ECO550 Anielli Eugenia de Padua Guimaraes Week 1 - Check Your Understanding
ECO550 Anielli Eugenia de Padua Guimaraes Week 1 - Check Your Understanding
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Date Created: 11/15/15
Week 1 Check Your Understanding Chapter 1 Problems 2 3 and 6 Chapter 2 Problems 1 5 and 6 By Anielli Eugenia de Padua Guimaraes To Dr Gil Ramos ECO 550 Managerial Economics April 14 2013 Check understanding Chapter 1 Problems 2 3 and 6 2 Explain several dimensions of the shareholderprincipal con ict with manager agents known as the principalagent problem To mitigate agency problems between senior executives and shareholders should the compensation committee of the board devote more to executive salary and bonus cash compensation or more to longterm incentives Why What role does each type of pay play in motivating managers Whenever the principal has the agent do a service on hisher behalf and cannot entirely monitor the agent39s activities a principal agent problem arises To minimize agency problems between shareholderprincipal and principalagent is necessary adequate monitoring and adequate motivations need to be offered Both the provisions could be determined by the firm In economics the traditional example is the probable con ict of interest between ownership and management but any delegation of authority gives rise to this dilemma Managers work as agents of the shareholders If there is an agency problem between the two groups it is important to get it resolved as soon as possible as it can cause problems within the business firm that can inhibit performance Managers should understand that long term incentives are valuable to both sides and that if they work in order to accomplish the firm goals rewards will across them 3 Corporate pro tability declined by 20 percent from 2008 to 2009 What performance percentage would you use to trigger executive bonuses for that year Why What issues would arise with hiring and retaining the best managers If Corporate profitability declined by 20 percent from 2008 to 2009 the shareholder wealth is used as indicator to check if it is increased or not According to this indicator the executive bonuses of the year are decided The issues would be experience qualification package would arise with hiring and retaining the best manager 6 In the context of the shareholder wealthmaximization model of a firm what is the expected impact of each of the following events on the value of the firm Explain why a New foreign competitors enter the market New foreign competitors enter the market because Economic profits are attractive to the firm or simply because a major competitor has However new firms enter markets in search of economic profits existing firms are forced to compete by lowering their prices and making do with fewer customers Protection usually comes in two forms taxes on foreign imports which make them more expensive compared with domestic goods and quotas on the number of foreign goods that can be imported b Strict pollution control requirements are enacted When strict pollution control requirements are enacted companies face costs associated with innovation to implement new control measures which sometimes help to reduce output and lower the rate of productivity resulting in the loss of revenue also it increase cost such as retraining staff c A previously nonunion workforce votes to unionize When a previously nonunion workforce votes to unionize companies are expected to pay higher wages This would decrease the value of the firm because unionization of workforce would increase the union strike threats with uncertainly of operations If the presence of a union in a workplace or firm boosts pay financial performance is likely to be worse unless there is a roughly equivalent union effect on productivity d The rate of in ation increases substantially When the rate of in ation increases substantially prices in all area will increase too It re ects the expected rate of in ation in the economy It is a type of in ation caused by substantial increases in the cost of important goods or services where no suitable alternative is available e A major technological breakthrough is achieved by the firm reducing its cost of production When a major technological breakthrough is achieved by the firm reducing its costs for production other companies will easily embrace technology forcing them to compete with each other Check understanding Chapter 2 Problems 1 5 and 6 1 For each of the determinants of demand in Equation 21 identify an example illustrating the effect on the demand for hybrid gasolineelectric vehicles such as the Toyota Prius Then do the same for each of the determinants of supply in Equation 22 In each instance would equilibrium market price increase or decrease Consider substitutes such as plugin hybrids the Nissan Leaf and Chevy Volt and complements such as gasoline and lithium ion laptop computer batteries Equation 21 is the demand function QD f P PS PC Y A AC N Cp PE TA TS Where QD quantity demanded of eg Toyota Prius or Chevy Volt P price of the good or service the auto PS price of substitute goods or services eg the popular gasolinepowered Honda Accord or Chevy Malibu PC price of complementary goods or services replacement batteries Y income of consumers A advertising and promotion expenditures by Toyota Honda and General Motors GM AC competitors advertising and promotion expenditures N size of the potential target market demographic factors CP consumer tastes and preferences for a greener form of transportation PE expected future price appreciation or depreciation of hybrid autos TA purchase adjustment time period TS taxes or subsidies on hybrid autos Equation 22 is the supply function Q3 f P P1 PUI T EE F RC PE TS Where Qs quantity supplied eg of domestic autos P price of the autos P1 price of inputs e g sheet metal PUI price of unused substitute inputs e g fiberglass T technological improvements e g robotic welding EE entry or exit of other auto sellers F accidental supply interruptions from fires oods etc RC costs of regulatory compliance PE expected future changes in price TA adjustment time period TS taxes or subsidies Overall we should not include variables other than price in both the supply function and the demand function it is more usual to include these only in the supply function 5 Two investments have the following expected returns net present values and standard deviation of returns PROJECT EXPECTED RETURNS STANDARD DEVIATION A 50000 40000 B 250000 125000 Which one is riskier Why Comparing project A and B I would say that Project A appears riskier than Project B because it has larger standard deviation 125000 but in fact Project B is riskier because it has a larger coefficient of variation than Project B does CVA VA 4000050000 080 CVB VB 125000250000 050 Once the two projects are significantly different in size I would say that the coefficient of variation is more appropriate 6 The manager of the aerospace division of General Aeronautics has estimated the price it can charge for providing satellite launch services to commercial firms Her most optimistic estimate a price not expected to be exceeded more than 10 percent of the time is 2 million Her most pessimistic estimate a lower price than this one is not expected more than 10 percent of the time is 1 million The expected value estimate is 15 million The price distribution is believed to be approximately normal Because the price distribution is normal the expected price is halfway between the most optimistic price and the most pessimistic price or 15 million Based on the Table 1 the 2 value corresponding to leaving 10 percent in the lower tail of a normal distribution is approximately 128 Therefore l28 standard deviations correspond to a distance of 500000 below the mean 1 million minus 15 million Hence one standard deviation is equal to l286 500000 or o 390625 This means the probability of getting less than 12mill 2209 z 12 million 15 million 390625 077 so from Table l we can find the p z lt 077 2206
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