1. Angela Bates, who works in a duplicating (photocopying) establishment for $20,000 per year, decides to open a small duplicating business of her own. She runs the operation by herself without hired help and invests no money of her own. She rents the premises for $15,000 per year and machines for $25,000 per year. She spends $10,000 per year on supplies (paper, ink, envelopes), electricity, telephone, and so on. During the year, her gross earnings are $75,000.

A. Is she successful in an accounting sense? Why or why not?

B. Is she successful in an economic sense? Why or why not?

C. Should she remain in business after her first year, if she has no strong preferences between working for herself and working for others in a similar capacity? Explain.

2. Airway Express has an evening flight from Los Angeles to New York with an average of 80 passengers and a return flight the next afternoon with an average of 50 passengers. The plane makes no other trips. The charge for the plane remaining in New York overnight is $1,200 and would be zero in Los Angeles. The airline company is contemplating eliminating the night flight out of Los Angeles and replacing it with a morning flight. The estimated number of passengers is 70 in the morning flight and 50 in the return afternoon flight. The one-way ticket for any flight is $200. The operating cost of the plane for each flight is $11,000. The fixed costs for the plane are $3,000 per day whether it flies or not.

A. Should the airline replace its night flight from Los Angeles to New York with a morning flight? Why or why not?

B. Should the airline remain in business? Why or why not?

3. Consider the case of Apple Computer, Inc. The firm currently experiences the following internal and external (i.e. market) characteristics:

• Easy access to distribution channels, as illustrated by direct-to-the-customer sales
• Achievement of constant returns to scale at relatively low levels of output (i.e. the firm achieves minimum efficient scale relatively quickly)
• Unique component suppliers
• Operation in a fragmented industry structure (i.e. the PC industry is fragmented)
• Price competition is the focus of competitive strategic tactics used in the PC industry
• High fixed costs relative to variable costs in the PC industry
• Relatively slow growth rates of demand in the PC industry

A. Based upon Porter's model, does the existence of easy access to distribution channels and small minimum efficient scale indicate high or low barriers to entry in the PC industry? Why?

B. Based upon Porter's model, do suppliers appropriate little or most of the value in the PC value chain? Why? 

C. Based upon Porter's model, is the intensity of rivalry in the PC industry high or low? Why?    .

4. Martin-Brower, a leading food distributor, pared its customer list to only eight fast-food chains. Its strategy was to satisfy the specialized needs of these customers at a very low cost. To do so, it stocked only their narrow product lines, located its warehouses near their locations, and geared its order-taking procedures to their purchasing cycles. While Martin-Brower was not the lowest-cost distributor in serving the market as a whole, it was the lowest-cost in serving its particular part of the market, the result being that it was fast-growing and relatively profitable. Based upon Porter's analysis and model, is it always a good strategy for a firm to serve a highly specialized market?

5. The makers of methyl methacrylate, Du Pont and Rohm and Haas, used to sell it at 85 cents per pound for commercial purposes, but for denture purposes it was sold to the dental profession for $45 per pound.

A. Assuming that there was no difference in quality, why would these producers find it profitable to charge different prices for this product?

B. In which market (the commercial market or the denture market) is the demand for the product relatively more inelastic? Why?

6. The price elasticity of demand for a managerial economics textbook sold in the U.S. is estimated to be -2.0, whereas the price elasticity of demand for managerial economics textbooks sold overseas is estimated to be -3.0. The U.S. market requires primarily hardcover textbooks with a marginal cost of $6; the overseas market is normally served with soft cover textbooks, having a marginal cost of only $4.50. What are the profit-maximizing prices in each market?

7. The Montana Company estimates its average cost to be $22 per unit of output when it produces 15,000 units. It wishes to earn 20% on its total investment, which is $175,000.

A. If the firm uses cost-plus pricing, what percentage mark-up over its average costs will it use? (Hint: It is not the 20% return on its total investment that it desires!)

B. Given your answer to part A, what price would it set?

C. Is the price in part B the optimal price? Why or why not?

8. An automobile manufacturer prices its automobiles utilizing a mark-up of 20% above its per-unit costs of production. The manufacturer believes that this mark-up will fully compensate the firm for the extraneous costs associated with producing automobiles and, in addition, return a decent profit. Currently, the average cost of producing an automobile to the firm is $10,000 and the price elasticity of demand for the manufacturer's automobiles is -4.

A. Based upon the current mark-up for this firm, what price per automobile is this firm currently charging?

B. Is the firm's 20% mark-up optimal? Why or why not?

C. Does it appear as though this firm is pricing its automobiles optimally? Why or why not? What advice would you give this firm with regards to its pricing policy?

9. The Hayes Company is composed of a marketing division and a production division. The production division produces a raw material that it transfers to the marketing division. There is an external market for this raw material, with the price in this market (which is perfectly competitive) being $18 per pound. The production division's average cost of production is $22 per pound. The VP of the production division argues that the transfer price for this raw material should be $22, otherwise this division cannot cover its costs. However, the VP of the marketing division argues that the transfer price for this raw material should be $18, otherwise this division will be paying more than it needs to. Which VP is correct? Why?

10. The California Corporation is composed of a marketing division and a production division. The marginal cost of producing a unit of the firm's product is $8 per unit, and the marginal cost of marketing the product is $6 per unit. Currently, the firm produces 6,200 units of the product, all of which is sold (i.e. transferred) to the marketing division for use in its advertising. The marketing division, in turn, uses advertising and packaging schemes to generate enough demand for the product so that it can be sold for $107 per unit. There is no external market for the product made by the production division, as the product is sold by the marketing division. The production and marketing divisions are involved in a transfer pricing dispute, in that the marketing division argues that the transfer price should be its marginal cost of $6 per unit while the production division claims it should be its marginal cost of $8 per unit. Which division is correct? Why?

11. Suppose that a change in tastes occurs in the Eurozone (the 17 European Union nations that currently use the euro [€] as their official, domestic currency) such that residents in Eurozone nations are prompted to purchase more goods and services from the U.S. In other words, Eurozone consumers purchase more imports from the U.S.

A. What would be the effect on the U.S. dollar-euro (i.e. U.S. dollars per euro, or $/€) exchange rate as a result of this situation?

B. Which currency has appreciated? Which currency has depreciated?

C. How would this situation affect the sales of a firm that produces in the U.S. but sells goods and services to Eurozone residents? Explain carefully.

12. Suppose a recent issue of the Financial Times of London states in an article that inflation in the U.S. is running at 6% while inflation in the U.K. is running at 4%. Many U.S. and U.K. firms sell their respective products not only in their domestic economies but also to each other. Further, often for these firms a significant portion of their profits come from sales of their respective products to each other.

A. Is the article good news or bad news for U.S. firms? Why?

B. Is the article good news or bad news for U.K. firms? Why?