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BUSI 620 Week 1 Questions for Critical Thinking 1
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BUSI 620 Week 3 Questions For Critical Thinking 3
(SOLUTIONS)
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BUSI 620 Week 4 Test 1 (TWO DIFFERENT VERSIONS)
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BUSI 620 Week 8 Test 2 (100 % Score)

BUSI 620 Week 1 Discussion Board 1
BUSI 620 Research Paper (2 Papers)
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BUSI 620 Research Paper (2 Papers)
This Tutorial contains 2 Papers
Topic 1: Electronic Commerce
Topic 2: ECONOMIC IMPACT OF MINIMUM WAGE INCREASE

Choose 1 of the following 2 options for your Research or Interview
Paper. Your paper will be at least 7 double-spaced pages for the main
content (not including the cover page and reference page). Your
choices include:
A research paper
Steps for writing the research paper:
a) Choose a topic in managerial economics.
b) Submit the topic and the outline of the paper to the instructor
anytime for approval.
c) A minimum of 3 references besides the textbook are required.
Liberty University library has excellent resources for your search for
journals.
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Business 620

Critical Thinking One
Salvatore’s Chapter 1:
Discussion Questions: 9.
Problems: 6, 9,15 and spreadsheet problem (p.37)
Froeb et al.’s Chapter 3:
a. Individual problems: 3-1 and 3-3.
a. Discussion Questions: 9.
b. Problems: 1(a), 7, and 9.
Discussion Question 9: How is the concept of a normal return on
investment related to the distinction between business and economic
profit?

Problem 6: Determine which of the two investment projects of Problem
5 the manager should choose if the discount rate of the firm is 20
percent.
Problem 9: A woman managing a photocopying establishment for
$25,000 per year decides to open her own duplicating place. Her
revenue during the first year of operations is $120,000 and her
expenses are as follows:
Salaries to hired help
45,000
Supplies
15,000
Rent
10,000
Utilities
1,000
Interest on bank loan
10,000
Calculate (a) Explicit Costs, (b) Implicit Costs, (c) Business Profit, (d)
Economic Profit, and (e) Normal Return on Investment.

Spreadsheet Problem: Using the data below, where column A
represents student numbers, column B the finishing time for a 1 mile
race for students, and column C the age of the students.
a) Use the data analysis tools to plot a line graph of all the finishing
times.
b) Calculate the mean, median, mode, sample variance, sample
standard deviation, and coefficient of variation to statistically describe
the data.
c) Use Excel to find the covariance between the two variables. What
does the covariance indicate about the relationship between finishing
time and age?
Individual problem 3-1: You won a free ticket to see a Bruce
Springsteen concert (assume the ticket has no resale value). U2 has a
concert the same night, and this represents your next-best alternative
activity. The tickets to the U2 concert costs $80, and on any particular
day, you would be willing to pay up to $100 to see this band. Assume
that they are no additional costs of seeing either show. Based on the
information presented here, what is the opportunity cost of seeing
Bruce Springsteen?
Individual problem 3-3: Due to the housing bubble, many houses are
now selling for much less than their selling price just two or three
years ago. There is evidence that homeowners with virtually identical

houses tend to ask more if they paid more for the house. What fallacy
are they making?
a. Discussion Questions: 9.
b. Problems: 1(a), 7, and 9.
Discussion Question 9: How would you react to a sales manager’s
announcement that he or she has in place a marketing program to
maximize sales?
Problem 1(a): Given the following total-revenue function: TR=9Q-
Q2(a) Derive the total-, average-, and marginal- revenue schedules
from Q=0 to Q=6 by 1’s.
Problem 7: Given the following total-cost schedule, Derive the
average-and marginal-cost schedules
Problem 9: With the total-revenue curve of Problem 1 and the total-
cost curve from

Individual problem 4-5: Your new insurance firm processes claims
through its newer, larger high-tech facility and its older, smaller low-
tech facility. Each month, the high-tech facility handles 10,000 claims,
incurs $100,000 in fixed costs and $100,000 in variable costs. Each
month, the low-tech facility handles 2,000 claims, incurs $16,000 in
fixed costs and $24,000 in variable costs. If you anticipate a decrease
in the number of claims, where will you lay off workers?
Individual problem 4-6: A copy company wants to expand production.
It currently has 20 workers who share eight copiers. Two months ago,
the firm added two copiers, and output increased by 100,000 pages per
day. One month ago, they added five workers, and productivity also
increased by 50,000 pages per day. Copiers cost about twice as much
as workers. Would you recommend they hire another employee or buy
another copier?
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Question #2 - Discuss how e-commerce affects you and/or your
company.

#5 How important is saving for a household and the economy? How
much should be saved?
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(SOLUTIONS)
Business 620 Critical Thinking Two
Salvatore’s Chapter 4: Discussion Questions: 8 and 10, 11.
Problems: 3(a) and (b), 7, 9, and 14, 15.
Individual problems: 6-1, 6-3, and 6-5.
Problems: 8, 15(b) and (c), and appendix problem 2 (p. 215).

