Answer Take Home Assigment (Andi Thahir)

ADVANCED MANAGERIAL ECONOMICS

Lecturer

DR. Victor B. Mariano

BY

Andi Thahir11-613176

GRADUATE SCHOOLJOSÉ RIZAL UNIVERSITY

80 SHOW BOULLEVARD, MANDALUYONG CITYMANILA, 2010

1. The demand function Px = 20 - 12

Qx

The supply function Sx = 12 + 54

Qx

a) What is the equilibrium Px and Qx?

b) If the demand shifted to PX = 30 - 12

Qx?

What would be the new equilibrium Px and Qx if the supply function remains the same?

If the supply function shifted to Sx = 6 + 54

Qx, what would be new

equilibrium Px and Qx

a) Equilibrium refers to a condition when demand equal with supply (D = S)So : Px = Sx

20 - 12

Qx = 12 + 54

Qx

20 - 12 = 54

Qx + 12

Qx

8 = 54

Qx + 24

Qx

8 = 74

Qx

8 ÷ 74

= Qx

8 x 47

= Qx

327

= Qx

Qx = 327

(It means quantity of the equilibrium is 327

)

To get Px, we have to put into the function :

Px = 20 - 12

Qx

= 20 - ( 12

x 327

)

= 20 - (3214

)

= 20 - (167

)

= 1407

- 167

= 1247

(it means price of the equilibrium is 1247

)

b) Px = 30 - 12

Qx

Sx = 12 + 54

Qx

Equilibrium refers to Px = Sx

Px = Sx

30 - 12

Qx = 12 + 54

Qx

30 - 12 = 54

Qx + 12

Qx

18 = 54

Qx + 24

Qx

18 = 74

Qx

18 ÷ 74

= Qx

18 x 47

= Qx

Qx = 727

(it means quantity of equilibrium is 727

)

Px = 30 - 12

Qx

= 30 - (12

x 727

))

= 30 - 367

= 210−367

= 1747

(it means price of the equilibrium is 1747

)

So the equilibrium refers to (727

, 1747

)

c) Sx = 6 + 54

Qx

Px = 20 - 12

Qx

Equilibrium refers to Px = Sx

Px = Sx

20 - 12

Qx = 6 + 54

Qx

20 - 6 = 54

Qx + 12

Qx

14 = 54

Qx + 24

Qx

14 = 74

Qx

14 ÷ 74

= Qx

14 x 47

= Qx

567

= Qx (it means quantity of the equilibrium is 567

)

Px = 20 - 12

Qx

= 20 - (12

x 567

)

= 20 - 287

= 140−287

= 1127

(it means price of the equilibrium is 1127

¿

So the equilibrium refers to (567, 1127

¿

2. The cross price elasticity of product X and Y is Ex1y = -0.38 for Py $10, the Qx = 30 units, if the price of y increase to $12, what would be new Qx?Ex1y = -0,38

Py1 = $10

Qx1 = 30 Unit

Py2 = $12

Ex1y = ΔQxΔPy

x P y1Qx1

-0,38 = Qx2−Q x1P y2−P y1

x P y1Qx1

-0,38 = Qx2−3012−10

x 1030

-0,38 = Qx2−302

x 13

-0,38 = Qx2−306

-0,38 x 6 = Qx2 - 30

-2,28 = Qx2 - 30

-2,28 + 30= Qx2

Qx2 = 27,72 (it means the new Q x is 27,72)

3. Why do you think the U.S. department of Justice blocks mergers which will

make an industry more concentrated?

US Department of Justice blocks merger which will make an industry more concentrate.

First of all we have to know the definition of merger. Merger Is the combining of two

or more entities Into one, through a purchase acquisition or a pooling of interest. In

merger there is no entity is created. It refers to the aspect of corporate strategy,

corporate finance and management dealing with the buying, selling and combining of

different company that can aid, finance or help growing company in given industry

grow rapidly without having to create another business entity.

Consolidating production in the hands of fewer firms through mergers and acquisitions

obviously is route to industrial concentration. Preventing transactions that, by

eliminating one or more competitors, would lead to undue increases in concentration

and the possible exercise of market power by the remaining firms is the mandate of the

two federal ANTITRUST agencies the US Department of Justice and the Federal Trade

Commission, under section 7 of the Clayton Act (1914).That mandate was strengthened

considerably by the Hart-Scott-Rodino Act (1978), which requires firms to notify the

antitrust authorities of their intention to merge and then to hold the transaction in

abeyance until it has been reviewed. Most transactions with summed firm values of

fifteen million dollars or more had to file premerger notifications initially; in February

2001 that threshold was raised to fifty million dollars and indexed for INFLATION .

Two important factors that antitrust authorities consider in deciding whether to allow a

proposed merger to proceed are the level of market concentration if the merger is

consummated and the change in market concentration from its premerger level. (Note

that the “market” considered relevant for merger analysis hardly ever corresponds to

the “industry” defined by the Economic Census; antitrust markets may be defined more

broadly or more narrowly; in practice, the definition of the relevant market usually is

the key to whether a merger is lawful or not.) Concentration thresholds are laid out in

the Justice Department's merger guidelines, first promulgated in 1968, revised

substantially in 1982, and amended several times since.

