Fundamentals of managerial economics 9e mark hirschey solutions manual and test bank

Fundamentals of managerial economics 9e mark hirschey solutions manual and test bank
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Chapter 2

BASIC ECONOMIC RELATIONS

QUESTIONS & ANSWERS

Q2.1          In 2007, Chrysler Group said it would cut 13,000 jobs, close a major assembly plant and reduce production at other plants as part of a restructuring effort designed to restore profitability at the auto maker by 2008. Its German parent, DaimlerChrysler said it is looking into further strategic options with partners to optimize and accelerate the plan as it seeks the best solutions for its struggling U.S. unit. Does this decision reflect an application of the global or partial optimization concept?  Explain.

Q2.1           ANSWER

Chrysler’s decision to scale back employment at four assembly plants is a reflection of partial optimization because its decision alternatives were constrained by past decisions.  The complexity of a completely integrated decision analysis approach--or global optimization--sometimes confines its use to major planning decisions.  For many day‑to‑day operating decisions, managers often employ much less complicated partial optimization techniques.  Partial optimization abstracts from the complexity of a completely integrated decision process by concentrating on more limited objectives within the firm's various operating departments.  For example, the marketing department is usually required to determine the price and advertising policy that will achieve some sales goal given the firm's current product line and marketing budget.  Alternatively, a production department might be expected to minimize the cost of a specified quantity of output at a stated quality level.  In both instances, the fundamentals of economic analysis provide the basis for optimal managerial decisions.

Q2.2           “The personal computer is a calculating device and a communicating device.  Spreadsheets incorporate the best of both characteristics by allowing managers to determine and communicate the optimal course of action.”   Discuss this statement and explain why computer spreadsheets are a popular means for expressing and analyzing economic relations.

Q2.2           ANSWER

When tables of economic data are displayed electronically in the format of an accounting income statement or balance sheet, such tables are often referred to as spreadsheets.  Microsoft Excel and other spreadsheet software programs are popular means for expressing economic relations because they incorporate methods for manipulating and analyzing economic data.  When the underlying relation between economic data is very simple, tables and spreadsheets by themselves may be sufficient for analytical purposes.  In other instances, a simple graph or visual representation of the data can provide valuable insight.  With spreadsheet software, creating graphs is quick and easy.  When the complex nature of economic relations requires that more sophisticated methods of expression be employed, spreadsheet formulas can be used to generate equations, or analytical expressions of functional relationships, that offer a very useful means for characterizing the connection among economic variables.  Equations are frequently used to express both simple and complex economic relations.  When the underlying relation among economic variables is uncomplicated, equations offer a useful compact means for data description.  When underlying relations are complex, equations are helpful because they permit the powerful tools of mathematical and statistical analysis to be employed.

Q2.3           For those 50 or older, membership in AARP, formerly known as the American Association of Retired Persons, brings numerous discounts for health insurance, hotels, auto rentals, shopping, travel planning, etc.  Use the marginal profit concept to explain why vendors seek out bargain-priced business with AARP members.

Q2.3           ANSWER

The rise (or fall) in total profit associated with a one‑unit increase in output is marginal profit.  The marginal profit concept is critical in managerial economics because the optimization process requires an analysis of change in one or more important economic variables.  A total profit function, for example, will be maximized when marginal profits equal zero, Mπ = 0, so long as total profit is falling as output expands beyond that point.

Vendors seek out bargain-priced business with AARP members so long as marginal revenue exceeds marginal cost, and marginal profit is positive.  Particularly when fixed costs are high and marginal costs are very low, as they are in hotel lodging, for example, discounted or bargain-priced business with AARP members can bring a large marginal profit contribution and be very appealing to vendors.

Q2.4           If a baseball player hits .285 during a given season, the player’s lifetime batting average of .278 will rise.  Use this observation to explain why the marginal cost curve always intersects the related average cost curve at either a maximum or a minimum point.

Q2.4           ANSWER

The marginal observation can increase, decrease, or have no effect on the average.  If the marginal is greater than the average, the average will rise.  If the marginal is less than the average, the average will fall.  At points where the average reaches an extreme (maxima or minima) and is neither rising nor falling, the marginal will equal the average. In terms of cost, average cost (AC) is rising if marginal cost (MC) is higher than average cost.  Average cost is falling if MC < AC.  AC reaches a minimum if MC = AC, and AC is rising with an increase in production.  AC reaches a maximum if MC = AC, and AC is falling with an increase in production.

Q2.5           Southwest Airlines is known for offering cut-rate promotional fares to build customer awareness, grow market share, and boost revenues in new markets.  Would you expect total revenue to be maximized at an output level that is typically greater than or less than the short-run profit-maximizing output level?  Is such an approach incompatible with long-run profit maximization?

Q2.5           ANSWER

Marginal revenue equals zero at the output level where total revenue is maximized.  On the other hand, marginal revenue equals marginal cost at the output level where total profit is maximized.  Given a typically downward sloping demand curve and positive marginal costs, it is reasonable to expect that the revenue-maximizing output level where MR = 0 will be greater than the short-run profit maximizing output level where MR = MC > 0.  However, it is important to recognize that there is no incompatibility between short-run revenue maximization and long-run profit maximization.  Many successful firms achieve long-run profit maximization through a measured approach to building consumer awareness, market share, revenues, and long-term profits.

Total revenue is typically maximized at an output level that is typically greater than the short-run profit-maximizing output level, but such an approach can be and typically is fully compatible with long-run profit maximization.