Discussion Question 8: If the price increase by 10 percent by how
much does the quantity of household
a) natural gas and
b) electricity change in the short run and the long run? (Hint: use the
price-elasticity values).
Discussion Question 10: Agricultural commodities are known to have
a price-inelastic demand and to be necessities. How can this
information allow us to explain why the income of farmers falls
a) After a good harvest?
b) In relation to the incomes in other sectors of the economy?
Discussion Questions: 11.
Suppose that the cross-price elasticity of demand between McIntosh
and Golden Delicious apples is 0.8 between apples and apple juice is
0.5 between apples and cheese is -0.4 and between apples and beer is
0.1 what can you say about the relationship between each set of
commodities
Problem 3: Starting with the estimated demand function for
Chevrolets given in Problem 2, assume that the average value of the
independent variables changes to N=225 million, I=12,000,
PF=10,000, PG=100 cents, A=250,000 and PI=0.

a) Find the equation of the new demand curve for Chevrolets.
b) Plot this new demand curve, D’C, and, on the same graph, plot the
demand curve for Chevrolets, DC, found in Problem 2(d).
Problem 7: The total operating revenues of a public transportation
authority are $100 million while its total operating costs are $120
million. The price of a ride is $1, and the price elasticity of demand for
public transportation has been estimated to be -0.4. By law, the public
transportation authority must take steps to eliminate its pricing deficit.
a) What pricing policy should the transportation authorty adopt?
Why? (b)
b) What price per ride must the public transportation authority charge
to eliminate the deficit if it cannot reduce costs?
Problem 9: A researcher estimated that the price elasticity of demand
for automobiles in the United States is -1.2, while the income elasticity
of demand is 3.0. Next year, U.S. auto makers intent to increase the
average price of automobiles by 5 percent, and they expect consumers’
disposable income to rise by 3 percent.
a) If sales of domestically produced automobiles do expect U.S auto
makers to sell next year?
b) By how much should domestic auto makers increase sales by 5
percent next year?
Problem 14: Suppose that a firm maximizes its total profits and has a
marginal cost of production of $8 and price elasticity of (-) 3. Find the
price at which the firm sells the product.
Problem15.

The research department of the Corn Flakes Corporation CFC
estimated the following regression for the demand of the cornflakes it
sells:
QX = 1.0 - 2.0P X + 1.5I + 0.8P Y - 3.0P M + 1.0A
Where QX = sales of CFC cornflakes, in millions of 10- ounce boxes
per year
P X = the price of CFC cornflakes, in dollars per 10- ounce box
I = personal disposable income, in trillions of dollars per year
P Y = price of competitive brand of cornflakes, in dollars per 10-
ounce box
P M = price of milk, in dollars per quart
A = advertising expenditures of CFC cornflakes, in hundreds of
thousands of dollars per year
This year, P X = $2, I = $ 4, P Y = $ 2.50, P M = $ 1, and A = $ 2.
Individual problems: 6-1, 6-3, and 6-5.
Individual problem 6-1: George has been selling 5,000 T-shirts per
month for $8.50. When he increased the price to $9.50 he sold only
4,000 T-shirts.
a) What is the demand elasticity?
b) If his marginal cost is $4 per shirt, what is his desired markup and
what is his initial actual markup?

c) Was raising the price profitable?
Individual problem 6-3: To conduct an experiment, AMC increases
movies tickets from $9 to $10 and measured the change in ticket sales.
Using the data over the following month, they concluded that the
increase was profitable. However, over the subsequent months, they
changed their monds and discontinued the experiment. How did the
timing affect their conclusion about profitability of increasing prices?
Individual problem 6-5: An end-of-aisle price promotions changes the
price elasticity of a good from -2 to -3. If the normal price $10,what
should be the promotional price be?
Problems: 8, 15(b) and (c), and appendix problem 2 (p. 215).
Problem 8: In a study published in 1980, B.B. Gibson estimated the
following price and income elasticities of demand for six types of
public goods.
a) Do these public goods conform to the law of demand? For which
public goods is demand price elastic?
b) What types of good are these public goods?

c) If the price or cost of college and university education increased by
10% and, at the same time, incomes also increased by 10%, what
would be the change in the demand for college and university
education?
Problem 15: Starting with the data from Problem 6 and the data of the
price of a related commodity for the years 1986 to 2005 given below,
we estimated the regression for the quantity demanded of a commodity
(which we now relabel Qx), on the price of the commodity (which we
now label Px), consumer income (which we now label Y), and the price
of the related commodity (Pz), and we obtained the following results
b) Evaluate the above regression results
c) What type of commodity is Z? Can you be sure?
Appendix problem 2:
a) Estimate the regression in Problem 5 based on Table 5-6 using
Excel’s regression function in the Data Analysis menu.
b) Using the coefficients found in the regression estimate, enter a
formula based in cells C6 through J6 to forecast the sales when quality
control goes from $2 million to $9 million a year.
c) Graph both the actual data and the forecast using the graphing
tools. Does the forecast vary much from the actual data
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#4 Discuss benefits and costs of unemployment benefits to individuals
and to the economy.
#5 Comment on the following statement: "A company should produce
and sell any product as long as there is a market for it."
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BUSI 620 Week 3 Questions For Critical Thinking 3
(SOLUTIONS)
Business 620
Critical Thinking Three

Salvatore’s Chapter 6: Discussion Questions: 1, 7, and 15.
Problems: 7 and appendix problems 1 and 3 (pp. 256–257).
Discussion Questions: 3, 11, and 12.
Problems: 4, 12, and 13.
Discussion Question 1:
a) What is forecasting? Why is it so important in the
management of business firms and other enterprises?
b) What are the different types of forecasting?
c) How can the firm determine the most suitable forecasting
method to use?
a) Which type of smoothing technique is generally better?
b) How do we determine which of two smoothing techniques
is better?
c) How can we forecast the values of a time series that
contains a secular trend as well as strong seasonal and
random variations?