Industrial concentrate related to characteristic structural from the business sector. It is

the degree to which production in an industry—or in the economy as a whole—is

dominated by a few large firms.Once assumed to be a symptom of “market failure,”

concentration is, for the most part, seen nowadays as an indicator of superior

economic performance. Concentration would have adverse effects if it bred market

power—the ability to charge prices in excess of costs—thereby increasing industry at

consumers' expense. In theory, industrial concentration can facilitate the exercise of

market power if the members of the industry agree to cooperate rather than compete,

or if the industry's dominant firm takes the lead in setting prices that rivals follow. And,

indeed, the evidence generated by hundreds of econometric studies suggests that

concentrated industries are more profitable than unconcentrated ones. But that

evidence begs the question. It does not tell us whether profits are higher in

concentrated industries because of market power effects or because the firms in those

industries use resources more efficiently (ie, have lower costs).

4. Explain why automobile manufacture is produce their own engines but purchase

mirrors from independent suppliers?

A big factor of how the industry can exceed its expectations is to benchmark other

automotive industries in other countries. In Japan, some Japanese manufacturing firms,

such as Honda and Toyota, have renewed attention back to the importance of cost

reduction. They have accumulated this reduction from existing products that will give

them more productivity and growth.

A slowdown in the industry is currently taking place and thousands of jobs are now

widely acknowledged to be part of a recession gripping the entire manufacturing sector

of the US economy. "After nearly a decade of record sales and corporate profits,

purchases of cars and trucks fell sharply in the fourth quarter of 2000." (March 2001)

Rising fuel prices, the fall on the stock market, worries about job security and a

decrease in consumer confidence all led to the decline. To turn this around, the

majority of the industry will cut costs and workers, but will start cutting in places

overseas like Latin America.

The automobile industry can look at U.S. commercial banks to see how they expanded

their range of activities in recent years. However, "some observers worry that banks

with access to a federal safety net have strong incentives to use new opportunities to

take greater risks and increase their likelihood of failure." (July 2002). There is always

some debate when attempting to pursue avenues of expansion and growth. It is

extremely important that the automobile industry balances the advantages and

disadvantages to create a diverse situation while maintaining creative and durable

products.

The Japanese auto industry is not only less integrated into parts production than the

U.S. Big Three, but it also organizes purchasing differently. In Japan, car makers

typically contract out subassembly and component manufacturing while the Big Three

primarily purchase simple parts. Thus while Chrysler may buy from 5,000 suppliers (and

GM 20,000), Japanese auto companies buy from 200-300 firms--though these direct

suppliers subcontract simple parts production to numerous small firms. Likewise,

procurement in Japan is based on long-term "strategic" partnerships rather than the

short-term contracting which has been typical of the U.S. until the past five years. One

consequence is that Japanese auto firms are smaller. In 1985 Toyota and Nissan

together employed a scant 120,000, while in North America G M alone employed4

19,000 in 1988. This pattern is repeated a cross most industries, two-thirds of the

entire Japanese labor force are found in small establishments while two-thirds of U.S.

workers are in large firms.

Because of this structure managers at Japanese suppliers take over tasks which in

Detroit are performed by the visible hand of middle management. In particular,

Japanese managers at both suppliers and assemblers face the challenge of coordinating

activities across firm boundaries. The Japanese auto industry developed innovative

approaches to contracting to govern this system, which influenced practice in much of

manufacturing. The parallel is obvious. While in the U.S. in the 1920s G M was one

center for experimentation with the "visible hand" of internal management, in Japan in

the 1950s Toyota developed an "invisible hand shake” for managing strategic

purchasing. The implications mirror those in the U.S.—having lowered inter firms

transactions costs, Japanese companies on the margin resorted to purchasing rather

than vertical integration Management innovations in Japan led not to an increase in the

scale of firms, but (on the margin)t o a decrease in scale.

Inducement to Change: The Adoption of a Subcontracting Strategy

Until the beginning of World War H--T937f or Japan—Ford and GM dominated the

Japanese automotive industry at their peak they assembled over 30,000 units annually

in Japan. Most of their output was on a CKD (completely knocked down) basis, using

imported parts. There were firms which manufactured common replacement items

(tires, wheels, batteries, brake linings, piston rings), but when Nissan, Toyota, and Isuzu

entered the industry during 1936-1937, they found few potential domestic parts

producers, and not all of them were interested in the automotive business. Existing

steel producers for exampled, id not believe Toyota was viable, and refused to supply

steel of the requisite types and consistency needed for large castings and forgings. The

fledgling auto firms were thus forced to integrate vertically. Toyota made its own glass,

electrical components and specialty steel for castings, as well as many of its own

machine tools. Nissan Motors turned to sister firms in the Nissan zaibatsu including

Tobata Casting and Hitachi

During the war the auto firms were forced to turn out munitions, not vehicles. From

August 1945 such production ceased and the facilities of many firms were temporarily

designated for reparations to Southeast Asia and placed under seal. Nissan, Toyota, and

Isuzu, the pre-war entrants, continued partial operations. A long with turning out pots

pans, and sundry items, they and the major aircraft producers entered or reentered the

automotive industry. They repaired U.S. jeeps, made four wheel trucks and motor

scooters, and turned out heavy trucks and buses. Passenger car production resumed in

significant volume in 1955 and surpassed truck production only in 1967.

