ECN E101 Lecture Notes - Lecture 3: Opportunity Cost, Hughes H-4 Hercules

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24 Dec 2020

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Rational behaviour suggests that people respond to incentives. The decision to choose one alternative over another occurs when that alternative"s marginal benefits exceed its marginal costs. When an incentive is provided on a large scale, the consequences can be extremely large. Asking how others respond can help prevent bad decisions by predicting the undesirable side-effects of a change in prices or policies. Price of gasoline rises people buy more fuel-efficient cars. There are more well-paid jobs available for university graduates with economics degrees. The opportunity cost of going to the movie increases. The institution has given students as disincentive to engage in non-school related activities. When you evaluate a government policy you are looking at two things: efficiency and fairness (equity) You need to answer this before you can produce something as you may possibly waste resources. This leads to efficiency resources are used to produce goods and services with the greatest economic value.

Related Questions

Question 1

Which compensation method helps to explain the large difference between the salaries of top-level managers and mid-level managers in a firm?

	A.	Tournaments
	B.	New blood
	C.	Piece rate
	D.	Backloaded compensation

3 points

Question 2

Please consider the information provided under Question 19 in Chapter 3 (page 54). Based on the stated information, the optimal number of bees kept if the externality is ignored by Yung is 5,000. Is the socially optimal number of bees higher or lower than 5,000?

	A.	We do not have enough information to answer this question
	B.	Same
	C.	Lower
	D.	Higher

3 points

Question 3

Which of the following factors contribute to the existence of firms?

	A.	All of these factors contribute to firm existence
	B.	Risks associated with specialization
	C.	Incomplete contracts
	D.	Willingness of some people to take on risk in exchange for residual income

3 points

Question 4

Public goods are often subject to free-rider problems because these goods are:

	A.	Non-rival and non-excludable
	B.	Rival and non-excludable
	C.	Non-rival and excludable
	D.	Rival and excludable

3 points

Question 5

Which of the following is the most efficient mechanism for allocating scarce goods?

	A.	Government allocation system
	B.	First-come-first-served system
	C.	Market system
	D.	Random allocation system

3 points

Question 6

Many years ago, most of the major Hollywood movie studios also owned chains of local movie theaters across the US. Today, most of the local movie theaters are owned by other companies. What has happened to the degree of integration in the movie industry over time?

	A.	Less horizontally integrated
	B.	Less vertically integrated
	C.	More horizontally integrated
	D.	More vertically integrated

3 points

Question 7

Your firm produces replacement parts for the nuclear submarines operated by the US Navy. Which one of Porter's Five Forces will be most prominent in determining your strategies and profitability?

	A.	Bargaining Power of Suppliers
	B.	Bargaining Power of Customers
	C.	Threat of New Entrants
	D.	Threat of Substitutes

3 points

Question 8

Which of the following statements is NOT true?

	A.	The market mechanism for allocating resources is most efficient due to the incentives it creates.
	B.	Markets are always the most efficient way to allocate goods, even if the market is not perfectly competitive.
	C.	The random allocation mechanism provides no incentives at all.
	D.	The government allocation mechanism provides no incentive for the economy to grow.

3 points

Question 9

Suppose a firm's cost structure exhibits economies of scope. Which of the following actions is compatible with this cost structure?

Diversify into other product lines

Focus on core competencies and reduce production

Focus on core competencies and maintain constant production

Focus on core competencies and expand production

Question 10

Please refer to Table 8.3 on page 132 in the book. Suppose we change the payoffs in the "low price, low price" cell to 0, 25 from 0, 0. Does this change the Nash equilibrium for the game, and is the game still a Prisoner's Dilemma?

	A.	Equilibrium changes, still a Prisoner's Dilemma
	B.	Equilibrium changes, no longer a Prisoner's Dilemma
	C.	Same equilibrium, no longer a Prisoner's Dilemma
	D.	Same equilibrium, still a Prisoner's Dilemma

3 points

Question 11

Which of the following statements about restricting entry to markets is NOT true?

	A.	Brand identity and logos are expensive to establish, and entrants may find it very expensive to establish comparable position in the market.
	B.	Predatory pricing is illegal but very difficult to prove in court
	C.	Branded products tend to have more elastic demand, which makes it more difficult for entrants to charge high prices and they must stay out of the market.
	D.	A low-quality seller cannot effectively use a warranty program to keep other firms out of its market

3 points

Question 12

Your firm earns $2 million per quarter in total revenue, and your accounting profits are $100,000 per quarter. You do not charge the firm for the use of an old building that you own because it is 50 years old and fully depreciated. However, another firm has offered you $200,000 per quarter to use the facility, and this is the market rental rate for similar facilities. In this case, we know that your:

	A.	Opportunity costs are positive and economic profits are negative
	B.	Opportunity costs and economic profits are positive
	C.	Opportunity costs are negative and economic profits are positive
	D.	Opportunity costs and economic profits are negative

3 points

Question 13

Please refer to Question 13 in Chapter 1 (page 17). What is the marginal cost of reducing global warming by 0.017 degrees?

	A.	MC = 60
	B.	MC = 5
	C.	We do not have enough information to answer this question
	D.	MC = 50

3 points

Question 14

In Chapter 6, Boyes focuses on negative externalities such as the various types of pollution. However, as we discussed during our online session, we can also observe positive externalities in which external benefits are generated for people. Which of the following is NOT an example of a positive externality?

