...Eco 550 Chapter 11 1. Assumption of the independence of risks matters in insurance because of adverse selection. When insuring against certain types of risk it can be difficult to ascertain risk factors on an individual scale and the law of large numbers is used. By judging the statistical probability of an event based on target population insurance companies can determine risk. As far as the second part of this question there must be something I am missing. It asks me to make a judgment related to positive and negative correlations but gives no second variable to consider to be even correlating. 14. If you have high skills you will much more quickly be noticed in the smaller firm thus possibly rewarding you much more quickly. However, if the other company is larger it may be harder to get noticed but the reward is likely higher as the potential for upward mobility is larger in a bigger company. Chapter 12 4. Monitoring your business partner in a partnership is much easier as you should be engaged with them personally far more often that a shareholder would with this board in a normal circumstance. Being in a partnership would make it harder in certain ways depending on the type of partnership and the amount of stakes each has in the business vs. the shareholder model. For example, a partner might not have personal leverage to say or do what is in the best interest of the company whereas shareholders will have no such personal qualms and can...
Words: 401 - Pages: 2
...Homework, Chapter 1 & 2 Instructor: ECO 550 Chapter 1 2. Principal agent conflict occurs when alternatives affect his or her self- interests in a company. The underlying assumption is that the agent's interests may differ from those of the principal. Usually, manager-agents have much less to lose versus the shareholders so they are faced with the dilemma of focusing on their own long-term job security which in some instances can motivate them to limit the amount of risks taken by the firm because an adverse outcome resulting from the risk could lead to their dismissal. The firm would need to look at what other companies are doing and the compensation tools that are being elsewhere. Not only is it crucial to maintain profits it is equally important to offer attractive incentive to managers so they are able to compete with other firms in retaining the best managers and also to motivate them to increase shareholders wealth. Also, compensation should also be based on the profitability of the company. 3 Short term pay-off should be the main focus to trigger executive bonus for that year and compensation should be based on the performance of agents. Issues that would arise with hiring the best managers are the attractiveness of the incentive package in relation to other companies. 6 a. If new foreign competitors enter the market, wealth would decrease because existing companies are forced to compete by lowering their prices and are forced to share their...
Words: 564 - Pages: 3
...ECO 550 Question 2 Shareholders want high long-term profits. Managers want job security and wonderful perks and amenities. Since risk and return tend to be positively related, managers may wish to avoid risks that shareholders want the managers to undertake. To encourage mangers to take on risks, compensation committees can place a greater weight of their compensation on long-term incentives such as stock, options to buy stock, and bonus based on surpassing the performance of comparable firms over several years. When all of the compensation is cash, managers wish to start only low risk projects to avoid making any mistakes and stay away from higher risk, potentially high-valued projects. Question 3 If Corporate profitability was to decline by 20 percent from 2008 to 2009. The shareholder wealth is used as an indicator to check whether it is increased or not. When the bonus is tied to the short-run earnings of the manager’s firm, then the bonus declines even if the manager did everything he or she could do in the midst of an economic downturn. The bonus is designed for managers that exceed their industry averages over the last several years. Issues such as experience, qualification, package would arise with hiring and retaining the best manager. Question 6 The following events would change shareholder wealth: A) More competition is likely to lower prices and thereby reduce the value of the firm. B) In general, higher costs on the firm is likely...
Words: 625 - Pages: 3
...Assignment 1 Demand Estimation COURSE: ECO 550 – Managerial Economics and Globalization Assignment 1: Demand Estimation I work for a leading brand of low-calorie frozen microwavable dinners, called Nukims. My supervisor has asked me to compute the elasticity of each independent variable, in a demand model for our product, which uses data from 26 supermarkets around the country in the month of April. The following is the regression equation, with the standard errors in the parentheses for the demand of the dinners: The following are the independent variables assumed: * Q = Quantity demanded of 3-pack units * P (in cents) = Price of the product = 500 cents per 3-pack unit * PX (in cents) = Price of leading competitor’s product = 600 cents per 3-pack unit * I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarkets are located = $5,500 * A (in dollars) = Monthly advertising expenditures = $10,000 * M = Number of microwave ovens sold in the SMSA in which the supermarkets are located = 5,000 My supervisor wants me to find the elasticity of demand for each independent value, but first we must find out the value of Q, by inserting the values in the demand regression equation as follows: The elastisities are calculated as follows: To determine the implications of each of these independent variable’s elasticity, you must first understand what elasticity in economics...
