1 A franchiser's contract with a new franchisee specifie

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1 A franchiser's contract with a new franchisee specifies that the latter has to buy a huge neon sign with the logo of the franchise

Economics

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1 A franchiser's contract with a new franchisee specifies that the latter has to buy a huge neon sign with the logo of the franchise. The neon sign is so expensive that it significantly reduces the fee that the franchiser can demand of the franchisee. Explain why making this demand on the franchisee may nevertheless be optimal for the franchiser, referring to the notions of opportunistic behavior and specific assets. (note: once the contract has been signed, the reputation of the franchise is, in a sense, “hostage” to good behavior by the new franchise).

2. A 1985 study of 130 stock purchase plans found that on average, these plans offered about 8 percent of the corporation’s stock to its managers at a discount of 12 to 15 percent off the market price. Typically, the plans allowed the managers to borrow funds at very low interest rates to buy the shares.

a. Explain the purpose of these stock purchase plans.

b. The stock market generally views the institution of such a plan positively. Following the announcement of a plan, the value of a firm’s shares rose, on average, 3 percent above the market trend. What does this say about the stock market’s evaluation of the effectiveness of the stock purchase plan?

a. Fill in the blanks in the following table.

b. Draw a graph that shows marginal cost, average variable cost, and average total cost.

4. A firm builds shipping crates out of wood. If wood costs $1 per square foot, how much will the wood for a 1-cubic-foot square crate (1 ft. ´ 1 ft. ´ 1 ft.) cost? How much would it cost to buy wood for an 8-cubic-foot square crate? Relate this calculation to economies of scale.

Suppose a firm has the following long–run total cost function: TC(q) = q3 – 20q2 + 200q, with MC(q) = 3q2 – 40q = 200. For each of the following output levels, determine whether the cost function exhibits economies of scale, constant returns to scale, or diseconomies of scale; q = 5, 10, 20 (hint: recall that when ATC is falling, MC is less than ATC; when ATC is rising, MC is above ATC, and when ATC is unchanging, MC = ATC. Therefore, calculate the scale economy index defined as, S = ATC/MC and see whether it is greater than, less than, or equal to 1).

A perfectly competitive firm has the following short-run cost function: SRTC = q2 + 30q + 400

The corresponding short-run marginal cost function is given by: SRMC = 2q + 30

a. If the market price is $50, how much output will this firm produce? Is $50 a long-run equilibrium price? Explain your reasoning.

b. Find the equation of this firm’s short-run supply function.

Consider a perfectly competitive firm with the following short-run total costs: SRTC = 150 + 2q2

The corresponding short-run marginal cost is given by: SRMC = 4q

a. If the market price is $80, how much output will the firm produce?

b. What will the firm’s profits be at a price of $80?

c. Find the quantity of output for which marginal cost equals average variable cost. What does this information tell you about this firm’s decision about whether to shut down in the short run rather than produce a positive quantity of output?

A competitive firm has a short-run total cost function given by: SRTC = q2 + 100

The corresponding short-run marginal cost function is: SRMC = 2q

a. If the market price is $60, how much output will the firm produce?

b. Find the firm’s profits at this level of output.

c. Find the equation of the firm’s short-run supply curve.

d. If there are 100 identical firms in the market, find the equation of the industry supply curve.

9. Gizmos are produced in a competitive industry by firms that have U–shaped long run average cost curves. Minimum average cost is $2, and the minimum efficient scale (MES) is 50 gizmos. The demand for gizmos is given by: T œ 12 ? Þ!!"UÞ

a. What is the long–run equilibrium industry price and quantity of gizmos? How many gizmos will each firm produce and how many firms will produce them? What is the amount of

profit to each firm? Using graphs, illustrate the equilibria for the market and for a typical firm.

10.

Firm F operates in a perfectly competitive industry. Firm F has a short–run cost function given by:

TC(q) = 10q2 + 40, and a short–run marginal cost function given by: MC(q) = 10 + 2q

a. What is the value of the fixed cost?

b. Assuming the firm operates, if T œ $20, what quantity will this firm produce? Calculate profits.

c. Consider your findings in part b. Should the firm shut down if all fixed cost is sunk? Should the firm shut down if $10 of the fixed cost is sunk (i.e., $30 is recoverable)?

11. Suppose the cost functions of producing goods X and Y are given by TC(X) = 500 + X and TC(Y) = 500 +4Y. The multi-product cost function for a firm that produces both X and Y jointly is given by: TC(X,Y) = 500 + X + 4Y. Do these cost relationships imply economies of scope in the production of X and Y? Explain.