Managerial Economics

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IMBA Managerial Economics Homework1
(Due:9/30)

1.In each of the following instances, discuss whether horizontal or vertical boundaries have been changed, and whether they were extended or shrunk.

a. General Motors divested Delphi Automotive Systems, which manufactures automotive components, systems and modules. b. Online auction service eBay acquired Skype, a provider of Internet telephony services. c. Following the September 11, 2001 attacks, the U.S. government established the Department of Homeland Security. The new Department took over the Customs and Secret Services from the Department of the Treasury and the Immigration Service from the Department of Justice.

Answer:
a) Vertical boundaries shrunk.
b) Vertical boundaries expanded (eBay customers can use Skype to communicate with each other). c) Horizontal and vertical boundaries of the Department of Homeland Security expanded.

2.In fall 2005, an ABC News poll reported that 46% of lower-income Americans (earning less than $100,000 a year) were angry about gasoline prices, while just 32% of higher-income people (earning $100,000 a year or more) were angry. Despite higher gasoline bills, just 22% of survey respondents said that they had reduced driving. However, 63% said that they would cut back on driving if gasoline prices rose above $3 per gallon.

a. Use a demand curve to explain why the proportion of people who would reduce driving is higher if the price of gasoline is higher. b. Explain how people can adjust to higher gasoline prices by replacing their cars rather than driving less. c. Why were relatively fewer higher-income people “angry” about high gasoline prices? Answer:

(a) The demand curve for gasoline would slope downward. Hence, the higher is the price gasoline, the more people would reduce driving. (b) Cars differ in gasoline consumption. People can adjust to higher gasoline prices by replacing “gas guzzlers” with more fuel-efficient cars. This is a long-term response. (c) People with higher income would be less sensitive to price changes.

3.The price of Chanel perfume is around $200 per fluid ounce, while the price of Arrowhead bottled water is $1 per gallon. Nancy buys 2 fluid ounces of Chanel and 10 gallons of bottled water a month.

a.Using relevant demand curves, illustrate Nancy's choices. Illustrate how the following changes will affect Nancy's demand for Chanel perfume: (i) price increase to $220 per fluid ounce, and (ii) cut in price of another of Nancy's favorite perfumes. b.Nancy spends more money each month on perfume than bottled water. Does this necessarily mean that perfume gives her more total benefit than water? Use appropriate demand curves to address this question.

Answer:
(a)(i) This will decrease the quantity demanded of Chanel perfume -- movement down along the demand curve; (ii) This will decrease the demand for Chanel perfume -- the demand curve shifts to the left. (b)No. Total benefit is the area under the demand curve (which is not the same as expenditure). The area under the demand curve for perfume could be much smaller than that for water. Implication: Nancy is getting much more buyer surplus from her purchases of water than from her purchases of perfume.

4.PCCW provides broadband Internet access in Hong Kong under the brand name, Netvigator. Table 1 lists several of the plans offered in April 2004.

|Table 1: Netvigator Broadband Internet Access Plans | |Plan |Monthly Subscription |Included Hours |Charge per additional hour|Bandwidth | |Basic |HK$198 |20 |HK$2 |Up to 1.5 Mbps | |3M Single User Plan |HK$298 |100 |HK$2 |Up to 3.0 Mbps | |6M Single User Plan |HK$398...
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