Words: 1167 - Pages: 5
...ECO 550 - Managerial Economics and Globalization April 28, 2014 Elasticity Elasticity is defined as the ratio of the relative change of the dependent variable to changes in the independent variable (Dick, 2002). Additionally, it can be said to be the percentage change of one variable given the percentage change in another variable (Boyes, & Melvin, 2012). Price elasticity refers to the responsiveness of the quantity demanded to price changes. It is given by; = change in quantity demanded/ Change in price Where quantity demanded (QD) =5200-42(500) +20(600) +5.2(5500) +0.20(10,000) +0.25(5,000) =28,050 Price of the product elasticity =28,050/21,000 =1.336% Price of the leading competitor’s product elasticity = 28,050/12,000 = 2.338% Per capita income elasticity = 28,050/28,600 = 0.981% Advertising elasticity = 28,050/2,000 = 14.025% Number of microwave ovens sold elasticity = 28,050/1250 = 22.44% 2. Based on the results; Price elasticity helps consumers who tend to spend limited income on goods with less elastic demand and it assists the...
Words: 1052 - Pages: 5
...Long-Term Investment Decisions Tiffant Lewis Strayer University Dr. Xiaodong Wu ECO 550 March 9, 2014 Introduction One of the most important long term decisions for any business relates to investment. Investment is the purchase or creation of assets with the objective of making gains in the future. Typically investment involves using financial resources to purchase a machine/building or other asset, which will then yield returns to an organization over a period of time. Planning investments involves thinking about a range of issues that have a bearing on where you ultimately decide to put your money. These issues will vary according to your particular age, circumstances and attitude to risk, and thinking about them carefully before you start making commitments will help you avoid some potentially costly mistakes. 1. Outline a plan that managers in the low-calorie microwaveable food company could follow when selecting pricing strategies for making their products as inelastic as possible. Provide a rationale for your response. Pricing the product to reach out the current and potential customers is crucial for the managers. It is their understanding and decisions that are going to determine the success of any business. A major strategy that ensures that customers are retained with the product is to make the product inelastic employing pricing and other strategies. However, before we explain the strategies to make low-calorie microwavable food inelastic, we must understand...
Words: 2357 - Pages: 10
...ECO 550 Week 3 Discussion Questions Week 3 DQ 1 "Managing in the Global Economy" Please respond to the following: * *Answer the following discussions based on the Katrina’s Candies scenario: * From the scenario for Katrina’s Candies, assuming the absence of quantitative data, determine the qualitative forecasting techniques that could be used within this scenario. * Now, assume you have acquired some time series data that would enable you to make short, medium, and long term forecasts. Ascertain the quantitative technique that will provide you with the most accurate forecast. Provide a rationale for your responses. Answer: From the scenario for Katrina’s Candies, assuming the absence of quantitative data, determine the qualitative forecasting techniques that could be used within this scenario. Quantitative data are anything that can be expressed as a number, or quantified. Examples of quantitative data are scores on achievement tests, number of hours of study, or weight of a subject. These data may be represented by ordinal, interval or ratio scales and lend themselves to most statistical manipulation. Qualitative data cannot be expressed as a number. Data that represent nominal scales such as gender, socieo economic status, and religious preference are usually considered to be qualitative data. Both types of data are valid types of measurement, and both are used in education journals. Only quantitative data can be analyzed statistically, and thus...
Words: 2436 - Pages: 10
...Strayer University ECO550 Written Assignment 4 Economic conditions like the weather have the capability to change every minute and are difficult to predict. Large corporations depend on various economic factors in world markets and decisions based on current economic information and trends. They also rely on the amount of sales revenues, profits, cost, labor and benefits to forecast future moves for the company. A company with traits that are monopolistic can dictate prices and supply based on the power they have over their products and services. An example of a company that has a large share of control over the building supply and home repair industry is Home Depot. Home Depot opened their first two stores in 1979 and was the first to offer a warehouse style atmosphere and high volume of inventory that no other home improvement or hardware store offered with 25,000 SKU’s and to date offers 1,972 stores and over 40,000 products (“Our History”, 2010). Lowes is a competing store that offers a very similar environment and products as Home Depot. The first Lowes was opened in 1946 and they now account for 1,750 stores and are the second largest store of its kind behind Home Depot (“History”, 2011). Both Lowes and Home Depot have been dominant in the industry and have put smaller hardware type stores out of competition since they cannot compete with the prices and selection. Much like Wal-Mart and Target are the leaders their respective...
