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Microeconomic Homework

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Q5: Explain the term satisfice as it relates to the operations of large corporation. The argument is that today’s large corporations do not aim to maximize profits but instead, their aim is to satisfice. The two parts of this idea that we must consider are the following: The position and power of stockholders in today’s corporation as opposed to the position and power of professional management in today’s corporation. Large corporations today are not managed by the owners or the shareholders. The argument states that most stockholders will be satisfied with an adequate dividend and some reasonable growth. Since most stockholders own a variety of stocks, they are more concerned with their portfolio of stocks rather than a particular stock. Also, shareholders may not be capable of knowing whether management is doing their best for them, but they may not be very concerned so long as they receive what they consider to be a satisfactory return on their investment, hence the term “satisfice.” Q6: Discuss the meaning of the term “principle-agent problem.”

Why does this problem exist? The principal-agent problem arises when management’s objectives are contrary to the objectives of stockholders. For example, management may be more interested in revenue growth or in maximizing their own income rather than maximizing profits in the interests of stockholders. The divergence in objectives between owners and management is known as the “principal-agent” problem. When stockholder and management goals differ, the corporation’s management may not act in the best interest of the stockholders but instead act in their own favor due to their selfish motives while keeping the stockholder satisfied with adequate return and moderate growth. Q8: What are some of the forces that cause managers to act in the interest of shareholders?

There are many forces that cause managers to act in the interest of shareholders. a) Managers are susceptible to pressure. If stocks are under-performing in the market as they can become targets for takeovers. b) Shareholders will share their stocks to other companies who can provide better returns and management will be punished / replaced by board members. c) Managers who have performed well for their stockholders will be in great demand, and as a result, will also be better compensated than their counterparts. d) Parts of an executive’s remuneration are tied to performance in terms of operating profits for the corporation or for units supervised by that executive. Q11: How do implicit cost lead to a difference between accounting and economic profits? Implicit costs leads to a difference between accounting and economic profits because implicit costs recognizes and counts the owners’ time and interest on the capital they contribute as profit. An economist includes costs that would be excluded by an accountant. Economic costs include not only the historical costs and explicit costs recorded by the accountants, but also the replacement and implicit costs (normal profits) that must be earned on the owners’ resources.

Problem 1: The following function describes the demand condition for a company that makes caps featuring names of college and professional teams in a variety of sports. Q = 2,000 – 100 P
where Q is cap sales and P is price.
How much caps could be sold at $12 each?
When P = $12,
Q = 2,000 – 100 (12)
= 800 units
What should the price be in order for the company to sell 1,000 caps? When Q = 1,000,
1,000 = 2,000 – 100 P
P = $10
At what price would cap sales equal to zero?
When Q = 0,
0 = 2,000 – 100 P
P = $20
Problem 2: Consider the following supply and demand curves for a certain product. Qs = 25,000 P
QD = 50,000 – 10,000 P
Plot the demand and supply curves.

What are the equilibrium price and equilibrium quantity for the industry? Determine the answer both algebraically and graphically. (Round to the nearest cent.) According to the graph above, the equilibrium price is around $1.5 and equilibrium quantity is 35,000 for the industry. Problem 3: The
following relations describe the supply and demand for posters. QD = 65,000 – 10,000 P

Qs = -35,000 + 15,000 P
Where Q is the quantity and P is the price of a poster, in dollars. Complete the following table.
Price ($) Qs Qd Surplus or Shortage
6.00 55000 5000 -55000
5.00 40000 15000 -25000
4.00 25000 25000 0
3.00 10000 35000 25000
2.00 -5000 45000 50000
1.00 -20000 55000 75000
What is the equilibrium price?
The equilibrium price is $4.00.
Problem 5: The ABC marketing consulting firm found that a particular brand of portable stereo has the following demand curve for a certain region: Q = 10,000 – 200 P + 0.03 Pop + 0.6 I + 0.2 A
Where Q is the quantity per month, P is price ($), Pop is population, I is disposable income per household (S), and A is advertising expenditure ($). Determine the demand curve for the company in the market in which P=300, Pop=1,000,000, I=30,000, and A=15,000. Q = 10000 – 200 *(300) + 0.03 (1,000,000) + 0.6 (30,000) + 0.2 (15,000) = 1,000 units

If P = 0, then Q = 10,000 + 30,000 + 18,000 + 3,000 = 61,000 units If Q = 0, then 200P = 10,000 + 30,000 + 18,000 + 3,000 P = $305 Calculate the quantity demanded at prices of $200, $175, $150, and $125. Price Q = 10,000 – 200P + 0.03 (1,000,000) + 0.6 (30,000) + 0.2 (15,000) 125 36,000

150 31,000
175 26,000
200 21,000
Calculate the price necessary to sell 45,000 units.
45,000 = 10,000 – 200P + 0.03 (1,000,000) + 0.6 (30,000) + 0.2 (15,000) 45,000 = 61,000 – 200P
P = $80
Problem 8: Over the years, the market demand for “long-playing records made of polyvinyl has fallen considerably as new technologies replaced the old “LP.” Yet, LPs are still available for sale and they sell at price points higher (in some cases much higher) than CDs. According to economic theory, when demand falls, the price of a product should fall. Explain this apparent contraction between and facts. In the law of demand, there are often instances of consumers behaving irrationally in purchasing products as price rises or falls, this is associated with the price and with the product’s quality. This polyvinyl vs. CD’s is an example also associated with taste and preference. Although the demand for polyvinyl has fallen, and the price in some cases has increased it has incorporated the idea of irrational buying associated with the law of demand and taste and preference changes.

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