,000 to make the same car. If the transaction is completed at $18,000, the transaction will generate a. no surplus. b. $5,000 worth of seller surplus and unknown amount of buyer surplus. c. $2,000 worth of buyer surplus and $3,000 of seller surplus. d. $3,000 worth of buyer surplus and unknown amount of seller surplus.

$2,000 worth of buyer surplus and $3,000 of seller surplus.

A buyer values a house at $525,000 and a seller values the same house at $485,000. If sales tax is 8% and is levied on the buyer, then, what would be the highest price that the buyer would be willing to pay? a. $525,000 b. $485,000 c. $486,111 d. $523,800

$486,111

The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that she will buy the company after five years. For the first $150,000 of profit, the vice president's compensation is a flat annual salary of $50,000 plus 50% of company profits. Beyond the first $150,000 in profits, the vice president's compensation is the salary she receives at $150,000 profit plus 20% of company profits in excess of $150,000. On the following graph, use the purple points (diamond symbols) to plot the vice president's salary as a function of annual profit, for the profits levels of $0, $50,000, $100,000, $150,000, $200,000, $250,000, and $300,000.

$50+(50%×$0)=$50.00 $50+(50%×$50)=$75.00 $50+(50%×$100)=$100.00 $50+(50%×$150)=$125.00 $125.00+20%×($200−$150)=$135.00 $125.00+20%×($250−$150)=$145.00 $125.00+20%×($300−$150)=$155.00

A consumer values a car at $525,000 and a producer values the same car at $485,000. If sales tax is 8% and is levied on the seller, then the seller's bottom-line price is (rounded to the nearest thousand) a. $527,000. b. $524,000. c. $525,000. d. $500,000.

$527,000

A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, the transaction will generate: a. No surplus b. $4,000 worth of seller surplus and unknown amount of buyer surplus c. $6,000 worth of buyer surplus and $4,000 of seller surplus d. $6,000 worth of buyer surplus and unknown amount of seller surplus

$6,000 worth of buyer surplus and $4,000 of seller surplus

The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that he will buy the company after five years. For the first $150,000 of profit, the vice president's compensation is a flat annual salary of $50,000 plus 80% of company profits. Beyond the first $150,000 in profits, the vice president's compensation is the salary he receives at $150,000 profit plus 30% of company profits in excess of $150,000. On the following graph, use the purple points (diamond symbols) to plot the vice president's salary as a function of annual profit, for the profits levels of $0, $50,000, $100,000, $150,000, $200,000, $250,000, and $300,000.

0/50 $50+(80%×$0)=$50.00 50/90 $50+(80%×$50)=$90.00 100/130 $50+(80%×$100)=$130.00 150/170 $50+(80%×$150)=$170.00 200/185 $170.00+30%×($200−$150)=$185.00 250/200 $170.00+30%×($250−$150)=$200.00 300/215 $170.00+30%×($300−$150)=$215.00

A consumer values a car at $30,000 and a producer values the same car at $20,000. If a tax is levied on the seller, what level of tax will result in unconsummated transaction? a. 40% b. 25% c. 20% d. 0%

40%

A consumer values a house at $525,000 and a producer values the same house at $485,000. If the transaction is completed at $510,000, what level of tax rate will result in unconsummated transaction? a. 3% b. 1% c. 5% d. 2%

5%

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 takeoff. This increases fuel consumption and increases the time that passengers must sit in a cramped plane awaiting takeoff. Which of the following performance metrics would, if emphasized in evaluations, not incentivize airlines to remedy these issues? Check all that apply. a. A performance metric that gives positive marks for minimizing fuel consumption b. A performance metric that measures timeliness of the flight, where a flight is considered "on time" as long as the plane takes off by the scheduled departure time c. A performance metric that measures timeliness of the flight, where a flight is considered "on time" as long as the flight is boarded and away from the gate by the scheduled departure time

A performance metric that measures timeliness of the flight, where a flight is considered "on time" as long as the flight is boarded and away from the gate by the scheduled departure time

lanes frequently push back from the gate on time but then wait 2 feet from the gate until it is time to queue up for takeoff. This increases fuel consumption and increases the time that passengers must sit in a cramped plane awaiting takeoff. Which of the following performance metrics would, if emphasized in evaluations, incentivize airlines to engage in such practices? a. A performance metric that measures timeliness of the flight, where a flight is considered "on time" as long as the flight is boarded and away from the gate by the scheduled departure time b. A performance metric that measures customer satisfaction, based on customer comfort while on the plane c. A performance metric that measures timeliness of the flight, where a flight is considered "on time" as long as the plane takes off by the scheduled departure time.

