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Q1: 21. Equity as an Option Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that malures in one year. The current market value of the firm's assets is $11,200. The standard deviation of the return on the firm's assets is 38 percent per year and the annual risk-free rate is 5 percent per year, compounded continuously. Based on the Black-Scholes model, what is the market value of the firm's equity and debt?See Answer
Q2:5. Draw graphs showing a perfectly competitive firm and industry in long-run equilibrium. a. How do you know that the industry is in long- run equilibrium? b. Suppose that there is an increase in demand for this product. Show and explain the short-run adjustment process for both the firm and the industry. c. Show and explain the long-run adjustment pro- cess for both the firm and the industry. What will happen to the number of firms in the new long-run equilibrium?See Answer
Q3:1. Discuss how the facts in the opening case study and the subsequent discussion of the potato industry illustrate the lack of control over prices by individual potato producers in a competitive market, the response to high prices predicted by the model of perfect competition, and the attempts by producers in a competitive market to gain control over price. Check recent busi- ness publications to find out how successful the United Potato Growers of America cooperative has been since the time of this chapter's case study.See Answer
Q4:3. Vietnam's seafood exports in January and February 2014 increased 23.5 percent compared to 2013, and it is expected that the annual export target will be met with relative ease.30 Supposing Vietnam's seafood market is per- fectly competitive and originally at the long-run equilibrium, draw graphs to answer the following questions: a. What was the effect of the increase in exports on the market equilibrium price and quantity of seafood in Vietnam? b. What was the effect of the increase in exports on the profit of an individual fisherman? c. How will the number of fishermen in Vietnam change in the long run? How does it affect the seafood market? d. With the change in the number of fishermen, how will the profit of an individual fisherman change? e. With the change in profit in the long run, will individual fishermen exit the market?See Answer
Q5:1. Discuss how the facts in the opening case study and the subsequent discussion of the potato industry illustrate the lack of control over prices by individual potato producers in a competitive market, the response to high prices predicted by the model of perfect competition, and the attempts by producers in a competitive market to gain control over price. Check recent busi- ness publications to find out how successful the United Potato Growers of America cooperative has been since the time of this chapter's case study.See Answer
Q6:Chapter 3: Application Questions: 1. In March 2010, Mc Donald’s Corp. announced a policy to increase summer sales by selling all soft drinks, no matter the size, for $1.00. The policy would run for 150 days starting after Memorial Day. The $1.00 drink prices were a discount from the suggested price of $1.39 for a large soda. Some franchisees worried that discounting drinks, whose sales compensate for discounts on other products, could hurt overall profits, especially if customers bought other items from the Dollar Menu. McDonald’s managers expected this promotion would draw customers from other fastfood chains and from convenience stores such as 7-Eleven. Additional customers would also help McDonald’s push its new beverage line-up that included smoothies and frappes. Discounted drinks did cut into McDonald’s coffee sales in previous years as some customers chose the drinks rather than pricier espresso beverages. Other chains with new drink offerings, such as Burger King and Taco Bell, could face pressure from the $1.00 drinks at McDonald’s. a. Given the change in price for a large soda from $1.39 to $1.00, how much would quantity demanded have to increase for McDonald’s revenues to increase? (Use the arc elasticity formula for any percentage change calculations.) b. What is the sign of the implied cross-price elasticity with drinks from McDonald’s competitors? c. What are the other benefits and costs to McDonald’s of this discount drink policy? See Answer
Q7:the discount policy may not retain after the discount policy is over. 2. In the second half of 2002, several major U.S. airlines began running market tests to determine if they could cut walk-up or unrestricted business fares and maintain or increase revenues. Continental Airlines offered an unrestricted fare between Cleveland and Los Angeles of $716, compared with its usual $2,000 fare, and found that it earned about the same revenue as it would have collected with the higher fare. Making similar changes on its routes from Cleveland to Houston, Continental found that the new fare structure yielded less revenue, but greater market share. On the Houston–Oakland route, the new fare structure resulted in higher revenue. a. What did these test results imply about business traveler price elasticity of demand on the Cleveland–Los Angeles, Cleveland–Houston, and Houston–Oakland routes for Continental Airlines? b. How did these results differ from the discussion of airline elasticity in this chapter? c. What factors caused these differences? See Answer
