THE ECONOMIC ENVIRONMENT OF BUSINESS
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| Spring 2017 |
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Graduate (S) Business Administration 509 THE ECONOMIC ENVIRONMENT OF BUSINESS |
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The homework should be written on 8 1/2 by 11 or A4 paper. If you use paper torn from a notebook, please trim the ragged edges before you turn it in. When calculations are required, you must show all work unless the answer is obvious. The homework is due on Tuesday, February 21. Please make a copy of your homework before you turn it in.
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1. Suppose you quit a job that was paying you $55,000 a year to start your own Internet related business. You withdraw $100,000 that you had in bonds that were paying you 4% a year to help start the business. You set up an office in a condo that you own but used to rent out for $1,000 a month. The first year of your operation, you paid salaries totaling $130,000 to three employees. You pay $500 a month in utilities, and you paid a total of $40,000 for supplies that first year. What is your total explicit cost and your total implicit cost for your business the first year? If your revenue the first year is $260,000, calculate your accounting profit and your economic profit.
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2. Consider an industry that has nine firms with the following market shares:
| 25 | 20 | 10 | 10 | 10 | 10 | 5 | 5 | 5 |
a. Calculate the four-firm concentration ratio for this industry.
b. Calculate the Herfindahl-Hirschman Index for this industry.
c. The second largest firm decides to acquire one of the smallest firms in order to better compete with the largest firm. How will the Department of Justice and the Federal Trade Commission react to the proposed deal?
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3. Consider a market with two firms, A and B. Firm A is the larger firm and is currently producing and selling 45 units of its product, while Firm B is selling only 20 units. Firm A is also more efficient than Firm B, leading to a higher profitability. Each firm is considering expanding its output by 10 units for the coming period, yielding the following payoff matrix:| Firm B | |||
| Units produced |
20 | 30 | |
| Firm A | 45 | 450, 140 | 360, 150 |
| 55 | 440, 100 | 330, 90 |
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a. If both firms make their decisions simultaneously, what will be the outcome in this market? Assume that this is a one-time action and the goal of each firm is to maximize its profits in the short-run.
b. Suppose Firm A can make its decision on output before firm B makes its decision. Use a game tree to determine what Firm A should do. What will be the outcome in this case?