Discussion Question 15: Explain why it is still useful to
pursue forecasting even though it is often off the market by
wide margins
Problem 7: The following table represents data on three
leading indicators for a three-month period. Construct the
composite index (with each indicator assigned equal weight)
and the diffusion index.
Appendix Problem 1: The following table reports the
Consumer Price Index for the Los Angeles area on a
monthly basis from January 1998 to December 2000 (base
year= 1982-1984). Eliminating the data for 2000, use Excel to
forecast the index for all of 2000 using a three- and six-
month average. Which provides a better forecast for 2000
using the data provided?
Appendix Problem 3: Forecast the data for 2000 again in
Problem 1 with exponential smoothing with w=0.3 and
w=0.7. Is this a better forecast than the moving average?
Discussion Questions: 3, 11, and 12.
Problems: 4, 12, and 13.
a) How is the law of diminishing returns reflected in the
shape of the total product curve?

b) What is the relationship between diminishing returns and
the stages of production?
Discussion Question 11: Minimum wage legislation requires
most firms to pay workers no less than the legistiated
minimum wage per hour. Using marginal productivity
theory, explain how a change in the minimum wage affects
the employment of unskilled labor
Discussion Question 12: It is always better to hire a more
qualified and productive worker than a less qualified and
productive one regardless of cost. True or false? Explain
Problem 4: Ms. Smith, the owner and manager of the Clear
Duplicating Service located near a university, is
contemplating keeping her shop open after 4pm and until
midnight. In order to do so, she would have to hire
additional workers. She estimated that the additional
workers would generate the following total output (where
each unit of output refers to 100 pages duplicated). If the
price of each unit of output is $10 and each worker hired
must be paid $40 per day, how many workers should Ms.
Smith hire?
Problem 12: Suppose that the production function for a
commodity is given by Q=10 √LK where Q is the quality of
output, L is the quantity of labor, and K is the quantity of
capital.

a) Indicate whether this production function exhibits
constant, increasing, or decreasing returns to scale.
b) Does this production function exhibit diminishing
returns? If so, when does the law of diminishing returns
begin to operate? Could we ever get negative returns?
Problem 13: Indicate whether each of the following
statements is true of false and give the reason.
a) A firm should stop expanding output after reaching
diminishing returns
b) If large and small firms operate in the same industry, we
must have constant returns to scale.
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Question #1 - Tetrangle Manufacturing has fixed costs of
$2,160 per day. The firm manufactures bicycle component
upgrade kits. The kits have a short-run average variable
cost of $48 and are sold for $66 each.
What is the breakeven level of daily output for the firm?
What is the degree of operating leverage when the daily
output is Q = 170?
Question #5 - As an employer wants to reduce the
production cost during the economic recession, he/she could
choose to (1) lay off some workers without changing wages
or (2) keep all workers but cut wages for all. Which method
would you choose? Why?
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(SOLUTIONS)

Business 620
Critical Thinking Four
a) Discussion Questions: 2 and 10.
b) Problems: 3, 11,12 and spreadsheet problem 1 (p. 357).
a) Problems: 7, 11, and spreadsheet problem 1.
a) Individual problems: 9-2, 9-3 and 9-4.
a) Individual problems: 11-4 and 11-5.

a) What is the distinction between marginal cost and
incremental cost?
b) How are sunk costs treated in managerial decision
making? Why?
Discussion Question 10: What are the aim, usefulness, and
shortcomings of
a) Cost-volume-profit analysis and
b) The concept of operating leverage?
Problem 3:Airway Express has an evening flight from LA to
NY with an average of 80 passengers and a return flight the
next afternoon with an average of 50 passengers. The plane
makes no other trip. The charge for the plane remaining in
NY overnight is $1,200 and would be zero in LA. The airline
is contemplating eliminating the night flight out of LA and
replacing it with a morning flight. The estimated number of
passengers is 70 in the morning 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 cost for the plane is $3,000 per day whether it flies
or not.

a) Should the airline replace its night from LA with a
morning flight?
b) Should the airline remain in business?
Problem 11: The Goldberg- Scheinman Publishing
Company is publishing a new managerial economics text for
which it has estimated the following total fixed and average
variable costs.
Total fixed costs:
Copy editing
Typesetting
Selling and promotion
10,000
70,000
20,000
Total fixed costs:
$100,000
Average variable costs:
Printing and binding

Administrative costs
Sales commissions
Bookstore discounts
Author’s royalties
6
2
1
7
4
Average variable costs
$20
Project selling price
$30
Determine the breakeven output and total sales revenues
and draw the cost-volume-profit chart
Determine the output that would generate a total profit of
$60,000 and the total sales revenues at that output level;
draw the cost-volume-profit chart.

