ECN 601 Topic 7 Problems; Chapters 21 and 22

Problems:Chapters21and22Assessment Description CompleteProblemsinChapters21and22inMindTapforManagerialEconomics:AProblemSolvingApproach.AccessMindTapthroughthelearningmanagement systemclassroom. 1 .IndividualProblems21-1 Whenrealestateagentsselltheirown,ratherthanclients',houses,theyleavethehousesonthemarketfora longer time (10 days longer on average) and wind up with better prices. Suppose that real estate agentsearn a commission equal to 3% of the sale value of each house that they help sell. Suppose a real estateagent has an offer on a house of $600,000. The agent can get a 2% higher offer with more effort and byleavingthehouse onthemarketforafewmoreweeks. Supposearealestateagenthasanoffer onahousethatshe owns.Theagenthasacurrent offerof $600,000,butcangeta2%higherofferwithmoreeffort andbyleavingthehouseonthemarketforafewmoreweeks. Assumethatallofthecommissionis paidbacktotheagent,sinceshe willactastheagentfor thesale. 2 .IndividualProblems21-2 Planes frequently push back from the gate on time, but then wait 2 feet away from the gate until it is timetoqueueupfortakeoff.Thisincreasesfuelconsumptionandincreasesthetimethatpassengersmustsitinacrampedplaneawaitingtakeoff.Thefollowingtableshowsthepayscheduleforthe flightcrew. Per diem pay indicates how much the flight crew earns once it checks into the airport. Holding payindicateshowmuchtheflightcrewearnsafteritloadstheplane.Hourlywageindicateshowmuchtheflightcrewearnsafteritpushesbackfromthegateandturnson thebeacon. In this scenario, who has an incentive to push back from the gate as early as possible? Check all thatapply. True or False: Allowing the airline to decide when to push back from the gate would reduce incentives topushback fromthegatetoo early. 3 .IndividualProblems21-5 Venture capital (VC) firms are pools of private capital that typically invest in small, fast-growingcompaniesthatcan'traisefundsthroughother means.Inexchangeforthisfinancing,VCs receiveashareof a company's equity, and the founders of the firm typically stay on and continue to manage thecompany. 4 .IndividualProblems22-1 Suppose that a paper mill “feeds” a downstream box mill. For the downstream mill, the marginalprofitability of producing boxes declines with volume. For example, the first unit of boxes increasesearningsby$60,thesecondby$54,thethirdby$48,andsoon, untilthetenthunitincreases profitbyjust $6. Thecost theupstreammillincurs forproducingenoughpaper(one“unit”of paper)tomakeoneunit ofboxesis$6.50. Assume the two mills operate as separate profit centers, and the paper mill sets the price of paper. Itfollowsthatthemarginalprofitabilityofboxesrepresentsthehighestpricethattheboxdivisionwouldbewilling to pay the paper division for boxes. Furthermore, assume that fixed costs are $0 for the papermill. Thefollowingtablesummarizesthequantity,totalrevenue,andmarginalcostsfromtheperspectiveofthepapermillfor selling papertothebox mill atvariousprices. Inthefollowingtable,fillinthemarginalrevenue,totalcost,andtotalprofitforthepapermillwhensellingpapertothebox millateachgivenprice. 5 .IndividualProblems22-4 Reductionofincentiveconflictsbetweendivisionmanagersisanadvantageofbasingincentivecompensationofdivisionmanagersoncompanywideprofit. Futura Furniture Products manufactures upscale office furniture for the “Office of the Future.” The salesdivisioncomprisesregionallybasedsalesofficesmadeupofsalesrepresentativesandregionalmanagers.Sales representatives—who report to the regional managers—conduct direct sales efforts with customersin their regions. As part of the sales process, representatives gather information about likely future ordersand convey that information back to the regional managers. Regional managers use that information tocreatesales forecasts,whicharethenusedasthebasisfor manufacturing schedules. Sales representatives and regional managers are both compensated on a salary plus commission(percentageofrevenue,aspricingiscentrallycontrolled).However,aregionalmanager'scommissionisadjustedbasedonregionalsalesthat exceed theforecasttarget.