MBA 540 Midterm Summer I Managerial Economics

Instructions: answer the following short answer questions.

Keynotes:

Determinants of Demand-Taste, Income, Substitutes, expectations, number of buyers

Determinants of Supply- Technology ,Factor Cost ,Substitutes, Taxes and subsidies, numbers of sellers

  1. Southwest Airlines is adding $100 million a year in new fees. Under new rules customers only get a partial refund for missed flights, prices are being raised for a third checked bag and for early boarding slots. The airline wants to increase revenue by $ 1.1billion.
  1. Using the law of demand, do you predict that demand will increase, decrease or stay the same? Give your reason.
  1. The demand for airline flights appears to be elastic. What may happen to total revenue if Southwest raises its prices?
  1. Multinationals operating in Chinahas been setting up factories deep in the interior in search of affordable labor. For companies exporting to Europe shipping by air is too expensive. Hewlett –Packard –HP has transported 4 million notebook computers by rail. Shipping one container by rail costs $ 10,000, one-third the price of air transit. It takes only 21 days to ship by rail, 40 days by sea. Shipping costs are factor cost for suppliers.
  1. In your opinion will HP lower laptop prices or just increase profits?
  1. What is the price of air transit? Are marginal benefits greater than marginal costs?
  1. The CEO of Bank of America Brian Moynihan recently stated that US taxpayer money should not be used to bail out major banks. The banks should be managed so that they will not need bailing out. B of A received $ 35 billion.
  1. Should our policy for major banks continue to be“Too Big to fail“or economic Darwinism?
  1. What might be the opportunity cost for $ 35 billion? Could taxpayers receive other goods or servicesinstead of bailouts such as education, medical research or jobs?
  1. What are the lessons from Societe’ General and JP Morgan Banks given their $ 7.1 billion and $ 6.2 billion losses respectively? Use the Organizational Architecture framework in your answers.
  1. Distinguish between opportunity costs and sunk costs?
  1. Toyota, Nissan and Honda will resume production at all Japanese locations later this month that were halted by the March 2011 earthquake. Japan’s Big 3 automakers said that their output will be only half of the normal volumes. The flow of auto parts and earthquake damage are 2 major factors. How will this impact the production function?
  1. Monsanto discovered that the marginal product of magnesium a variable factor in manufacturing of fertilizer will lead to the eventual diminishing output as the use of the magnesium is increased. This illustrates what economic theory?
  1. The IBMCorporation has 3 major plants in the United States. At each plant management quadrupled the inputs in an effort to increase output. At Plant A the output doubled, at Plant B the output increased 4 fold and at Plant C the output increased fivefold.

For each plant what type of returns to scale was experienced? What conclusions could you make about the performance of Plant C?

  1. Distinguish between elastic and inelastic demand. Give examples.