Spreadsheet problem 1: For the following table, calculate in
Excel the average fixed costs (AFC), the average variable
cost (AVC), the average total costs (ATC), and the marginal
costs (MC).(note total fixed cost=$30)
a) Problems: 7, 11, and spreadsheet problem 1.
Problem 7: From figure 9-4, determine the effect of a 33
percent tariff on commodity X
Problem 11: Most book publishers pay authors a percentage
of the revenue from book sales. Explain the conflict that this
creates between publishers and authors.
Spreadsheet problem 1: If the market supply function of a
commodity is QS=3,250 and
a) the market demand function is QD=4,750-50P is
expressed in dollars, use Excel to calculate values QD and
QS for P from 25 to 50 in 1’s.
b) If the market demand increased to Q’D=5,350-50P, what
is the equilibrium price?

c) If the market demand decreased to Q’’D=4,150-50P, what
is the equilibrium price?
d) For (a)-(c), if TC=0.005Q2-Q, what is the profit in each
case?
Individual Problem 9-2
Because beer and marijuana are seen as substitutes, beer
sellers would have opposed the legalization of marijuana.
But since snack foods are a complement to marijuana, snack
food sellers would have been in favor of legalization of
marijuana.
‘Individual problem 9-3: Snack food vendors and beer
distributors earn some monopoly profits in their local
markets but see them slowly erode from various new
substitutes. When CA voted on legalizing marijuana, which
side do you think that California beer distributors were on?
What about the snack food vendors? Why?

Individual problem 9-4: Relative to managers in more
monopolistic industries, are managers in more competitive
industries more likely to spend their time on reducing costs
or pricing strategies?
Individual problem 11-4: How does a decrease in US interest
rates affect the EU/US exchange rate?
Individual problem 11-5: How will a dollar devaluation
affect businesses and consumers in the twin cities of El Paso,
US and Juarez, Mexico?
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BUSI 620 Week 4 Test 1 (TWO DIFFERENT VERSIONS)

The level of sales in May, June, July, and August were 84,
92, 83, and 89, respectively. What is the four-period moving
average forecast of sales in September?
If the t ratio for the slope of a simple linear regression
equation is equal to 1.614 and the critical values of the t
distribution at the 1% and 5% levels of significance,
respectively, are 3.499 and 2.365, then the slope is
Which of the following is a leading economic indicator?
Economies of scope refers to the decrease in average total
cost that can occur when a firm
The forecast level of sales for the month of May was 240
units. Actual sales in May turned out to be 200 units. Use an
exponential smoothing coefficient of 0.8 to forecast sales for
June
Application of simple linear regression analysis to the
estimation of a demand equation has yielded the following:
Q = 24 - 2 P If the current product price is P=$6 and the
quantity sold per time period is Q=10, then the error (e) for
the current time period is equal to (actual quantity sold -
estimated quantity sold)
One difference between foreign and domestic demand for a
commodity exported by the U.S. is that

Monica quit her $50,000 per year job, purchased a building
that was previously rented by the operator of a candy store
for $1,500 per month, and used the space to breed and sell
tropical fish. In her first year she made a business profit of
$60,000. What was her economic profit?
As the economy emerged from the most recent recession,
household income rose by 6%. Over the same period, total
expenditures on beef increased by 3%. Assuming that all
other economic variables were held constant,
Which of the following would be referred to as
"outsourcing"?
Which of the following is a question that is uniquely relevant
to the subject of business ethics?
Of the following types of costs, which is most likely a fixed
cost for a shoe manufacturer?
Mr. D’s Barbeque of Pickwick, TN produces 10,000
dryrubbed rib slabs per year. Annually Mr. D’s fixed costs
are 50,000. The average variable cost per slab is a constant
$2. The average total cost per slab then is
Which of the following is not a qualitative forecasting
technique?
If the price elasticity of demand for a product is -5, and the
income elasticity of demand for the product is 2.5. If a 0.5%

decrease in product price as accompanied by a 1% decrease
in consumer income, the firm's total sales will
Which of the following would most likely make the demand
for an item more elastic?
The price of a firm's product increases from $5 to $6. As a
result, the quantity demanded of the product declines from
600,000 to 500,000. The price elasticity of demand for the
good is equal to (Use the arc price elasticity of demand)
Regression analysis was used to estimate the following
seasonal forecasting equation: St = 124 + 18 D1 - 46 D2 - 28
D3 + 2.5 T
D1 is a dummy variable that is equal to one in the first
quarter and zero otherwise; D2 is a dummy variable that is
equal to one in the second quarter and zero otherwise; and
D3 is a
dummy variable that is equal to one in the third quarter and
zero otherwise. Forecast the level of sales in the second
quarter of time period ten (T=10).
A computer manufacturer can produce 5 computers for
$5,000 and 10 computers for $7,500. Based on this
information, what is the marginal cost per computer of the
6th through 10th computer?

