16 Market shares of chocolate makers are in the table .a.Calculate the Herfindahl-Hirschman Index.The Index.The Herfindahl-Hirschman Index is 1,800. TheHerfindahl-Hirschman Index euals the sum of the suares ofthe market shares of the !0 lar"est firms or of all firms if thereare less than !0 firms. The Herfindahl-Hirschman Index euals1!#$ 10#$ #0#$ 1!#$ #!#$ 1!#, %hich euals 1,800 .b.&hat is the structure of the chocolate industr'(This industr'( This industr' is moderatel' com)etiti*e because theHerfindahl-Hirschman Index lies in the ran"e 1,000 to 1,800. 1+.T%o 1+.T%o leadin" desi"n firms, stro tudios of an rancisco and Hers /x)erimental esi"n aborator',Inc. of 2saka, 3a)an, %orked %ith Microsoft to desi"n the 4box 560 *ideo "ame console. IM, TI, TI, andi desi"ned the 4box 5607s hard%are. T%o firms, lextronics &istron, and Celestica, manufacturethe 4box 560 at their )lants in China and Tai%an.a.escribe Tai%an.a.escribe the roles of market coordination and coordination b' firms in the desi"n, manufacture, andmarketin" of the 4box 560.Microsoft 560.Microsoft entered the market to hire *arious firms, stro tudios and Hers /x)erimental esi"naborator' to desi"n the 4box 560 and then entered the market a"ain to hire IM, TI, TI, and i todesi"n the hard%are of o f the 4box 560. inall', Microsoft once a"ain entered the market to hirelextronics and &istron, and Celestica to )roduce the 4box 560. 2nce Microsoft had contracted%ith these firms, the desi"n, manufacture, etc. takes )lace %ithin the firm.b.&h' firm. b.&h' do 'ou think Microsoft %orks %ith a lar"e number of other firms to brin" the 4box to market, ratherthan )erformin" all the tasks at its headuarters in eattle( Microsoft %orks %ith a lar"e number of firms rather than doin" e*er'thin" in-house because it is lessex)ensi*e for Microsoft to %ork %ith other firms. These other firms ha*e s)eciali9ed in *arious tasksand so ha*e "ained economies of scale that Microsoft does not )ossess. Therefore it is chea)er forMicrosoft to enter the market and hire the ex)ertise it needs than to do it all itself. c.&hat are the roles of transactions costs, economies of scale, economies of sco)e, and economies of irmMarket irmMarket share:)ercent;Ma'fair, Inc1!ond, Inc10Ma"ic, Inc#0ll
11. Federal Express Express enters into contracts with independent truckoperators who ofer FedEx service and who are rewarded by thevolume (cubic meters) o packages they carry.a. hy doesn!t FedEx buy more trucks and hire more drivers"FedEx drivers"FedEx aces a principal#agent problem. $n particular% it is not easyto monitor its drivers and insure that they are working hard toe&ciently deliver packages. FedEx overcomes this problem by hiringindependent contactors and then paying them based on the amount opackages they deliver. deliver. Essentially% FedEx uses a
piecework method opayment.b. hat incentive problems might arise rom the arrangement thatFedEx thatFedEx uses"FedEx pays its drivers based on the volume o packages they deliver.'his deliver.'his method o payment creates a ew potential problems or FedEx.First% FedEx must worry about the uality o its service. $nparticular% unless FedEx bases part o the payment on uality% itsdrivers have an incentive to drop the package and race of to thenext delivery delivery with no concern or how the packages are handled.econd% FedEx must take care that drivers do not attempt to selectonly packages that are close to the FedEx location and avoidpackages that have a greater than average driving time. Finally%FedEx also must worry that its drivers do not take undue risks whiledriving( whiledriving(in order) order)to deliver as many packages as possible. $ FedExtrucks FedExtrucks were involved in too many accidents% FedEx would sufer badpublicity and% presumably% would lose some business 1#. ee is a com)uter )ro"rammer %ho earned >5!,000 in #00+. ut on 3anuar' 1, #008 ee o)ened a bod' board manufacturin" business. t the end of the first 'ear of o)eration, he submitted the follo%in" information to his accountant? @ He sto))ed rentin" out his cotta"e for >5,!00 a 'ear and used it as his factor'. The market *alue of the cotta"e increased from >+0,000 to >+1,000. @ He s)ent >!0,000 on materials, )hone, utilities, etc. @ He leased machines for >10,000 a 'ear. @ He )aid >1!,000 in %a"es. @ He used >10,000 from his sa*in"s account, %hich earns ! )ercent a 'ear interest. @ He borro%ed >A0,000 at 10 )ercent a 'ear from the bank. @ He sold >160,000 %orth of bod' boards.