Professor Spry

Final Exam

ECON 600

Professor Spry

Fall 2004

Version A

Instructions: Answer each question in the space provided; you may use the back of the page if necessary. Each of the 5 questions you answer is worth 20 points. There are a total of 100 points possible. Your grade will be based on how well and how clearly concepts from ECON 600 are applied to the case situation in each question.

Exam Agreement:

The answers in this exam represent my own work. I have used written material, including texts and class notes in preparing my answers. In regard to answering these questions, I have not sought or used the assistance of classmates or others, nor have I provided assistance to classmates. However, I understand that I may ask questions of the instructor.
I understand that if I violate these stipulations I will receive a failing grade for this examination and that this will have serious repercussions for the course grade.

My signature below attests to my understanding of and my agreement with the stipulations in this exam agreement.

______

SignaturePrint NameDate

1. Dilbert Has a Problem

Scott Adams has copyrighted the image and name “Dilbert.” The total cost of producing Q units of Dilbert related merchandise is: . The daily demand for Dilbert related merchandise is. Q is the number of units of Dilbert related merchandise.

a. What is the market structure for Dilbert related merchandise? How many units of Dilbert related merchandise should Scott Adams produce? What price should he charge for one unit of Dilbert related merchandise? Clearly explain your reasoning.

b. What is total revenue per day from Dilbert related merchandise to Scott Adams? What are the daily profits from Dilbert related merchandise? Clearly explain your reasoning.

c. The proposed “Napster Anything Act of 2004” would remove all copyright and trademark protections. Under this Act, Scott Adam’s copyright of Dilbert would be eliminated. Describe the new market structure that would occur if Dilbert entered the public domain, meaning anybody could use Dilbert. What would be the new price of one unit of Dilbert related merchandise? Forecast the annual economic profit of the Dilbert related merchandise industry if the Dilbert copyright was eliminated. Clearly explain your reasoning.

2. Forecasting the A’s

The Oakland A’s operate a Major League Baseball team in Oakland, CA.

The own price elasticity of demand for baseball tickets for the A’s is 3.1 (in absolute value). The income elasticity of demand for Oakland A’s baseball tickets is 1.6. The cross-price elasticity of demand for Oakland A’s baseball tickets with respect to the price of San Francisco Giant’s tickets is 0.3. Be sure to show all calculations.

a. In the wake of the A’s success, Billy Beane is considering a twenty percent increase in ticket prices. If Oakland A’s raise their prices by 20 percent, what will be the percentage change in sales of Oakland A’s baseball tickets?

b. If an economic recovery increases incomes in the Bay area by 4.2%, what will be the percentage change in Oakland A’s ticket sales?

c. If the San Francisco Giants lower their ticket prices by 5%, what will be the percentage change in sale of Oakland A’s tickets?

3. Jamaican Pharmaceutical and Polymer Chemical Corporation

The amount of training that firms make available to their employees varies greatly across firms and across occupations. Some firms pay the employment and training costs or tuition for employees regardless of the content of the knowledge gained; others are more picky. Consider the following policies of two firms:

Polymer Chemical Corporation is a large manufacturing firm located in the isolated city of West Lafayette, Indiana (population 28,000). West Lafayette is also the home of PurdueUniversity. Polymer extensively uses technology including Chem-It software. Only two other firms in the world use Chem-It software: KA Chemical in South Korea and Toshi Chemical Concern in Japan. Polymer will pay for its employees to obtain a masters degree in chemistry from Purdue, as long as the coursework includes training using Chem-It software.

Jamaican Pharmaceutical is a large international drug company with a regional sales headquarters in Minneapolis, Minnesota. Minneapolis is also the home of the University of Minnesota and UST. Jamaican Pharmaceutical refuses to pay for M.B.A degrees for members of its sales force. Jamaican Pharmaceutical will not even pay for part-time M.B.A. programs.

Evaluate these decisions. Would you recommend any changes to the existing policies at these firms? Please explain your reasoning clearly.

4. The Oakland A’s

How did Billy Beane change the allocation of decision rights within the Oakland A’s? Critically evaluate these changes in decision rights within the Oakland A’s. Do the new decision rights result in a balanced organizational architecture? Specifically, does the new organizational architecture link specific knowledge and decision rights in an effective manner and provide incentives to use information productively?

5. Multitasking at Lincoln, Safelite, Nordstrom, and Arthur Andersen

Discuss how the multitask principal-agent problem was addressed, if at all, at Lincoln Electric, Safelite, Nordstrom, and Arthur Andersen. Base your discussion on the case readings and course concepts.