The Country Music Hall of Fame is considering lowering
admission prices to increase gross revenue. This plan will
work if the price elasticity of demand for tickets is
The theory of the firm postulates that the primary objective
of managers is to maximize
If three of the eleven leading indicators move up, and the
remaining eight are constant, the diffusion index is
Which of the following is a business function that is a part of
logistics?
Which of the following is not viewed by firms as an
advantage of electronic commerce over traditional
commerce?
A multiple regression analysis based on a data set that
consists of 30 observations yielded the following estimated
demand equation: Q = 120 - 1.1 P + 0.04 I + 0.90 A where P
is price, I is income, and A is advertising. If price is equal to
$1,000, income is equal $20,000, and advertising
expenditures are equal to $500, then the predicted quantity
demanded (Q) is
What is the present value of $1.21 received at the end of two
years if the interest rate is 10% and compounding is annual?
The price elasticity of demand for a firm's product is equal
to -1.8. The firm currently sells 4,000 units per day at a price

of $2. If the firm increases its product price by 10%, then it
can expect to sell approximately
A leading indicator is a measure that usually
A security system company’s total production costs depend
on the number of systems produced according to the
following equation,
Total costs = $10,000,000 + $2,000 Q where Q is the quantity
produced. What is the average total cost of production when
20,000 uits are produced?
Buyers consider gasoline and SUV to be complements. If
gasoline price increases, what would you expect to occur in
the SUV market?
Which of the following is an explicit cost to a firm?
A country that has an abundance of cheap labor will tend to
If Sam’s, a local watering hole, increased the price of a pint
of Guinness by 20%, it estimates the number of MBA
students purchasing Guinness would decrease by 4%. Based
on this data
Use the information about marginal cost (MC) and marginal
revenue (MR) that is presented in the table below to
determine the profit maximizing level of output.
A baseketball company is considerign purchasing a new
machine that doubles capacity from producing 100 balls to

200 balls per day. The machine will occupy 1,000 square feet
of unused space on the facotry floor. Which costs are
irrelevant in this decision to purchase a machine?
Regression analysis was used to estimate the following linear
trend equation:
St = 10.5 + 0.25 t
Use this equation to forecast the value of the dependent
variable (St) in time period of 10
In a free-enterprise system, profit is socially desirable
because it
If you are trying to determine the value of a firm, which of
the following factors would be relevant?
A firm that has total fixed costs of $40,000 sells its output for
$250 per unit and has an average variable cost of $150. If the
firm's cost and revenue curves are linear, how much output
must the firm produce to break even?
A firm currently produces 2,500 units of output per week.
After an additional worker is hired, output rises to 2,620
units per week. If the weekly wage paid to a worker is $480,
what is the firm's short-run marginal cost?
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2. Why are cartels unstable and why do they often fail?
5. Respond to the charge that immigrants flood the labor
market and drive down wages in the U.S.
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(SOLUTIONS)
Business 620
Critical Thinking Five

a) Discussion Questions: 2,3 and 8.
b) Problems: 1 and 5.
Froeb and McCann's Chapter 10:
a) Individual problems: 10-4.
a) Discussion Questions: 11,12 and 13.
b) Problems: 2, 6, and 10.
Discussion Question 2: (a) What are the advantages of the
Herfindahl index over concentration ratios in measuring the
degree of concentration in an industry? (b) What is the
disadvantage of both?

DQ3: What is the difference between limit pricing and
contestable markets?
Discussion Question 8: In what way does OPEC resemble a
cartel? How successful was it?
Problem 1: Find the Herfindahl index for an industry
composed of (a) three firms—one with 70 present of the
market, and the other two with 20 and 10 percent of the
market, respectively; (b) one firm with a 50 percent share of
the market and 10 other equal-sized firms; (c) 10 equal-sized
firms.
Problem 5: Starting with the reaction functions of duopolists
A and B from Problem 4, find the Cournot solution
algebraically.
a) Individual problems: 10-4.
Individual problem 10-4: Examine the US passenger airline
industry using the Five Forces. Is this an attractive industry?
Why or why not?

DQ11: Do the duopolists in a Cournot equilibrium face a
prisoners’ dilemma? Explain.
Discussion Question 12: How did the 1971 law that banned
cigarette advertising on television solve the prisoners’
dilemma for cigarette producers?
Discussion Question 13: (a) What is the meaning of tit-for-
tat in game theory? (b) What conditions are usually required
for tit-for-tat strategy to be the best strategy?
Problem 2: From the following payoff matrix, where the
payoffs are the profits or losses of the two firsts, determine
(a) whether firm A has a dominant strategy, (b) whether
firm B has a dominant strategy, (c) the optimal strategy for
each firm, and (d) the Nash equilibrium, if there is one.
Problem 6: Explain why the payoff matrix in problem 1
indicates that firms A and B faces the prisoner’s dilemma
Problem 10: Given the following payoff matrix, (a) indicate
the best strategy for each firm. (b) Why is the entry-
deterrent threat by firm A to lower the price credible to B?
(c) What could firm A do to make its threat credible without
building excess capacity?

