Question 1: To open a new business, a manager must obtain a license from the city for $20,000. The license is transferable, but only $3,000 is refundable in the event the firm does not use the license.
a. What are the firm's fixed costs? Sunk costs?
b. Suppose the manager obtains a license but then decides against opening the business. If another firm offers the manager $2,000 for the license, should the manager accept the offer?
Question 2: In 1995 the U.S. Justice Department sued to block a merger between Microsoft and Intuit, the producer of the nation's best-selling business software. The Justice Department argued that the merger would lessen competition and raise prices of business software. Is there an economic argument that the merger might actually result in lower prices? Explain.
Question 3: According to Industry Week, a shoe manufacturer recently had a production run that resulted in 100,000 pairs of defective shoes. Workers on the production line knew the shoes were defective as they were being produced, but did nothing to fix the problem. Do you think a profit sharing plan for workers would mitigate future problems? Explain.
Question 4: As a manager of the WeDoWell Corporation, you have negotiated with several vendors and are on the verge of signing an eight-year contract with Bolts Enterprises. Under the contract, they would ship to you 2,000 titanium bolts per month at a price of $1,000 per bolt. Your assistant has just brought you an article from a trade publication that indicates another company has developed a new technology that reduces the cost of producing the titanium bolts. How would this information affect the optimal length of your contract with Bolts Enterprises? Explain.
Question 5: In many online information markets, we have observed in recent years greatly increased concentration in each market sector. What is the primary reason for the emergence of a dominant firm in each market?
Question 6: Omega Travel competes in the travel market. Consumers know that Omega has the best agents in the industry and offers superior service. Nonetheless, Omega earns zero economic profits because numerous competitors have entered the market over the last few years. Based on this information, what market structure does Omega operate in? Explain briefly.
Question 7: Art-R-Us makes hand-painted art reproductions. The owner-manager wishes to hire another artist, and is considering paying a fixed wage plus either (1) a share of the profits from each painting sold or (2) a fixed payment for each piece produced. Which plan would you choose if you were the owner? Which plan would you favor if you were the artist? Explain.
Question 8: In a 1998 press release, Boeing Commercial Airplane Group (BCAG) announced that it was signing a 10-year contract with distributor Thyssen Inc. - a distributor of raw aluminum - valued at approximately $300 million. The contract reflects Boeing's effort to reduce costs and production bottlenecks resulting from supply shortages. The contract specifies prices and guarantees quantities of raw aluminum to be delivered to BCAG's suppliers. If you were the production manager at BCAG, how would you justify the long-term nature of the contact with Thyssen Inc.?