Words: 1017 - Pages: 5
...Describe the industry and explain the general pattern of change of the particular market model. Industry: telecommunications. For the purposes of this assignment, I will limit my discussion to what had been known as “phone service” and not broadcast entities (TV, radio, etc...) nor shall I dwell on the so-called Cable industry. The analysis shall also be primarily focused on the domestic market. Throughout the world, historically the communication industry has overwhelmingly been a monopoly. This was also true in the United States. As AT&T evolved from the late 19th century, except for a year as a nationalized company, existed as a national monopoly. In the so- called Progressive era of the 1910’s, the idea that a natural monopoly would be more efficient and economical than competing systems took hold. The idea of universal service, with rural rates being lower than urban rates (price discrimination). While never a “true” monopoly, with its substantial market share, and restrictions on connecting non-Western Electric equipment to its network, AT&T operated as one. The barriers to entry were primarily economic, the expensive right-of-way access and materials for wired connectivity being first among them. The restriction of un approved devices not being allowed on the AT&T network, limited interconnecting between competitors as well as additional connection & maintenance fees contributed to its dominance. As a monopoly, there were limited phone styles, and little need for deep...
Words: 488 - Pages: 2
...ECO 550 Managerial Economics Strayer University To Purchase Complete Quiz Bank for ECO 550 Strayer University Follow this Link http://www.researcherclub.com/product.php?id_product=192 Chapter 1 Quiz: 1. The form of economics most relevant to managerial decision-making within the firm is: a. macroeconomics b. welfare economics c. free-enterprise economics d. microeconomics e. none of the above 2. If one defines incremental cost as the change in total cost resulting from a decision, and incremental revenue as the change in total revenue resulting from a decision, any business decision is profitable if: a. it increases revenue more than costs or reduces costs more than revenue b. it decreases some costs more than it increases others (assuming revenues remain constant) c. it increases some revenues more than it decreases others (assuming costs remain constant) d. all of the above e. b and c only 3. In the shareholder wealth maximization model, the value of a firm's stock is equal to the present value of all expected future ____ discounted at the stockholders' required rate of return. a. profits (cash flows) b. revenues c. outlays d. costs e. investments 4. Which of the following statements concerning the shareholder wealth maximization model is (are) true? a. The timing of future profits is explicitly considered. b. The model provides a conceptual basis for evaluating...
Words: 28656 - Pages: 115
...Managerial economics Name Course College Date 2. Dimensions of principal agent problem Principal-agent problem is concerned on challenges that arise when an agent is required to act in the best interest of the principal. These relationships can arise either through obligatory contractual relationships or through informal relationships that are revealed at some point in time. This problem arises when there is asymmetric information or as a result of different interests between the two parties. One problem manager’s face is keeping a company profitable as well as increasing the value of shareholders dividends. The agent might have hidden information which determines the level of their benefits and also the benefit of the principal in which none of them could get in the absence of the relationship. The agent has special skills in respective areas of work with which the principal use for their interests. In this case it’s extremely hard to monitor the steps taken by the agent to execute his/her duties since this might lower their performance as a felling of mistrust from the principal. Mutual consent is of great importance in this kind of relationship. The principal on the other hand might not have disclosed to the agent the challenges faced in pursuit of their goal. The investment on its own involves taking a risk with which expected returns are not certain. This calls for initiating incentives to the agents to maximize the chances of attaining these set targets...
Words: 941 - Pages: 4
...Accounting 550 DQ 1. There are four firms in an industry with the following market shares Firm 1 -30% Firm 2 -25% Firm 3 -25% Firm 4 -20% A) Calculate the Herfindahl Hirschman Index for the industry. HHI (.30) + (.25) + (.25) + (.20) HHI = 900 + 625 + 625 + 400=.225 b) What is the number of effective competitors in this market? Show your calculation. = 1/.255: = 3.92 DQ 2. Suppose the demand curve for a monopolist is given as: Qd = 500- P MR = 500 - 2Q a) Determine the monopolist's profit-maximizing price and output. MC = ATC = 50 MR = MC MR = 500 – 2Q 2Q = 500 - 50 2Q = 450 Q = 450÷2 =Q=225 maximizing quantity output 225 = 500 – P P=$275 profit max price. b) Calculate the monopolist's profit. TR-TC (P X Q) - (ATC X Q) = Q(P-ATC) 225×(275) =$61,875 c) What is the Lerner Index for the industry? L = (P-MC)÷P (275-50)÷275 225÷275= L=.818 DQ 3. There are two industries, A and B; and each industry consists of four firms. However, each of the four firms in industry A has a 25% market shares while those firms in industry B have 80% 10%, 5% and 5% market respectively.. a) Calculate the three- and four-firm concentration ratios for each industry. Industry A = 25 + 25 + 25 +25= 100 Industry B = 80+ 10 + 5 + 5 = 100 b) Calculate the Hirfindahl Hirschman Index for each industry. Industry A = 25^2 + 25^2 +25^2 +25^2 625 + 625 + 625 + 625 =0.25 Industry B = 80^2 + 10^2 + 5^2 + 5^2 6400 + 100 + 25 + 25 = .655 c)...