A performance metric that measures timeliness of the flight, where a flight is considered "on time" as long as the flight is boarded and away from the gate by the scheduled departure time

In early 2010, many New York City teachers lost their jobs due to school closures. By late 2010, 1,800 had not yet applied for another teaching job, despite the fact that there were 1,200 openings. Which of the following types of programs would incentivize this behavior from unemployed teachers? a. A program that pays unemployed teachers a salary approximately equal to the salary of a fully employed teacher b. A program that assists unemployed teachers in finding and applying for vacant teaching positions in New York City c. A program that assists unemployed teachers with professional development, résumé creation, and networking

A program that pays unemployed teachers a salary approximately equal to the salary of a fully employed teacher

An advantage of capitalism is that a. It allows the market to self-regulate and clear itself b. It allows a person to follow his or her own self interest c. It allows voluntary transactions, which create wealth d. All of the above

All of the above

When using economic analysis, all choices involve a. profit guarantees b. only benefits c. accounting principles d. costs and benefits

Costs and benefits

The biggest advantage of capitalism is: a. Generates wealth with the help of government intervention b. That prices assists in moving assets from high valued to low value uses c. It forces involuntary exchanges d. Creates wealth by letting a person follow his or her own self-interest

Creates wealth by letting a person follow his or her own self-interest

In a 2015 National Bureau of Economic Research (NBER) working paper, researchers found that decreases in unemployment benefits lead to higher employment. Which of the following arguments best explains the findings of this paper? a. decreasing unemployment benefits reduces incentives to remain unemployed. b. Decreasing unemployment decreases the costs of remaining unemployed. c. Decreasing unemployment benefits increases incentives to remain unemployed.

Decreasing unemployment benefits reduces incentives to remain unemployed.

Economics is simply the study of how economies try to maximize GDP

False

In 2008, the Labour Party in Britain promised that patients would have to wait for no more than four hours to be seen in an emergency room. True or False: This policy incentivizes hospitals to bring patients immediately into the emergency room upon their arrival at the hospital.

False

Successful firms have large market shares. Their size assures their success.

False

The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that he will buy the company after five years. After the five-year time period, the purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years. Assume the company will be worth $10 million in five years. The goal of the owners of the firm is to maximize profits. True or False: This contract aligns the incentives of the new vice president with the profitability goals of the firm's owners.

False

The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that he will buy the company after five years. Compensation of the new vice president is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. The goal of the owners of the firm is to maximize profits. True or False: This contract aligns the incentives of the new vice president with the profitability goals of the firm's owners.

False

business resources are often unlimited due to easy stock market access. This promotes the avoidance of costs.

False

33) Price gouging a. Outlaw trade at prices above a certain price level b. Outlaw trade at prices below a certain price level c. Is an act of charging a high price to take advantage of shortages created by natural disasters d. None of the above

Is an act of charging a high price to take advantage of shortages created by natural disasters

The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that she will buy the company after five years. In this initial contract, compensation of the new vice president is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. The initial contract also stipulates that, after a five-year period, the purchase price of the company will be 4.5 times earnings (profit), computed as average annual profitability over the next five years. Assume the company will be worth $10 million in five years. The goal of the owners of the firm is to maximize profits. A contract that fixes the purchase price of the firm after five years at $2 million would make the incentives of the vice president more aligned with the goals of the firm, compared with the original contract.

MORE

A good policy __________ and a bad policy _______________________. a. concentrates on government intervention; refrains from government intervention. b. Moves an asset to higher value use; moves an asset to lower value use c. Moves an asset to lower value use; moves an asset to higher value use d. refrains from any government intervention; concentrates on government intervention

Moves an asset to higher value use; moves an asset to lower value use

Efficiency implies opportunity, a. Always b. Never c. Only if accompanied by secure property rights d. None of the above

Never

An individual's value for a good or service is a. the amount of money he or she used to pay for a good. b. the amount of money he or she is willing to pay for it. c. the amount of money he or she has to spend on goods. d. None of the above.