In response to this environment the previous strategy of vertical integration was

reversed. The Dodge Line policies of April 1949 provided the impetus and a channel

through which the U.S. Occupation successfully quelled the postwar inflation. The

resulting recession, however, led many large firms to reduce their work force and

produced bitter labor confrontations. The three dominant truck producers—Toyota,

Nissan, and Isuzu--all underwent strikes. Toyota faced bankruptcy due to inventory

mismanagement, until it was bailed out by Bank of Japan. The Korean War broke out in

June 1950, ending the overall recession and leading to orders for trucks and contracts

for vehicle repair, paid for in U.S. dollars. But while output increased rapidly, the auto

firms were reluctant to add to their work force. It was unclear how long the boom

would last and memories of the confrontation with unions over layoffs were still fresh.

So firms subcontracted production that had until then been carried out in-house to

other, generally smaller firms. Thus, while Toyota's output rose five-fold during 1952-

1957, employment rose only 12%.

Two factors enabled this shift. Because output was low, production depended upon

general purpose tools and skilled workers rather than production lines or other

dedicated assets. In fact, individual manufacturing steps, such as the drilling of holes

and the hand debarring of castings, had long been "put out” to small workshops.

Second, until the late 1950st here was significant excess capacity in manufacturing

(particularly in machining and stamping) and the auto industry was small relative to

manufacturing is a whole. It was thus relatively easy to find suppliers for simple parts at

competitive rates. This made subcontracting doubly advantageous. By Turning to

outside suppliers, the auto firms were able to increase their Output without new

investment. Instead, they would devote their limited manual resources to final

assembly new model design, and other activities which remained in-house.

5. Levi Straus & co paid $46,532 for a 110 year old pair of Levi’s jeans, the oldest pair of

jeans by out bidding several other bidders an e bay internet auction, does this

situation best represent producer-producers, consumer-consumer rivalry or

producer-consumer rivalry, explain!

This situation best represent consumer-consumer rivalry. Because consumer-consumer

rivalry present scarsity of goods that reduce the negotiating power of consumers as

they compete for the right to the goods. A 110 years old pair of Levi’s Jeans is the

oldest pair of jeans. This is a very antique and scare good have a reduce negotiating

power in bidding. It means the bidder have to compete for the oldest pair oj jeans.

That’s why Levi Strauss and co. needs to pay for an expensive price ($46.532).

In the other side from this case, we have to learn in understanding the market,

especially for industry rivalry. Knowing industry rivalry means that we have the

characteristic of framework that will lead to a more profitable industry.

6. What is the amount that you will pay for an asset that would generate an income of

$150,000 At the end of each of five years for ten years

$150,000$150,000

PV= 0 1 2 3 4 5 6 7 8 9 10

PV= FV

(1+i )n FV=¿ $150.000/5 years

PV=(150.000 x2 )

(1+i )10i=0

PV=300.000110

n=10

PV=300.000

So that I will pay $300.000 for the asset.

7. An industry consist of three firms with sales of $200,000, $500,000 and $400.000, :

a. Calculate the Herfindahl-Hirshman index (HHI)b. Based on the U.S. department of justice’s merger guidelines described in the text,

do you think the department of Justice would block a horizontal merger between two firms with sales of $200,000 and $400,000? Explain?

Answer:

a).

HHI=HHI=10,000(( 200,0001,100,000 )2

+( 500,0001,100,000 )2

+( 400,0001,100,000 )2

)=¿

3719,008

If happens horizontal block between two firm wits sales $ 200,000 and $ 400,000 so HHI is

HHI=10,000(( 500.0001,100,000 )2

+( 600,0001,100,000 )2

)=¿5.041

Here C4 is 0,545. So the concentration will add 5.041. it will be monopoly potensial and will be dangerous for market because that firm wil be trust which forbidden in the USA. The government must avoid that merger.

b). The United States Federal anti-trust authorities such as the Department of Justice and the Federal Trade Commission use the Herfindahl index as a screening tool to determine whether a proposed merger is likely to raise antitrust concerns [increases of over 0.0100 points generally provoke scrutiny, although this varies from case to case. The Antitrust Division of the Department of Justice considers Herfindahl indices between 0.1000 and 0.1800 to be moderately concentrated and indices above 0.1800 to be concentrated . As the market concentration increases, competition and efficiency decrease and the chances of collusion and monopoly increase.

8. The accompanying graph summarizes the demand and costs for a firm that operates in a monopolistically competitive market.a. What is the firm’s optimal output?b. What is the firm’s optimal price?c. What are the firm’s maximum profits?d. What adjustments should the manager be anticipating?

Answer:

a. The firm’s optimal output is P=90 and Q=11 b. The firm’s optimal price is P= 80 an Q = 12c. The firm’s maximum profits is P=60 and Q=7 (MR =MC)d. The managers should be increasing price and decreasing cost

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