Tim 2) and dawn are the theater watching the latest Oliver Stone film. Unfortunately, they both realize
that neither one has enjoyed the movie thus far. Tim says to dawn, we might as well stay, we already
paid our six bucks each. Dawn responds, we should stay, but not because we paid six bucks each, but
because we have nothing better to do. Which statement makes more sense? Explain.
The opportunity cost of using a resource for a given purpose is its value in its best alternative use.
In this case, Dawn responds, we should stay, but not because we said six bucks each, but because we
have nothing better to do. It statement makes more sense than Tim says to Dawn. Furthermore, the
answer to this question depends on the opportunity cost of their time. Because, Tom and Dawn
considered opportunity cost concern watched movie is the best alternative nothing to do.
3) A company recently raised the pay of employees by 20 percent. Employee productivity remained the
same. The CEO of the company was quoted as saying, it just goes to show that money does not motivate
people. Provide a critical evaluation of this statement.
The company recently raised the pay of employees by 20%, but productivity remained the same.
According to the CEOs statement, we can see that level of monetary compensation is not the only
important component of the job. Because people have a broad range of interests, it extends beyond
money. Furthermore, economists usually apply money as one of the goods being considered. However in
this case, money is just a convenient unit of value which basically represents purchasing power. I suggest
that this company should exercise different methods to motivate employees such as Happy-Is-Productive,
Good-Citizen and/or Product-of-the-Environment model, etc
4) Some people (for example, Hayek) argue that decentralization of economic decisions in the economy
leads to an efficient resource allocation. What differences exist within the firm that makes the link
between decentralization and efficiency less car?
6) What effect does the existence of contracting costs have on market economies?
Contracting is cost including search and information costs, bargaining and decision costs and
policing and enforcement costs. The existence of contracting costs has two effects on market economies
that result in fewer transaction and concern about informational specialization. When contracting costs
exists, it is not necessary for consumers to go to each factor to buy parts of the product but they can go
straight to the firm to buy the finished product. These results in fewer transactions since the consumers
just have to make transaction with the firm, not through multiple factors. Besides, the consumers
buying from a firm only has to be concerned with the quality of the end product, they do not have to
specialize in their knowledge about each separate part of the product.
7) Southwest Airline estimate the short-run price elasticity of business fares to be 2 an d the long run
elasticity to be 5. Is ticket demand more elastic in the short run or long run? Does this seem
reasonable? Explain.
Price elasticity is determined by the length of the period to which the demand curve pertains. So
the consumers demand tends to be more elastic or responsive to price changes over longer period than
within a shorter period. Therefore, ticket demand is more elastic in the long run. An increase in airplane
ticket is expected to result in an instant decline in ticket sold. Long run effects will be even bigger as
consumers recognize other airline options. Thus, the chance of losing customers to other airlines will be
larger.
8) Economies of scale and economies of scope are the same concept. Do you agree?
According to the definition each, I do not agree that economies of scale and economies of scope
are different idea. Economies of scope involve cost saving that result from joint production, whereas
economies of scale involve efficiencies from producing higher volumes of given product. It is possible to
have economies of scope without having economies of scale and vice versa.
9) Your company recently hired the best manager in the industry. Should the owners of the firm
anticipate economic profits? Explain