Individual problem 15-4: The following represents the
potential outcomes of your first salary negotiation after
graduation: Assuming this is sequential move game with the
employer moving first, indicate the most likely outcome.
Does the ability to move first give the employer an
advantage? If so, how? As the employee, is there anything
you could do to realize a higher payoff?
Individual problem 15-5: Every year, management and
labor renegotiate a new employment contract by sending the
proposals to an arbitrator who chooses the best proposal
(effectively giving one side or the other $1 million). Each side
can choose to hire, or not hire, an expensive labor lawyer (at
the cost of $200,000) who is effective at preparing the
proposal in the best light. If neither hires lawyers or if both
hire lawyers, each side can expect to with about half of the
time. If only one side hires a lawyer, it can expect to win
three-quarters of the time.
a) Diagram this simultaneous move game
b) What is the Nash Equilibrium of the game?
c) Would the sides want to ban lawyers?
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1. Why does an exporter face a foreign exchange risk?
How can the exporter hedge its foreign exchange risk?
5. Do you think the interest on pay day loans is too high or
just right? Should Christians charge poor people on
interest?
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(SOLUTIONS)

Business 620
Critical Thinking Six
a) Discussion Questions: 7, 8,11, and 13.
b) Problems: 5,12 and spreadsheet problem 1 (p. 523).
a) Individual problems: 14–1 and 14–4.
Discussion Question 7: Quantity discounts are not a form of
price discrimination because the firm saves on handling
large orders? True or false? Explain
Discussion Question 8

(a) Why are first- and second-degree price discrimination
less common than third- degree price discrimination? (b)
Are lower airline fares at midweek an example of third-
degree price discrimination? (c) Under what conditions
would it not be useful to charge different prices in different
markets (i. e., practice third-degree price discrimination)
even if possible?
Discussion Question 11: How is the transfer price of an
intermediate product determined when:
a) There is no external market for the intermediate product
b) A perfectly competitive external market for the
intermediate product exists
c) An imperfectly competitive external market for the
intermediate product exists?
Discussion Question 13: What are:
a) The advantages of cost-plus pricing?
b) The disadvantages of cost-plus pricing?
c) Why is incremental cost pricing the correct pricing
method? Why is full-cost pricing equal to it?

Problem 5
The Dairy Farm Company, a small producer of milk and
cheese, has estimated the quantities of milk and cheese that
it can produce with three levels of total expenditures or total
costs. These are indicated in the following table. If the price
of milk (product A) and the price of cheese (product B) that
the firm receives are $ 1 each per unit of the products, draw
a figure showing the maximum total profi t (p) that the firm
can earn at each level of TC and the overall maximum profit
that the firm can earn for the three different levels of TC.
Problem 12:
a) Will a monopolist’s total revenue be larger with second-
degree price discrimination when the batches on which it
charges a uniform price are larger or smaller? Why?
b) How does a two-part tariff differ from bundling?
Spreadsheet Problem 1: Using a spreadsheet like the
following, entering formulas for the total revenue and
consumers surplus, and given the following demand curve of
a consumer for a monopolist product Q=14-2p

a) Find the total revenue of the monopolist when it sells 6
units of the commodity without practicing any form of
discrimination. What is the value of the consumer’s surplus?
b) What would be the total revenue of the monopolist if it
practiced first-degree price discrimination? How much
would the consumers’ surplus be in this case?
c) What if the monopolist charged P=$5.50 for the first 3
units of the commodity and P=$4 for the next 3 units – what
type of price discrimination is this?
Individual Problem 14-1: Why might Mattel set a much
lower contribution margin on its Barbie dolls than on the
accessories for the dolls?
Individual Problem 14-4: A manufacturer of microwaves
has discovered that male shoppers have little value for
microwaves and attribute almost no extra value to an auto-
defrost feature. Female shoppers generally value
microwaves more than men and attribute value to the auto-
defroster feature. There is little additional cost to
incorporating auto defrost feature. Since men and women

cannot be charged different prices for the same product the
manufacturer is considering introducing two different
models. The manufacturer has determined that men value a
simple microwave at $70 and one with auto defrost at $80
while women value a simple microwave at $80 and one with
auto defrost at $150. If there is an equal number of men and
women, what pricing strategy will yield the greatest
revenue? What if women compromise the bulk of microwave
shoppers?
Discussion 8: What is the basic difference between using a
subsidy to induce producers to install antipollution
equipment and a tax on producers who pollute?
Discussion 10: Given the difficulties that the regulation of
public utilities faces, would it not be better to nationalize
public utilities, as some European countries have done?
Explain your answer

Problem 12: Determine whether the Justice Department
would challenge a merger between two firms in an industry
with 10 equal sized firms, based on its 1984 Herfindahl-
index guidelines only
Problem 13: Explain:
a) In what way the U.S. trucking industry exemplified the
capture theory hypothesis of government regulation prior to
the passage of the Motor Carrier Act of 1980 and
b) The result of the passage of the Motor Carrier Act in
1980.
Problem 15: From the following figure referring to natural
monopolist, indicate
a) The best level of output, price, and profit per unit and in
total for the monopolist
b) The best level of output and price with a lump sub tax
that would eliminate all monopolists profits
c) The best level of output, price and profits per unit and in
total with a $3 per unit tax collected from the monopolist,
and

d) The best level of output and profit per unit and in total if
the government sets the price of the product or service at
$10.
e) Which is the best method of controlling monopoly power?
Why?
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(SOLUTIONS)
Business 620
Critical Thinking Seven
Salvatore's Chapter 14:

b) Problems: spreadsheet problems 1 and 2.
b) Individual problems: 19–5 and 19–6.
a) Discussion Questions: 7.
b) Problems: 8, 10, and spreadsheet problem 1.
Discussion Question 12: What is the rationale behind the
minimax regret rule? What are some of the less formal and
precise methods of dealing with uncertainty? When are these
useful?