Final Exam

ECON 600

Professor Spry

Fall 2004

Version B

Exam Agreement:

My signature below attests to my understanding of and my agreement with the stipulations in this exam agreement.

______

SignaturePrint NameDate

1. (20 points) Minnesota Wild Wings

Minnesota Wild Wings sells spicy wings to hungry consumers. They recently attempted to determine the demand curve for their wings. They experimented with two prices for wings, while carefully making sure other factors like the day of the week and weather were unchanged. At a price of $0.40 per wing, 500 wings are sold per day. At a price of $0.50 per wing, 400 wings are sold each day. The cost of producing wings are $0.20 per wing.

a. Using the linear approximation method solve for the linear demand curve facing Minnesota Wild Wings.

b. What price should Minnesota Wild Wings charge for a wing? How many wings should Minnesota Wild Wings sell?

2. Multitasking at Lincoln, Safelite, Nordstrom, and Arthur Andersen

3. Ethics

Cigarette manufacturers manufacture a product with: 1) a known health risk.

Moreover, for years companies, 2) hid documents that proved that cigarettes are addictive

and 3) took steps to promote addiction in the way that they designed cigarettes.

a. Under Friedman’s view of Corporate Social Responsibility, which of the 3 actions listed above are ethical and which are unethical? Explain your reasoning.

b. List and provide a rationale for two steps that companies must take to promote ethical business behaviors that further the goal of value maximization.

4. Generous Motors Corporation

Generous Motors Corporation raised the pay of all employees by 15 percent. Six months later, employee productivity has remained unchanged. The CEO of Generous Motors was quoted as saying, “it just goes to show that money does not motivate people.” Provide a critical evaluation of this statement.

5. Incentive Pay at KBAD

Consider the salary of T.V. Nelson, a sales agent for KBAD, a popular radio station in El Paso, Texas. She has an effort cost of C = e2, where e is hours of effort per period. The wage package is W = $1,000 + 0.4*Q where Q denotes Nelson’s dollar sales per period. The CEO has chosen the $1,000 base pay and the incentive of 0.4. Nelson’s sales are generated by the following productivity function: Q = 100*e + . The last term denotes the effect of outside risk factors, and has the following distribution:

+$300 with probability 0.50; - $300 with probability 0.50

Effort hours
e / Expected benefit to employee E(W) / Expected marginal benefit to employee / Expected cost to employee
e2 / Expected marginal cost to employee / Expected Revenue for Firm E(Q) / Expected Profit For Firm
E(Q)-E(W)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

a. How many effort hours will T.V. Nelson choose? What is her corresponding expected compensation? Justify, using the table above.

b. T.V. Nelson has a reservation level of utility of 1900. Will she want to stay at KBAD? Will KBAD want to keep her? Why?

Final Exam

ECON 600

Professor Spry

Fall 2004

Version C

Exam Agreement:

My signature below attests to my understanding of and my agreement with the stipulations in this exam agreement.

______

SignaturePrint NameDate

1. Multitasking at Lincoln, Safelite, Nordstrom, and Arthur Andersen

2. Pension Fund Management

Pension fund managers for the State of Michigan control $45 million in assets. The manger of one of these pension funds is compensated based entirely on fund performance. He earned over $1.2 million last year. As a result, the fund is contemplating a proposal to cap the compensation of fund managers at $200,000.

Evaluate this proposal.

3. Nano-Circuit Technology

Nano-Circuit Technologyemploys labor and rents preprogrammed robots for its production process. The robots can handle some of the human tasks and vice versa. Suppose that at the current input usage levels, the marginal product of labor is 20 shipments of circuits per day and the marginal product of robots is 100 shipments of circuits per day. The daily wages & benefits per worker are $80 and the daily rental rate per robot is $500.

Explain why Nano-Circuit Technology is currently NOT minimizing the cost of producing its current daily output – in other words, why it is NOT using an optimal mix of labor and automation.

Describe how Nano-Circuit Technology should adjust employment of labor and robots to reduce the total cost of producing its current level of integrated circuits.

4. The Oakland A’s

How did Billy Beane change the allocation of decision rights within the Oakland A’s? Critically evaluate these changes in decision rights within the Oakland A’s. Do the new decision rights result in a balanced organizational architecture? Specifically, does the new organizational architecture link specific knowledge and decision rights in an effective manner and provide incentives to use information productively?

5. Incentive Pay at KBAD

+$500 with probability 0.50; - $500 with probability 0.50

a. How many effort hours will T.V. Nelson choose? What is her corresponding expected compensation? Justify, using the table above.

b. T.V. Nelson has a reservation level of utility of 1900. Will she want to stay at KBAD? Will KBAD want to keep her? Why?