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Sample Topics

1. A flight route is served by American Airlines? (AA) and Southwest Airlines? (SW). Suppose American is the industry leader. American will decide whether to raise? airfares, and then Southwest will decide whether to match the price increase. What is the Nash equilibrium of the game?

2. In a two-player, one-shot, simultaneous-move game, each player can choose strategy A or strategy B. If both players choose strategy A, each earns a payoff of $400. If both players choose strategy B, each earns a payoff of $200. If player 1 chooses strategy A and player 2 chooses strategy B, then player 1 earns $100 and player 2 earns $600. If player 1 chooses strategy B and player 2 chooses strategy A, then player 1 earns $600 and player 2 earns $100.

a. Write this game in normal form.

b. Find each player’s dominant strategy, if it exists.

c. Find the Nash equilibrium (or equilibria) of this game.

d. Rank strategy pairs by aggregate payoff (highest to lowest).

e. Can the outcome with the highest aggregate payoff be sustained in equilibrium? Why or why not?

3. While there is a degree of differentiation between major grocery chains like Albertsons and Kroger, the regular offering of sale prices by both firms for many of their products provides evidence that these firms engage in price competition. For markets where Albertsons and Kroger are the dominant grocers, this suggests that these two stores simultaneously announce one of two prices for a given product: a regular price or a sale price. Suppose that when one firm announces the sale price and the other announces the regular price for a product, the firm announcing the sale price attracts 1.000 extra customers to earn a profit of $5,000, compared to the $3,000 earned by the firm announcing the regular price. When both firms announce the sale price, the two firms split the market equally (each getting an extra 500 customers) to earn profits of $2,000 each. When both firms announce the regular price, each company attracts only its 1,500 loyal customers and the firms each earn $4,500 in profits. If you oversaw pricing at one of these firms, would you have a clear-cut pricing strategy? If so, explain why. If not, explain why not and propose a mechanism that might solve your dilemma. (Hint: Unlike Walmart, neither of these two firms guarantees “Everyday low prices”).

4. Suppose Toyota and Honda must decide whether to make a new breed of side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile by $1,000. If both firms make side-impact airbags standard equipment, each company will earn profits of $2.5 billion. If neither company adopts the side-impact airbag technology, each company will earn $1 billion (due to lost sales to other automakers). If one company adopts the technology as standard equipment and the other does not, the adopting company will earn a profit of $3 billion and the other company will lose $1.5 billion. If you were a decision maker at Honda, would you make side-impact airbags standard equipment? Explain.

5. Suppose a UAW labor contract with General Dynamics is being renegotiated. Some of the many issues on the table include job security, health benefits, and wages. If you are an executive in charge of human resource issues at General Dynamics, would you be better off (a) letting the union bear the expense of crafting a document summarizing its desired compensation or (b) making the union a take-it-or-leave-it offer? Explain.

1. You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. What is the true cost of going skiing? Now suppose you had been planning to spend the day studying at the library What is the cost of going skiing in this case? Explain.

2. Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza. ‘’

a. What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?

b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root beer?

c. The price of pizza can be expressed in terms of gallons of root beet What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price? Explain.

3. Maria has decided always to spend one-third of her income on clothing.

a. What is her income elasticity of clothing demand?

b. What is her price elasticity of clothing demand?

c. If Maria’s tastes change and she decides to spend only one-fourth of her income on clothing, how does her demand curve change? What is her income elasticity and price elasticity now?

4. What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus com-pare to the tax revenue? Explain.

5. You are thinking about setting up a lemonade stand. The stand itself costs $200. The ingredients for each cup of lemonade cost $0.50.

a. What is your fixed cost of doing business? What is your variable cost per cup?

b. Construct a table showing your total cost, average total cost, and marginal cost for out-put levels varying from 0 to 10 gallons. (Hint: There are 16 cups in a gallon.) Draw the three cost curves.

1. Give some reasons why gross domestic product is not a suitable measure of the well-being of the nation. (Have you noticed newspaper accounts in which journalists seem to use GDP for this purpose?)

2. Country A and Country B have identical population growth rates of 1 percent per annum, and everyone in each country always works 40 hours per week. Labor productivity grows at a rate of 2 percent in Country A and a rate of 2.5 percent in Country B. What are the growth rates of potential GDP in the two countries?

3. The following table shows real GDP per hour of work in four imaginary countries in the years 2000 and 2010. By what percentage did labor productivity grow in each country? Is it true that productivity growth was highest where the initial level of productivity was the lowest? For which countries?

4. What is a consumption function, and why is it a useful device for government economists planning a tax cut?

5. Comment on the following statement: “Inflationary and recessionary gaps are nothing to worry about because the economy has a built-in mechanism that cures either type of gap automatically.”

1. R.C. had earnings per share of $8 in year 2015, and it paid a $4 dividend. Book value per share at year’s end was $80. During the same period, the total retained earnings increased by $24 million. R.C. has no preferred stock, and no new common stock was issued during the year. If R.C.’s year-end debt (which equals its total liabilities) was $240 million, what was the company’s year-end debt ratio?

2. You are about to borrow $15,000 from a bank at an interest rate of 8% compounded annually. You are required to make three equal annual repayments in the amount of $5,820.50 per year, with the first repayment occurring at the end of year 1. Show the interest payment and principal payment in each year.

3. On October 1, 1970, Walmart first offered 300,000 shares of its common stock to the public at a price of $16.50 per share. Since that time, Walmart has had 11 two-for-one stock splits. So, if you purchased 100 shares in 1970, you would have 204,800 shares as of September 30, 2014. The closing price of the stock on that day was $77.50. What is the compound growth of the Walmart stock over 44 years? (This is equivalent to asking what kind of interest rate you have to earn to match the same growth from your savings account.)

4. Student Emergency Financial Services, Inc., which makes small loans to college students, offers to lend $550. The borrower is required to pay $42 at the end of each week for 16 weeks. Find the interest rate per week. What is the nominal interest rate per year? What is the effective interest rate per year?

5. A local delivery company has purchased a delivery truck for $15,000. The truck will be depreciated under MACRS as five-year property. The truck’s market value (salvage value) is expected to decrease by $2,500 per year. It is expected that the purchase of the truck will increase its revenue by $10,000 annually. The O&M costs are expected to be $3,000 per year. The firm is in the 40% tax bracket, and its MARR is 15%. If the company plans to keep the truck for only two years, what would be the equivalent present worth?

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