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Economics

Michael Parkin

Chapter 10

Organizing Production - all with Video Answers

Educators


Chapter Questions

01:56

Problem 1

One year ago, Jack and Jill set up a vinegarbottling firm (called JJVB). Use the following data to calculate JJVB's opportunity cost of production during its first year of operation:
Jack and Jill put $\$ 50,000$ of their own money into the firm and bought cquipment for $\$ 30,000$
They hired one worker at $\$ 20,000$ a year.
Jack quir his old job, which paid $\$ 30,000$ a year, and worked full-time for JJVB.
: Jill kept her old job, which paid $\$ 30$ an hour, but gave up 500 hours of leisure a year to work for JJVB.
I JVB bought $\$ 10,000$ of goods and services.
The market value of the cquipment at the end of the year was $\$ 28,000$
ack and Jill have a $\$ 100,000$ home loan on which they pay interest of 6 percent a year.

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01:44

Problem 2

Joe, who has no skills, no job experience, and no alternative employment, runs a shoeshine stand. Other operators of shoeshine stands earn $\$ 10,000$ a year. Joe pays rent of $\$ 2,000$ a year, and his total revenue is $\$ 15,000$ a year. Joe spent $\$ 1,000$ on equipment, which he used his credit card to buy. The interest on a credit card balance is 20 percent a year. At the end of the year, Joe was offered $\$ 500$ for his business and all its equipment. Calculate Joc's opportunity cost of production and his economic profit.

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01:57

Problem 3

Four ways of laundering 100 shirts are:
a. Which methods are technologically efficient?
b. Which method is economically efficient if the hourly wage rate and the implicit rental rate of capital are (i) wage rate $\$ 1,$ rental rate $\$ 100$
(ii) wage rate $\$ 5,$ rental rate $\$ 50 ;$ and (iii) wage rate $\$ 50,$ rental rate $\$ 5 ?$

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03:29

Problem 4

Executive compensation, based on performance, can theoretically constrain pay, but companies are paying their top executives more and more. The median compensation of a CEO in 2013 was $\$ 13.9$ million, up 9 percent from 2012 Source: CNBC, April 28, 2014
What is the economic problem that CEO compensation schemes are designed to solve? Would paying executives with stock align their interests with shareholders?

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01:28

Problem 5

Sales of the firms in the tattoo industry are: Calculate the four-firm concentration ratio. What is the structure of the tattoo industry?

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03:30

Problem 6

No retailer has more cachet among gamers than GameStop. For now, only Wal-Mart has a larger share $-21.3 \%$ last year. GameStop's share was $21.1 \%$ last year, and may well overtake $\mathrm{Wal}$ Mart this year. But if new women gamers prefer shopping at Target to GameStop, Wal-Mart and Target might erode GameStop's market share. Source: Fortune, June 9,2008
Estimate a range for the four-firm concentration ratio and the HHI for the U.S. game market based on the data provided in this news clip.

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01:39

Problem 7

FedEx contracts independent truck operators to pick up and deliver its packages and pays them on the volume of packages carried. Why doesn't FedEx buy more trucks and hire more drivers? What incentive problems might arise from this arrangement?

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03:11

Problem 8

Calculate Lee's opportunity cost of production and his economic profit.

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01:23

Problem 9

Lec's accountant recorded the depreciation on his cottage during 2012 as $\$ 7,000 .$ According to the accountant, what profit did Lee make?

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02:39

Problem 10

In $2014,$ Homer was a salosperson and had an annual salary of $\$ 8,000 .$ He also carned $\$ 1,500 \mathrm{by}$ teaching japanose On January $1,2015,$ he quir his job, stopped teaching, and rented a storcfront to run a bookshop. He took $\$ 6,000$ from his savings account to buy bookshelves and other facilitics. During $2015,$ he paid $\$ 13,000$ toward rent and $\$ 7,500$ in salary to an cmployee he hired. He received a tocal revenue of $\$ 43,000$ from the bookshop and carned interest at 5 percent a year on his savings account balance. Normal profit is $\$ 52,000$ a year. Ar the cnd of $2015,$ John could have sold his bookchelves and other facilities for $\$ 2.800$. Calculate John's opportunity cost of production and his coonomic profit in 2015.

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01:06

Problem 11

The key driver of profitability will be that the focus of the company isn't on profitability. Our focus is on the customer. If we can find a way to give customers what they want better than anybody else, then what can stop us?
a In spite of what Chrysler's vice chairman and co-president daims, why is Chrysler's focus actually on profitability?
b. What would happen to Chrysler if in didn't focus on maximizing profit, bur instead focused its production and pricing decisions to "give customers what they want"?

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01:23

Problem 12

Stocks too volatile? Bonds too boring? Then try an alternative investment- one you can wear on your wrist..... [The] typical return on a watch over five to ten years is roughly 1096 . [One could $]$ do better in an index fund, but $\ldots .$ what other investment is so wearable?
a. What is the cost of buying a watch?
b. What is the opportunity cost of owning a watch?
c. Does owning a watch create an economic profit opportunity?