Q8:3. Based on the elasticity data in Table 3.7, discuss why public health officials generally advocate the use of cigarette taxes to reduce teenage smoking, while state and local governments often use these taxes to raise revenue to fund their services. See Answer
Q9:4. Xiaomi, a Chinese smartphone company, sold 5,000 of its Redmi phones in Singapore in eight minutes after its online sale kicked off. a. What does the above information tell you about the price elasticity of demand for Redmi phones in Singapore? b. What is the effect of the online sale on the total revenue received by Xiaomi for selling its Redmi phones? c. If more Chinese smartphone makers expand their business to Singapore, how do you expect the price elasticity of demand for Xiaomi phones to change? See Answer
Q10:5. Develop a case study of a retailer that uses rewards or loyalty programs to influence demand and price elasticity of demand for their products. How do these programs influence both current and future demand? See Answer
Q11:6. Suppose Mr. Masaki operates a newspaper stand in Japan. He sells The Japan Times, an English language newspaper published in Japan, at the same price as all other newspaper stands do. a. What is the price elasticity of demand for The Japan Times sold by Mr. Masaki? b. If we look at the whole market for The Japan Times, will the price elasticity of demand remain the same as your answer in question (a)? See Answer
Q12:7. Find examples in the current business news media of how eBay and other online sellers obtain information about the price elasticity of demand by making unannounced temporary adjustments to their prices and fee structures. See Answer
Q13:8. Suppose you are the manager of The Vila Gale Fortaleza, a five star hotel in Brazil, and expecting a huge number of tourists during 2014 FIFA World Cup held from 12 June to 13 July 2014. In each of the following cases, what pricing decision should you make in order to make higher total revenue? a. Price elasticity of demand is known to be –2. b. Price elasticity of demand is known to be –0.8. c. Price elasticity of demand is known to be –1. See Answer
Q14:3. Jim is considering quitting his job and using his savings to start a small business. He expects that his costs will consist of a lease on the building, inventory, wages for two workers, electricity, and insurance. a. Identify which costs are explicit and which are opportunity (implicit) costs. b. Identify which costs are fixed and which are variable. See Answer
Q15:4. Suppose Marcus is operating a bookstore, and he made zero economic profit last year. a. What was Marcus’s accounting profit likely to be? b. If the implicit costs had increased, what would be the effect on Marcus’s economic and accounting profits? See Answer
Q16:8. Does an increase in rent lead to the same effect on a firm’s average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and marginal cost (MC) as an increase in wage rates does? See Answer
Q17:9. Suppose that a firm’s only variable input is labor. When 50 workers are used, the average product of labor is 50, and the marginal product of the 50th worker is 75. The wage rate is $80, and the total cost of the fixed input is $500. a. What is average variable cost? Show your calculations. b. What is marginal cost? Show your calculations. c. What is average total cost? Show your calculations. d. Is each of the following statements true or false? Explain your answer. 1. Marginal cost is increasing. 2. Average variable cost is increasing. 3. Average total cost is decreasing. See Answer
Q18:Application questions: 1. In the fast-food industry case that opened this chapter, describe how diminishing returns set in for the production process and how management responded to this situation. See Answer
Q19:2. In order to promote animal welfare, Taiwan’s government has set a minimum standard for free range eggs. If the egg producers provide each hen an indoor space of no less than 8 square meters, they will receive certification that distinguishes their animal-friendly eggs from other battery-cage eggs. Suppose you are an egg producer currently producing battery-cage eggs in Taiwan and decide to start producing free-range eggs next year. In order to provide more space for the hens, you will have to expand your farm. a. What will be the effect of expanding the farm on your total, average and marginal costs? b. Does your answer in question (a) give you enough information to decide whether to produce free-range eggs next year? See Answer
Q20:4. Explain why a change in a firm’s total fixed cost of production will shift its average total cost curve, but not its marginal cost curve. See Answer

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