The amount of money he or she is willing to pay for it.

A politician in a small town notices that many citizens in the town cannot find work. In order to assist these individuals in finding work, the politician proposes that all unemployed adults be made eligible for a large monthly cash payment to help them meet basic needs during their job search. Which of the following is true regarding the goal alignment of this program? a. The goals of the politician and the goals are the job seekers would be aligned, since unemployed individuals would have a stronger incentive to remain employed. b. The goals of the politician and the goals of the job seekers would be aligned, since unemployed individuals would have a stronger incentive to look for work. c. The goals of the politician and the goals of the job seekers would not be aligned, since unemployed individuals would have a stronger incentive to remain unemployed.

The goals of the politician and the goals of the job seekers would not be aligned, since unemployed individuals would have a stronger incentive to remain unemployed.

Suppose Apple recently made a bid to acquire Netflix. As a result, the market value of Netflix rose. Furthermore, suppose the market value of Apple fell, but the decrease was smaller in magnitude than the rise in the market value of Netflix. What does this tell you about the value-creating potential of the deal? a. The market thinks that combining these assets will neither create nor destroy value. b. The market thinks that combining these assets will destroy value. c. The market thinks that combining these assets will create value.

The market thinks that combining these assets will create value.

In 2009, when Kraft bid $16.7 billion for Cadbury, Cadbury's market value rose. However, Kraft's market value fell by more. What does this tell you about the value-creating potential of the deal? a. The market thinks that combining these assets will destroy value. b. The market thinks that combining these assets will neither create nor destroy value. c. The market thinks that combining these assets will create value.

The market thinks that combining these assets will destroy value.

Suppose Apple recently made a bid to acquire Netflix. As a result, the market value of Netflix rose. Furthermore, suppose the market value of Apple fell by the same amount, exactly offsetting the rise in the market value of Netflix. What does this tell you about the value-creating potential of the deal? a. The market thinks that combining these assets will create value. b. The market thinks that combining these assets will neither create nor destroy value. c. The market thinks that combining these assets will destroy value.

The market thinks that combining these assets will neither create nor destroy value.

Another word for alternative is cost

True

Being a "first mover" does not always guarantee that a business will succeed

True

By focusing on a core competency, a manager is giving up other things that a business could do

True

Economic analysis encourages managers to think about alternatives

True

Economic decision making makes people consider the benefits and the costs when examining an alternative

True

Economics is a way to analyze business issues and can be used in decision making

True

In 2008, the Labour Party in Britain promised that patients would have to wait for no more than four hours to be seen in an emergency room. True or False: This policy incentivizes hospitals to make patients wait outside before allowing them to enter the emergency room upon their arrival at the hospital.

True

Suppose the government is considering penalizing airlines $27,500 per passenger each time passengers are made to remain on the plane on the tarmac for more than three hours before a flight. True or False: The threat of this fine could increase delays by forcing airlines to deplane and reboard more than necessary.

True

Suppose the government is considering penalizing airlines $27,500 per passenger each time passengers are made to remain on the plane on the tarmac for more than three hours before a flight. True or False: The threat of this fine incentivizes airlines to cancel more flights than before.

True

The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that she will buy the company after five years. After the five-year time period, the purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years. Assume the company will be worth $10 million in five years. The goal of the owners of the firm is to maximize profits. True or False: This contract does not align the incentives of the new vice president with the profitability goals of the firm's owners.

True

The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that she will buy the company after five years. Compensation of the new vice president is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. The goal of the owners of the firm is to maximize profits. True or False: This contract does not align the incentives of the new vice president with the profitability goals of the firm's owners.

True

The personality of the CEO is one of many factors that might contribute to business success.

True

Why are property rights so important in creating wealth?

With individual ownership of property, owners keep the value they create by moving assets to higher-valued uses thereby creating an incentive to engage in such transactions.

