ECO 500: Managerial Economics

Problem 01-23 (Essay, Autogradable)
Two months ago, the owner of a car dealership (and a current football star) significantly changed his sales manager’s compensation plan. Under the old plan, the manager was paid a salary of $6,000 per month; under the new plan, she receives 2 percent of the sales price of each car sold. During the past two months, the number of cars sold increased by 40 percent, but the dealership’s margins (and profits) significantly declined. According to the sales manager, “Consumers are driving harder bargains and I have had to authorize significantly lower prices to remain competitive.” What advice should you give the owner of the dealership?

Increase the percentage of the sales price the manager receives.
Offer the manager a percentage of profits rather than sales.
Pay the manager a fixed salary only.
Problem 01-21 (Essay, Autogradable)
Brazil points to its shrimp-farming industry as an example of how it can compete in world markets. One decade ago, Brazil exported a meager 400 tons of shrimp. Today, Brazil exports more than 58,000 tons of shrimp, with approximately one-third of that going to the United States. Brazilian shrimp farmers, however, potentially face a new challenge in the upcoming years. The Southern Shrimp Alliance – a U.S. organization representing shrimpers – filed a dumping complaint alleging that Brazil and five other shrimp-producing countries are selling shrimp below “fair market value.” The organization is calling for the United States to impose a 300 percent tariff on all shrimp entering the United States’ borders. Brazilian producers and the other five countries named in the complaint counter that they have a natural competitive advantage such as lower labor costs, availability of cheap land, and a more favorable climate, resulting in a higher yield per acre and permitting three harvests per year. In what many see as a bold move, the American Seafood Distributors Association – an organization representing supermarkets, shrimp processors, and restaurants – has supported Brazilian and other foreign producers, arguing that it is the Southern Shrimp Alliance that is engaging in unfair trade practices.

What type of rivalry exists between U.S.-based shrimp producers (represented by the Southern Shrimp Alliance) and foreign shrimp producers?

What type of rivalry exists between the members of the American Seafood Distributors Association and the U.S.-based shrimp producers?

Problem 01-19 (Essay, Autogradable)
You are the manager in charge of global operations at BankGlobal – a large commercial bank that operates in a number of countries around the world. You must decide whether or not to launch a new advertising campaign in the U.S. market. Your accounting department has provided the accompanying statement, which summarizes the financial impact of the advertising campaign on U.S. operations. In addition, you recently received a call from a colleague in charge of foreign operations, and she indicated that her unit would lose $8 million if the U.S. advertising campaign were launched. Your goal is to maximize BankGlobal’s value.

Pre-Advertising Campaign

Post-Advertising Campaign

Total Revenues

$18,610,900

$31,980,200

Variable Cost

TV Airtime

5,750,350

8,610,400

Ad development labor

1,960,580

3,102,450

Total variable costs

7,710,930

11,712,850

Direct Fixed Cost

Depreciation – computer equipment

1,500,000

1,500,000

Total direct fixed cost

1,500,000

1,500,000

Indirect Fixed Cost

Managerial salaries

8,458,100

8,458,100

Office supplies

2,003,500

2,003,500

Total indirect fixed cost

$10,461,600

$10,461,600

Should you launch the new campaign?

.

Problem 01-15 (Algo)
Approximately 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these addicts cost the U.S. economy $300 billion in medical expenses and lost productivity. Despite the enormous potential market, many biotech companies have shied away from funding research and development (R&D) initiatives to find a cure for drug and alcohol addiction. Your firm – Drug Abuse Sciences (DAS) – is a notable exception. It has spent $280 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $75 million today. Unfortunately, the firm’s opportunity cost of funds is 8 percent and it will take another five years before final approval from the Federal Drug Administration is achieved and the product is actually sold. Expected (year-end) profits from selling the drug are presented in the accompanying table.

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

$0

$0

$0

$0

$15,400,000

$17,500,000

$19,100,000

$22,700,000

$25,900,000

What is the net present value of the project?

Instruction: Round your answer to the nearest penny (2 decimal places). Use a negative sign (-) where appropriate.

$

Should DAS continue with its plan to bring the drug to market, or should it abandon the project?

Problem 01-14
Jamie is considering leaving her current job, which pays $75,000 per year, to start a new company that develops applications for smart phones.  Based on market research, she can sell about 50,000 units during the first year at a price of $4 per unit.  With annual overhead costs and operating expenses amounting to $145,000, Jamie expects a profit margin of 20 percent.  This margin is 5 percent larger than that of her largest competitor, Apps, Inc.

a. If Jamie decides to embark on her new venture, what will her accounting costs be during the first year of operation?  Her implicit costs?  Her opportunity costs?

Accounting costs:  $
Implicit costs:        $
Opportunity costs:  $

b. Suppose that Jamie’s estimated selling price is lower than originally projected during the first year.  How much revenue would she need in order to earn positive accounting profits?  Positive economic profits?

Revenue needed to earn positive accounting profits: $
Revenue needed to earn positive economic profits:   $

Problem 01-08 (Algo)
Jaynet spends $25,000 per year on painting supplies and storage space.  She recently received two job offers from a famous marketing firm – one offer was for $125,000 per year, and the other was for $105,000.  However, she turned both jobs down to continue a painting career. If Jaynet sells 35 paintings per year at a price of $5,000 each:

a. What are her accounting profits?

$

b. What are her economic profits?
Problem 01-09
Suppose the total benefit derived from a given decision, Q, is B(Q) = 20Q – 2Q2 and the corresponding total cost is C(Q) = 4 + 2Q2, so that MB(Q) = 20 – 4Q and MC(Q) = 4Q.

Instruction: Use a negative sign (-) where appropriate.

a. What is total benefit when Q = 2? Q = 10?

When Q = 2:
When Q = 10:

b. What is marginal benefit when Q = 2? Q = 10?

When Q = 2:
When Q = 10:

c. What level of Q maximizes total benefit?

d. What is total cost when Q = 2? Q = 10?

When Q = 2:
When Q = 10:

e. What is marginal cost when Q = 2? Q = 10?

When Q = 2:
When Q = 10:

f. What level of Q minimizes total cost?

g. What level of Q maximizes net benefits?

Problem 01-04 (Algo)
A firm’s current profits are $800,000. These profits are expected to grow indefinitely at a constant annual rate of 5 percent. If the firm’s opportunity cost of funds is 8 percent, determine the value of the firm:

Instructions: Round your responses to 2 decimal places.

a. The instant before it pays out current profits as dividends.

$ million

b. The instant after it pays out current profits as dividends.

$ million

Problem 01-07 (Essay, Autogradable)
It is estimated that over 100,000 students will apply to the top 30 M.B.A. programs in the United States this year.

a. Using the concept of net present value and opportunity cost, when is it rational for an individual to pursue an M.B.A. degree.

.

b. What would you expect to happen to the number of applicants if the starting salaries of managers with M.B.A. degrees remained constant but salaries of managers without such degrees decreased by 20 percent?

.