Technical Questions - they operate in a market economy. It analyzes h...

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Chapter 1 Technical Questions

• Microeconomics focuses on the behavior of individual consumers, firms, and industries as

they operate in a market economy. It analyzes how these various groups respond to changes in prices that affect their consumption, production, and selling decisions. It also describes how firms and consumers interact in various types of markets and can be used as a basis for determining competitive strategies. Macroeconomics focuses on the overall economic environment in which businesses operate. It analyzes the spending decisions of different sectors of the economy—the household, business, government, and foreign sectors.Macroeconomic policy deals with the issues of inflation, unemployment, and economic growth. Changes in the macroeconomic environment influence firms through the microeconomic issues of demand, cost, revenues, and profits.

• Outputs are the final goods and services that firms and industries sell to consumers. Consum-

ers create a demand for all of these goods and services. Inputs are the resources or factors of production that are used to produce the final outputs. Inputs include land, labor, capital, raw materials, and entrepreneurship. Firms’ use of these inputs is related to the demand for their products.(Economics for Managers 3e Paul Farnham) (Solution Manual all Chapters) 1 / 4

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• The four major types of markets are perfect competition, monopolistic competition,

oligopoly, and monopoly. The key characteristics that distinguish these markets are (1) the number of firms competing with each other, (2) whether the products sold in the markets are differentiated or undifferentiated, (3) whether entry into the market by other firms is easy or difficult, and (4) the amount of information available to market participants.

• In the model of perfect competition, firms are price-takers because it is assumed there are so

many firms in each industry that no single firm has any influence on the price of the product.Each firm’s output is small relative to the entire market, so that the market price is deter- mined by the actions of all suppliers and demanders. In the other market models, firms have an influence over the price. If they raise the price of the product, consumers will demand a smaller quantity; if they lower the price, consumers will increase the quantity demanded.

• In macroeconomics, the five major categories of spending are consumption (C), investment

(I), government (G), export (X), and import (M). GDP = C + I + G + X – M. The first four categories are added together, while import spending is subtracted because it represents a flow of expenditure out of the domestic economy to the rest of the world.

• Fiscal policies are implemented by the national government and involve changing taxes (T)

and government expenditure (G) to stimulate or slow the economy. These decisions are made by the political institutions in the country. Monetary policies are implemented by a country’s central bank—the Federal Reserve in the United States. These policies focus on changing the money supply in order to influence interest rates, which then affect real consumption, in- vestment spending, and the resulting level of income and output.Application Questions 2 / 4

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• Microeconomic factors facing the global automobile industry include consumer demand for

increased automobile quality and additional features, the increased preferences for sport utili- ty vehicles, the differing preferences of Chinese versus U.S. consumers, and the continued need to redesign production processes to lower production costs. Macroeconomic factors in- clude the continuing weak recovery in global economic activity especially in Europe and the fluctuations in currency exchange rates.2a. This is a description of a perfectly competitive market. It discusses factors influencing the demand and supply of corn, where the focus is on the price and quantity in the entire market, not the decisions of individual producers. The drought decreased the supply of corn in the U.S., which caused prices to increase. Countries such as China, Japan, and South Korea then turned to find substitute sources of corn in Argentina and Brazil.

• Staples, OfficeMax, and Office Depot operate in an oligopoly market with interdependent

behavior. All three companies have been forced to close stores, downsize their existing stores, and increase their online operations.

• This discussion describes the attempt by the U.S. wireless telecommunications industry to

gain monopoly or market power through mergers of independent firms. The federal government prohibited T-Mobile from merging with AT&T, given concerns over the market power of that combined firm. T-Mobile then announced a merger with its smaller rival, MetroPCS, that would still allow it to cut costs and expand its operations. 3 / 4

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• Chinese restaurants represent monopolistic competition. There are 36,000 Chinese

restaurants, most of them small, family operations. No national chain dominates these restaurants, largely due to the use of the wok for cooking. Specialized stoves and chefs are required for this type of cooking, which has limited the expansion of these firms into large- scale production.

• Numerous examples can be found. In general, the more competitive the market is, the more

firms will have to rely on reducing the costs of production, as they have less control over price. Firms with market power often use all types of strategies. For example, many restau- rants responded to the economic slowdown in 2007 and 2008 by scaling back expansion plans, skimping on items like extra sauce and free sour cream, closing sites, and laying off workers. After examining rivals’ portions of hash browns and french fries and analyzing leftovers, Vicorp, which owns 400-plus Village Inn and Bakers Square restaurants, cut back as much as an ounce from each serving of these foods with a projected annual savings of more than $500,000. See Jeffrey McCracken and Janet Adamy, “Restaurants Feel Sting of Surging Costs, Debt,” Wall Street Journal, April 24, 2008.

• Examples of these types of strategies are discussed in Chapter 14. Firms looked for ways to

increase productivity and cut costs. Many also developed new pricing strategies to increase their profits or minimize their losses.Chapter 2 Technical Questions

• Demand increases (assuming that computers are a normal good).
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