The rational-actor paradigm is: a. a tool for problem-solving b. a tool giving advice on how to live your life. c. a tool for analyzing behavior d. a tool for evaluating options for action

a tool for analyzing behavior

Taxes a. impede the movement of assets to higher-valued uses. b. reduce incentives to work. c. decrease the number of wealth-creating transactions. d. All of the above.

all of the above

The biggest advantage of capitalism is that a. it allows the market to self-regulate. b. it allows a person to follow his self interest. c. it allows voluntary transactions, which create wealth. d. All of the above

all of the above

Wealth-creating transactions are more likely to occur a. with private property rights. b. with strong contract enforcement. c. with black markets. d. All of the above.

all of the above

Which of these actions creates value? a. buying a struggling firm and selling off its assets for more than the purchase price b. baseball slugger drawing paying fans into the ballpark c. student increasing his decision making ability with an MBA d. all of the above

all of the above

Economics deal with: a. Human behavior b. Choosing between alternatives c. Market analysis d. A way to think about problems

all the above

Money-making opportunities result from: a. A lack of efficiency b. assets in lower-valued uses c. assets in higher-valued uses d. a failure to consider the longer-term

assets in lower-valued uses

Two similar surgeries, breast reconstruction and breast augmentation, have different prices. Breast augmentation is cosmetic surgery not covered by health insurance. Patients who want the surgery must pay for it themselves. Breast reconstruction following breast removal due to cancer is covered by insurance. The price of one of the surgeries has increased by about 10% each year since 1995, whereas the price of the other has increased by only 2% per year. Breast ______ surgery likely has the lower rate of inflation, since insurance coverage offers a stronger incentive to undergo breast _______ , driving up prices.

augmentation reconstruction

A buyer willingly buys if the price of a good is: a. above his value b. below his value c. at his value d. less than he expected

below his value

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 takeoff. This increases fuel consumption, and increases the time that passengers must sit in a cramped plane awaiting takeoff. Which of the following performance metrics would, if emphasized in evaluations, incentivize airlines to remedy these issues? Check all that apply. a. A performance metric that gives positive marks for minimizing fuel consumption b. A performance metric that measures timeliness of the flight, where flights are considered "on time" as long as the plane takes off by the scheduled departure time c. A performance metric that measures timeliness of the flight, where flights are considered "on time" as long as the flight is boarded and away from the gate by scheduled departure time

both a & b

Determining whether a policy is good or bad requires that we look: a. At those who benefit from the policy b. Those who lose because of the policy c. A profit and loss spreadsheet recording the effects of the policy. d. Both a and b

both a and b

if people behave rationally, optimally, and self-interestedly, a bad decision occurs for which of these reason(s)? a. the decision-maker did not have enough information to make a good decision. b. the decision maker-did not take the necessary time to make a good decision. c. the decision-maker did not have the incentive to make a good decision. d. both a and c

both a and c

A price ceiling can often be viewed as: a. the government setting price above market equilibrium price. b. an implicit tax on producers and an implicit subsidy to consumers. c. the government setting price below market equilibrium price. d. Both b and c.

both b and c

Price ceilings are primarily intended to help a. no one b. government c. producers d. consumers

consumers

In economic analysis: a. costs are viewed in terms of alternatives given up b. business managers are assumed to have all the needed data c. popular management jargon assumes an important role d. business resources are seen to be unlimited

costs are viewed in terms of alternatives given up

In 2009, when Kraft bid $16.7 billion for Cadbury, Cadbury's market value rose. However, Kraft's market value fell by more. The market believes that Kraft's bid was _________ the present value of the expected future profits from Cadbury.

greater than

Suppose you recently sold your used car. Assume that no new production was involved in this transaction. Wealth was created because the buyer's willingness to pay was ____________ the value of your willingness to sell. Suppose you sold the car for $24,000. If the minimum price, or "bottom line," you would accept for the car is $10,000 and the most the buyer is willing to pay is $32,000, then the seller surplus is $ and the buyer surplus is $ . The total surplus created by the transaction is $

greater than $14,000 seller surplus ($24,000 - $10,000) $8,000 buyer surplus ($32,000 - $24,000) $22,000 total surplus ($14,000 + $8,000)

Suppose an individual is looking to build a house in a plain that is prone to flooding. Because of the risk of damage due to flooding, the buyer's top dollar for building the house is only $280,000. Suppose the cost of building a house in this area is $330,000. A wealth-creating transaction is not possible since the seller's bottom line (or the cost of building the house) is _____________ the buyer's top dollar. The difference between the cost of building the house minus the buyer's top dollar is $_________________ Suppose the government subsidizes flood insurance for homes in the flood plain. Because of this, the buyer has access to very cheap insurance, worth an expected $70,000. Without such a subsidy, the high likelihood of flood results in extremely high rates for flood insurance. With this subsidy, the individual ________ incentivized to build a house in the flood plain.