Words: 297 - Pages: 2
...Abstract This paper will describe the details of a fictitious business and will assess the current environmental scan factors while determining the factors that will have the greatest impact on plant operations and management’s decision to continue or discontinue operations. Thirdly, this paper will evaluate the financial performance of the company using the information provided in the scenario; consider all key drivers of performance, such as company profit or loss for both the short term and long term. Also, a recommendation as to how the company can improve its profitability and develop a brief plan to implement the recommendations. Lastly, this paper will assess the circumstances in which the company should discontinue operations while providing a set of reasonable rationales. 1. Briefly describe the details of the fictitious business that you created for this assignment. The fictitious business in this assignment is named TopShop, which is an American multinational retailer with its main headquarters in New York. It is a high end fashion brand that specializes in fashion clothing, shoes, make-up and accessories. Currently, TopShop has 150 workers for its factory in New Jersey, and has hired a consultant to offer some advice that could help it make a decision as to whether it should shut down completely or continue operations. In addition, TopShop has 100 workers that produce 6,000 units of output per month (working 20 days / month). The daily wage (per worker) is...
Words: 1337 - Pages: 6
...Assignment 1: Demand Estimation Student’s Name Course Tutor Date Assignment 1: Demand Estimation Compute the elasticities for each independent variable. Note: Write down all of your calculations Elasticity refers to the degree of responsiveness in quantity demanded in relation to the changes in factors that affect demand, for instance, price (McGuigan, 2014). The independent variables in the equation include price of the product, price of competitor’s product, income in the area, and advertising expenditure. Therefore, the elasticities include price elasticity, cross elasticity, income elasticity, and advertising elasticity respectively. The values below indicate the equation and formula that will be used to compute the elasticities of each of the independent variable. Equation: QD = -5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M Elasticity = (% Change in Quantity)/ (% Change in Price) N/B: % Change = (Amount of Change)/ (Initial Level) Price Elasticity (Ep) = ΔQd/ ΔP * P/Qd ΔQd/ ΔP = - 42 P/Qd = 500/5000 = 0.1 Ep = - 42 * 0.1 = - 4.2 Cross Elasticity (Epx) = ΔQd/ ΔPX * PX/Qd ΔQd/ ΔPX = 20 PX/Qd = 600/5000 = 0.12 Epx = 20 * 0.12 = 2.4 Income Elasticity (EI) = ΔQd/ ΔI * I/Qd ΔQd/ ΔI = 5.2 PX/Qd = 5,500/5000 = 1.1 EI = 5.2 * 1.1 = 5.72 Advertising Elasticity (EA) = ΔQd/ ΔA * A/Qd ΔQd/ ΔA = 0.20 A/Qd = 10,000/5000 = 2 EA = 2 * 0.20 = 0.4 Determine the implications for each of the computed elasticities for the business in terms of short-term and...
Words: 1227 - Pages: 5
...Market Model Patterns of Change Jennifer Harris Dr. Faux Economics 550 August 24, 2013 The healthcare insurance industry is an industry that is growing fast and is extremely competitive. New laws are causing the healthcare insurance industry to change rapidly. This industry operates as an oligopoly with a few big firms controlling the majority of the market. The price for coverage is not dictated by only one provider. In the oligopoly model no single theory explains the behavior that is evident. The degree of competitiveness is affected by the economy, law, technology, and the number of firms in the market. Medical loss ratios are often used to help managers understand industry characteristics. Competitors to this industry have changed over the years as well now the closest competitors are government provided insurance, persons who pay out of pocket, and the private sector that operates on donations. I think a good pricing policy for insurance companies to adopt would be one that is based on income. The new health insurance law (Obamacare) is requiring that all Americans carry insurance by January 1, 2014. This law will change the health insurance industry rapidly. The big New York Stock Exchange-listed insurance firms have known for many years that their core business models are not sustainable. The insurance companies have tried to ignore the risk that they were assuming because of pressure from Wall Street. The big companies have done this by simply administering...
Words: 1766 - Pages: 8