	A.	Workers can help one another to "cover the phones" and make sure that someone is always available to help clients
	B.	Workers can provide ideas to one another about how to solve problems
	C.	All of these cases are examples of positive externalities
	D.	Workers can form carpools and use other means to reduce commuting costs

3 points

Question 15

Common property resources are:

	A.	Non-rival and non-excludable
	B.	Non-rival and excludable
	C.	Rival and non-excludable
	D.	Rival and excludable

3 points

Question 16

The free-rider problem arises in markets for common property resources.

	A.	False
	B.	True

3 points

Question 17

Firms that set their product price below the actual cost of production may be engaging in:

	A.	Predatory pricing
	B.	Monopoly pricing
	C.	Moral hazard
	D.	Dollar-cost averaging

3 points

Question 18

Under a cap-and-trade mechanism to control air pollution, what happens to the price of pollution rights if the supply of righs is reduced (i.e., the supply of rights is reduced)?

Increases

Decreases

No change

Question 19

The key method for a manufacturing firm to avoid hold-up problems is to have another source of inputs.

	A.	False
	B.	True

3 points

Question 20

Your firm sells luxury autos, and you have asked the marketing department to develop and stronger brand identity through a new ad campaign. After the campaign has run for 6 months, you hire an economic consultant to study the impact of the campaign on the demand for your autos. The consultant reports that the demand for your cars is now more elastic than it was 6 months ago. Was the new ad campaign successful?

	A.	Yes
	B.	No

AN ETHICAL DILEMMA*

Steven, a junior at Northeast State, just started working part-time at a local fast food restaurant chain. Although not his dream job, it paid for tuition and books, and the restaurant gave him the flexible schedule he needed for school. After a few months, Steven found he got along well with all of his coworkers, but it was apparent they did not respect the company or the management. The employees made fun of their bosses and treated the work area like a playground. In some respects, Steven thought it was a fun environment to work in, especially after hours when management was gone for the day. They played their music loudly, laughed, and talked with one another during the down times instead of cleaning up their work areas like they were supposed to. Despite the fact there were ethical policies telling employees how they were expected to act in the workplace, these policies never seemed to be enforced. One day, while working with his coworker Julie on the food assembly table, Steven saw Julie accidentally drop a meat patty on the floor. Without so much as a flinch, she bent down, picked up the patty, stuck it back on the bun, and wrapped it up. It happened so fast that Steven wasnât even sure he had seen rightâespecially since Julie had done it so casually. Steven watched in dismay as another worker took the hamburger out to the customer. Over the next few weeks, Steven saw others, including the shift supervisor, do the same thing with burgers and other products. Once, an entire cheeseburger hit the greasy floor, was picked up, and was taken to the customer. This time the customer complained the burger tasted funny and sent it back. Steven noticed other unsanitary practices such as employees not washing their hands between handling meat and vegetables and not washing utensils between uses. Obviously, such practices were against company policies and, if reported, the supervisors in charge could get in trouble and the restaurant would face investigations from the health department. However, there was ample opportunity for things like this to occur. There was no one watching them, and the shift supervisor also engaged in these activities. Steven felt it was the companyâs responsibility to hire good people, so they were to blame if these things happened. One day, Steven approached Julie and asked, âWhy do so many people here serve food that has fallen on the floor to customers?â Julie thought about it briefly as though she had never considered it before and replied, âI guess itâs because it would take too much time to get another beef patty out of the freezer, cook it, and serve it to the customer. This is a fast food restaurant, after all, and Iâm not interested in hearing customers complain about the time it takes for them to get their food. Besides, the restaurants with the fastest service get a bonus from corporate headquarters. Last year the supervisors rewarded us with some extra money for doing our jobs so quickly.â Steven was somewhat taken aback by the honest reply and asked, âWouldnât you be disgusted if you were served dirty food at a restaurant?â This time Julieâs response was quick. She said, âWhat I donât know wonât hurt me.â She walked off. Several weeks went by and the same practices continued. Steven became more and more concerned about the consequences that could happen in an environment so laid back and unconcerned about safety and health. It seemed like the more time that passed, the worse everyoneâs attitude became. One day, at the beginning of his shift, Steven noticed the walk-in freezer had been left open. As he went to shut the door, he discovered a smell of rotten meat. It almost made him vomit. âHow could this happen?â he wondered. He threw away the rotten meat without asking anyone because he was afraid of what the answer might be. After Steven threw out the spoiled meat, he began to wonder how the culture of the restaurant got to the point of supporting such practices. He realized the seemingly minor unsanitary practices allowed major issues to arise that could possibly hurt someone. Steven felt he should say or do something, but to whom? He sat down and pondered what he should do.

QUESTIONS | EXERCISES

1. Describe the nature of the organizational culture in the restaurant. What kind of opportunities are there for unethical behavior to occur? Are there any opportunities for ethical behavior?

2. What are some of the incentives employees might have to engage in this type of behavior?

3. If the organizational culture of the restaurant does not change, what are some likely outcomes and consequences?

ECN E101 Lecture Notes - Lecture 3: Opportunity Cost, Hughes H-4 Hercules

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