greater than $50,000.00 is

In 2013, France's labor unions won a case against Sephora to prevent the retailer from staying open late and forcing its workers to work "antisocial hours." The cosmetic store does about 20 percent of its business after 9 p.m., and the 50 sales staff who work the late shift are paid an hourly rate that is 25 percent higher than the rate paid to workers on the day shift. Many of the late-hour workers are students or part-time workers, who are put out of work by these new laws. Because workers would prefer to work for high wages during late hours rather than being unemployed, this law has caused workers' time to be moved from -valued activities to -valued activities. True or False: In order to profit from this law, an individual could purchase Sephora products during the day and sell them at a higher price after 9 p.m.

higher lower True

In 2013, France's labor unions won a case against Sephora to prevent the retailer from staying open late and forcing its workers to work "antisocial hours." The cosmetic store does about 20 percent of its business after 9 p.m., and the 50 sales staff who work the late shift are paid an hourly rate that is 25 percent higher than the rate paid to workers on the day shift. Many of the late-hour workers are students or part-time workers, who are put out of work by these new laws. Forcing the retailer to close earlier forces the store's assets, such as the building and merchandise, to be moved from _______ -valued activities to _______ -valued activities. True or False: In order to profit from this law, an individual could purchase Sephora products during the day and sell them at a higher price during normal store hours.

higher lower False

Wealth generating activities always: a. produce positive externalities to society b. produce gains for one party c. increase wealth for everyone d. increase total surplus

increase total surplus

A price ceiling a. is a government-set maximum price. b. is an implicit tax on producers and an implicit subsidy to consumers. c. will create a surplus. d. causes an increase in consumer and producer surplus.

is an implicit tax on producers and an implicit subsidy to consumers.

The owners of a small manufacturing company have hired a vice president to run the company with the expectation that he will buy the company after five years. In this initial contract, compensation of the new vice president is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. The goal of the owners of the firm is to maximize profits. A contract that allowed the vice president to keep 4% of profits above $150,000 would make the incentives of the vice president _______ aligned with the goals of the firm, as compared to the original contract.

less

Suppose an individual is selling a car and has a "bottom line" of $22,000. Also suppose that another individual is looking to purchase a car, with a "top dollar" of $25,000. A wealth-creating transaction is possible, since the seller's bottom line is _______ the buyer's top dollar. The total surplus from such a purchase would be $_____ Suppose the government imposes a tax of $6,000 on the purchase of a car. With this tax, the wealth-creating sale of the car between these two buyers will_______ take place.

less than $3000.00 No longer

There are three levers one can push to correct bad decision-making. Which of the following is NOT such a lever? a. change the current decision makers' incentives b. give more information to the current decision maker. c. let someone else who has no relationship to the problem make the decision. d. let someone else who has better information or incentives make the decision.

let someone else who has better information or incentives make the decision.

Economic analysis: a. has little use in business decision making b. makes managers consider alternatives c. does not consider the costs of decisions d. is based on the idea that business resources are unlimited.

makes managers consider alternatives

Which of the following are examples of a price floor? a. Minimum wages. b. Rent controls in New York. c. Both a and b. d. None of the above.

minimum wages

The most important factor in business success is: a. luck b. market share c. being the first mover d. having a dynamic CEO e. Not really known if there is such a thing

not really known if there is such a thing

A well-designed organization is one in which employee incentives are aligned with: a. organizational design b. the relation-actor paradigm c. corporate incentives d. organizational goals

organizational goals

The absence of property rights contributes to: a. wealth b. poverty c. an equal playing field d. none of these

poverty

The difference between the minimum price the producer is willing to accept and the price the producer actually receives for a product is referred to as: a. market surplus. b. market shortage. c. consumer surplus. d. producer surplus.

producer surplus

Government regulation a. provides incentives to conduct business in an illegal black market b. plays no role in generating wealth c. is the best way to eliminate poverty d. does not enforce property rights

provides incentives to conduct business in an illegal black market

The one thing that unites all economists is their use of: a. organizational design b. the rational-actor paradigm c. incentives d. organizational history

the rational-actor paradigm