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01:08

Problem 13

Use the following data to work. Four methods of completing a tax return and the time taken by each method are with a $\mathrm{PC}, 1$ hour; with a pocket calculator, 12 hours; with a pocket calculator and paper and pencil, 12 hours; and with a pencil and paper, 16 hours. The $\mathrm{PC}$ and its software $\cos t \$ 1,000,$ the pocket calculator costs $\$ 10,$ and the pencil and paper cost $\$ 1$.
Which, if any, of the methods is technologically efficient?

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01:55

Problem 14

Use the following data to work. Four methods of completing a tax return and the time taken by each method are with a $\mathrm{PC}, 1$ hour; with a pocket calculator, 12 hours; with a pocket calculator and paper and pencil, 12 hours; and with a pencil and paper, 16 hours. The $\mathrm{PC}$ and its software $\cos t \$ 1,000,$ the pocket calculator costs $\$ 10,$ and the pencil and paper cost $\$ 1$.
Which method is economically efficient if the wage rate is (i) $\$ 5$ an hour,
(ii) $\$ 50$ an hour, and
(iii) $\$ 500$ an hour?

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02:48

Problem 15

Precision agriculture will become commonplace on farms. It will include the use of self-driving machinery and flying robots to automatically survey and treat crops.
a. Assume that using self-driving machinery for agriculture requires fewer farmers and less time. Is using self-driving machinery technologically efficient?
b. What additional information would you need to be able to say that switching to self-driving machinery is economically efficient for agriculture?

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02:57

Problem 16

Starbucks has more than 10,000 employees, 6,700 stores, which serve some 50 million customers in 51 countries each week. Geoffrey mwa Ngulumbi runs the family-owned fair trade farm in Tanzania and supplies Starbucks with coffee beans and other raw materials.
a. How does Starbucks coordinate its activities? Is it likely to use mainly a command system or an incentive system? Explain.
b. How do you think Geoffrey mwa Ngulumbi coordinates the activities of his farm? Is he likely to use mainly a command system or also to use incentive systems? Explain.
c. Describe, compare, and contrast the principalagent problems faced by Starbucks and Geoffrey mwa Ngulumbis farm. How might these firms cope with their principal-agent problems?

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01:22

Problem 17

At Facebook, the key to innovation and creativity is employee autonomy. Employees are encouraged to take ownership over their spaces, and this could mean coming up with original ideas to improve Faccbook services to designing the office walls. The company also offers its employees unrivaled perks and competitive salaries. Source: Business Insider, April 27, 2015
a. Describe Facebook's method of organizing production with employees.
b. What are the potential gains and opportunity costs associated with this method?

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01:27

Problem 18

Market shares of smartphone producers are:
Calculate the Herfindahl-Hirschman Index. What is the structure of the smartphone industry?

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01:32

Problem 19

Two leading design firms, Astro Studios of San Francisco and Hers Experimental Design Laboratory, Inc, of Osaka, Japan, worked with Microsoft to design the Xbox 360 video game console. IBM, ATI, and Sis designed the Xbox 360 's hardware. Three firms Flextronics, Wistron, and Celestica- manufactured the Xbox 360 at their plants in China and Taiwan.
Describe the roles of market coordination and coordination by firms in the design, manufacture, and marketing of the Xbox 360.

Alejandro Ruiz
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01:45

Problem 20

Two leading design firms, Astro Studios of San Francisco and Hers Experimental Design Laboratory, Inc. of Osaka, Japan, worked with Microsoft to design the Xbox 360 video game console. IBM, ATI, and SiS designed the Xbox 360 's hardware. Three firms Flextronics, Wistron, and Celestica- manufactured the Xbox 360 at their plants in China and Taiwan.
a. Why do you think Microsoft works with a large number of other firms, rather than performing all the required tasks itself?
b. What are the roles of transactions costs, economics of scale, economies of scope, and economies of team production in the design, manufacture, and marketing of the Xbox?

Alejandro Ruiz
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01:03

Problem 21

Why do you think the Xbox is designed in the United States and Japan but built in China?

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03:16

Problem 22

After you have studied Economics in the Neus on
PP. $278-279$, answer the following questions.
a. What products do Facebook and Google sell?
b. In what types of markets do Facebook and Google compete?
c. How do social nerworks and Internet search providers generate revenue?
d. What is special about social networking sites that make them attractive to advertisers?
c. What is special about Internet search providers that make them attractive to advertisers?
f. What technological changes might increase the profitability of social networks compared to Internet search providers?

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01:40

Problem 23

School districts in many states experiment with plans that compensate teachers partly based on classroom performance, rather than their years on the job and coursework completed. Working with mentors to improve their instruction and getting bonuses for raising student achievement encourages efforts to raise teaching quality.
How does "merit pay" attempt to cope with the principal-agent problem in public education?

Alejandro Ruiz
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