Discussion Question 15: How does the adverse selection
problem arise in the credit-card market? How do credit-
card companies reduce the adverse selection problem that
they face? To what complaint does this give rise?
Spreadsheet Problem 1: An individual has to choose between
investment A and investment B. The individual estimates
that the income and probability of the income from each
investment are as given in the following table.
Investment A
Investment B
Income
Probability
Income
Probability
4,000
0.2
4,000
0.3
5,000
0.3

6,000
0.4
6,000
0.3
8,000
0.3
7,000
0.2
Using Excel’s statistical tools, calculate the standard
deviation of the distribution of each investment.
Which of the two investments is more risky?
Which investment should the individual choose?
Spreadsheet Problem 2: An individual is considering two
investment projects. Project A will return a zero profit if
conditions are poor, a profit of $4 if conditions are good, and
a profit of $8 if conditions are excellent. Project B will return
a profit of $2 if conditions are poor, a profit of $3 if
conditions are good, and a profit of $4 if conditions are

excellent. The probably distribution of the conditions is as
follows:
Conditions:
Poor
Good
Excellent
Probability
40%
50%
10%
Using Excel, calculate the expected value of each project and
identify the preferred project according to this criterion.
Assume that the individual’s utility function for profit is
U(X) =X-0.05X2. Calculate the expected utility of each
project and identify the preferred project according to this
criterion.
Is this individual risk adverse, risk neutral, or risk seeking?
Why?

Individual Problem 17-1: You’re the manager of global
opportunities for a US manufacture, who is considering
expanding sales into Europe. Your market research has
identified three potential market opportunities: England,
France, and Germany. If you enter the English market, you
have a 0.5 chance of a big success (selling 100,000 units at a
per-unit profit of $8), a 0.3 chance of moderate success
(selling 60,000 units at a per-unit profit of $6), and a 0, 2
chance of failure (selling nothing). If you enter the German
market, you have a 0.2 chance of huge success (selling
150,000 units at a per-unit profit of $10), a 0.5 chance of
moderate success (selling 70,000 units at a per-unit profit of
$6), and a 0.3 chance of failure (selling nothing). If you can
enter only one market, and the cost of entering the market
(regardless of which market you select) is $250,000, should
you enter one of the European markets? If so, which one? If
you enter, what is your expected profit?
Individual Problem 17-4: Your company has a customer
who is shutting down a production line, and it is your
responsibility to dispose of the extrusion machine. The
company could keep it in inventory for possible future
product and estimates that the reservation value of $250,000.
Your dealings on the second-hand market lead you to believe
that these is a 0.4 chance a random buyer will pay $300,000 a
0.25 chance the buyer will pay $350,000, a 0.1 chance the

buyer will pay $400,000, and a 0.25 chance it will not sell. If
you must commit to a posted price, what prices maximizes
profit?
b) Individual problems: 19–5 and 19–6.
Individual Problem 19-5: Soft selling occurs when a buyer is
skeptical of the usefulness of a product and the seller offers
to set a price that depends on realized value. For example,
suppose you’re trying to sell a company a new accounting
system that will reduce costs by 10%. Instead of naming that
price, you offer to give them the product in exchange for
50% of their cost savings. Describe the information
asymmetry, the adverse selection problem, and why soft
selling is a successful signal.
Individual Problem 19-6: You need to hire some new
employees to staff your start-up venture. You know that
potential employees are distributed throughout the
population as follows, but you can’t distinguish among them:
Employee Value
Probability
$50,000
0.25
$60,000

0.25
$70,000
0.25
$80,000
0.25
What is the expected value of five employees you hire?
a) Discussion Questions: 7.
b) Problems: 8, 10, and spreadsheet problem 1.
a) When can the NPV and the IRR methods of evaluating
investment projects provide contradictory results?
b) How can this arise?
c) Which method should then be used? Why?
Problem 8: John Piderit, the general management of the
Western Tool Company, is considering introducing some
new tools to the company’s product line. The top
management of the firm has identified three types of tools
(referred to as projects A, B, and C). The various divisions of
the firm have provided the data given in the following table

on these three possible projects. The company has a limited
capital budget of $2.4 million for the coming year.
a) Which project(s) would the firm undertake if it used the
NPV investment criterion?
b) Is this the correct decision? Why?
Problem 10: The MacBurger Company, a chain of fast-food
restaurants, expects to earn $200 million after taxes for the
current year. The company has a policy of paying out half of
its net after-tax income to the holders of the company’s 100
million shares of common stock. A share of common stock of
the company current sells for eight times current earnings.
Management and outside analysts expect the growth rate of
earnings and dividends for the company to be 7.5 percent
per year. Calculate the cost of equity capital to this firm.
Spreadsheet Problem 1: The benefits and costs of an
investment project (the purchase of a piece of machinery)
are those given in the following table. In excel, calculate the
net revenue, or the revenue from the investment minus the
costs; the present value coefficient for every year, and the
present value of the net revenue. Add together column F to
get the net present value of the project. Should the firm
purchase the machine?
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BUSI 620 Week 8 Test 2 (100 % Score)
100 % Score
Question 1
A movie theater that charges a lower price for matinees than
for evening showings is
engaging in
Question 2
The market demand curve for a perfectly competitive
industry is QD=122P.

Question 3
An individual is indifferent between a certain payment of
$20 and a game that will pay $50
or nothing with equal probabilities. The individual has a
certainty equivalent coefficient of
Question 4
A market is comprised of five firms and their market shares
are 30%, 25%, 20%, 15%, and
10%. What is the Herfindahl index for the industry?
Question 5
An investment opportunity will pay $10 with a 20%
probability, $20 with a 40% probability,
$30 with a 30% probability, and $40 with a 10% probability.
What is the standard deviation
of the investment?
Question 6

The fully allocated cost of a product is $45. If the firm wants
to use a markup of 30%, then it
should charge a unit price of
Question 7
Investment A has an expected value of 5 and a standard
deviation of 2. Investment B has an
expected value of 10 and a standard deviation of 5. Using the
coefficient of variation
approach to comparing these two investments,
Question 8
Suppose that the firms in an oligopolistic market engage in a
price war and, as a result, all
firms earn lower profits. Game theory would describe this as

Question 9
Identify the Nash equilibrium in the following game.
Question 10
The fully allocated cost of a product is $10. If the price
elasticity of demand for the product
is 2,
then the firm's optimal markup is
Question 11
A firm plans to raise $4 million by borrowing at an interest
rate of 16% and to raise $1
million by issuing common stock. The firm's stock has a beta
coefficient of 2, the risk free
interest rate is 6%, the average rate of return on stocks is
9%, and the marginal tax rate is

25%. What is the firm's composite cost of capital?
Question 12
A firm that uses profits earned in one market to sell a
product or service below its average
variable cost in another market is engaged in
Question 13
In game theory, a dominant strategy refers to a choice
Question 14
Which of the following is a device that controls imports and
generates government
revenue?

Question 15
There are two U.S. locations where your company is
currently the only producer of soda.
You currently make 40 in each location, but Pepsi is entering
the markets. What decision
should you make? (the chart applies to each location)
Question 16
A firm that is considering one independent project should
accept it if
Selected Answer: the internal rate of return on the project
exceeds the firm's cost of capital
Question 17
A monopolist faces a marginal revenue function of MR = 20
Q.
The monopolist's

marginal cost is $15 at all levels of output. How many units
of output should the firm
produce in order to maximize profits?
Question 18
Which of the following is always illegal in the U.S.?
Question 19
The restaurant industry has a market structure that comes
closest to
Question 20
Which of these deals with asymmetry of information?
Question 21

If an increase in output by a firm imposes uncompensated
costs on other firms, these costs
are referred to as
Question 22
A firm can borrow at an interest rate of 5%. Its marginal
tax rate is 40%. What is its cost of
debt?
Question 23
Which of the following is a condition required for the
practice of price discrimination?
Question 24
In the short run, a monoplist will shut down if it is
producing a level of output where
marginal revenue is equal to shortrun
marginal cost, but price is

Question 25
An individual has a certainty equivalent coefficient equal to
0.4. What is the most this
individual would pay to play a game that pays $50 or $30
with equal probability?
Question 26
In repeated games, a strategy that involves attacking players
that attack you and
cooperating with players that cooperate with you is a
Question 27
One difference between the public interest theory and the
economic theory of regulation is
that the former
Question 28
The prisoners' dilemma explains why

Question 29
A strategy that is best regardless of what rival players do is
called
Question 30
An investment opportunity will pay $50 with a 10%
probability, $20 with a 40%
probability, and will result in a loss of $20 with a 50%
probability. What is the expected
value of the investment?
Question 31
When several independent firms form a temporary network
to take advantage of a shortterm
business opportunity, the result is called a
Question 32
The threat of new entrants would be higher under which of
the following conditions?

Question 33
Which of the following made monopolization and restraint
of trade illegal?
Selected Answer: Sherman Act
Question 34
Which of the following is a characteristic of both
monopolistic competition and perfect
competition?
Question 35
Antilock brakes, airbags, and seatbelts increased the
number of accidents while
simultaneously decreasing the number of fatal accidents.
Why does this happen?
Question 36
An individual must decide whether or not to pursue a
business opportunity. If he does

pursue the opportunity, then he will get a $20 profit if the
business is successful and a $10
loss if the business fails. Apply the maximin and minimax
regret criteria to this decision.
Question 37
Which of the following is an example of the prisoners'
dilemma?
Question 38
Which of the following defines a zerosum game?
Question 39
The breakup of AT&T in 1984 separated the poduction of
long distance and local
telephone service and sacrificed beneftis from
Question 40
In a twoplayer game, which of the following is a Nash
equilibrium?

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BUSI 620 MENTOR Education Your Life--busi620mentor

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