+ @ #!,000 a 'ear. a. Calculate ee7s o))ortunit' cost of )roduction and economic )rofit. ee has costs of >!0,000 )aid for materials, )hone, utilities, etcB >1!,000 for %a"esB >10,000 )aid for the machine leaseB >A,000 )aid for interest ex)ense on the loanB >5,!00 of for"one rent for the cotta"e )lus >1,000 for the Dde)reciationE of the cotta"e :the cotta"e actuall' a))reciated;B >!00 in for"one interest from the sa*in"s accountB and, >#!,000 for normal )rofit. These "i*e a total o))ortunit' cost of >10+,000. ee7s economic )rofit is the total re*enue, >160,000, minus the total o))ortunit' cost, >10+,000, for an economic )rofit of >!5,000. b. ee7s accountant recorded the de)reciation on his cotta"e durin" #00+ as >+,000. ccordin" to the accountant, %hat )rofit did ee7s make( ee7s accountant %ill include ee has costs of >!0,000 )aid for materials, )hone, utilities, etcB >1!,000 for %a"esB >10,000 )aid for the machine leaseB >A,000 )aid for interest ex)ense on the loanB and, +,000 of de)reciation ex)ense for a total o))ortunit' cost of >86,000. The total )rofit accordin" to the accountant %ill eual total re*enue, >160,000, minus total cost, >86,000, for a )rofit of >+A,000 15. In #00+, Toni Toni tau"ht music and earned >#0,000. he also earned >A,000 b' rentin" out her basement. 2n 3anuar' 1, #008, she uit teachin", sto))ed rentin" out her basement, and be"an to use it as the office for her ne% &eb site desi"n business. he took >#,000 from her sa*in"s account to bu' a com)uter. urin" #008, she )aid >1,!00 for the lease of a &eb ser*er and >1,+!0 for hi"h-s)eed
Internet ser*ice. he recei*ed a total re*enue from &eb site desi"nin" of >A!,000 and earned interest at ! )ercent a 'ear on her sa*in"s account balance. !!,000 a 'ear. t the end of #008, Toni Toni could ha*e sold her com)uter for >!00. Calculate Toni7s Toni7s o))ortunit' cost of )roduction and economic )rofit in #008. #0 08. Toni has costs of >1,!00 for the lease of a &eb ser*erB >1,+!0 for hi"h-s)eed Toni Internet ser*iceB >!!,000 for normal )rofitB >#0,000 of for"one earnin"s from teachin"B >A,000 of for"one rent from rentin" her basementB >100 of for"one interest from her sa*in" accountB and >1,!00 for the de)reciation of her com)uter :%hich euals the >#,000 )aid for it minus the >!00 for %hich she could ha*e sold it;. These *arious costs sum s um to a total o))ortunit' cost of >85,8!0. Toni7s Toni7s economic D)rofitE is her total re*enue, >A!,000, minus her total o))ortunit' cost, >85,8!0, for an economic loss of >58,8!0.
18. TheCol v i nI nt er v i ew:Chr y sl er Thek eydr i v erofpr ofi t abi l i t ywi l l bet hatt hef oc us oft hec ompanyi s n’ tonpr ofi t abi l i t y .Our f o c usi so nt h ec u s t o me r . I f wec anfi n dawa yt o g i v ec us t o me r swh a t t h e ywa n t b e t t e rt h a na n y b o d ye l s e , t h e nwh a t c a ns t o pu s ?For i l 14, t une,Apr 2008 a. I ns pi t eo f wh a t Ch r y s l e r ’ sv i c ec ha i r ma na n dc op r e s i d e n t c l a i ms , wh yi sCh r y s l e r ’ s f o c us ac t ual l yonpr ofi t abi l i t y ?Ch r y s l e r ’ sa c t u a l f o c usi so ni t spr o fi t b e c au s ei f Ch r y s l e r c o n t i n u e st oi n c u r l o s s esCh r y s l e r e v en t u a l l y wi l l s hutd own. b. Wh a t wo u l dh a p p e nt oCh r y s l e r i f t h e yd i d n ’ t f o c uso nma x i mi z i n gp r o fi t s , b u t i n s t e a d o n l y f o c us edt h e i r p r o d u c t i o na n dp r i c i n gd e c i s i o n st o“ g i v ec us t o me r swh a t t h e ywa n t ? ” I ng e n e r a l c us t o me r swa n t v e r yel a b o r a t e , v er yc os t l ya u t o mo b i l e ss ol df o r a ne x c ep t i o n a l l yl o wp r i c e. I n p a r t i c ul a r , c us t o me r swa n t t op a yt h el o we s t p r i c ep o s s i b l er e g a r d l e s sof t h ec omp a n y ’ sp r o fi t . I f Ch r y s l e r f o c us e do no n l ygi v i n gc us t o me r swa n t t h e ywa n t , Ch r y s l e r wo u l dc on t i n u ei n c ur a l o s sa n d u l t i ma t e l ywo u l dei t h e r c l o s eo r b epu r c h a s e dbya no t h e r c o mp a n y .
1* +ust atchestocks atchestocks too volatile" ,onds too boring" 'hen try an alternative investment-one investment-one you can wearon your wrist. /'he0 typical return return on a watch over ve to ten years is roughly 123. /4necould0 do better in an index und% but what other investment is so wearable" Fortune% 5pril 16% 7228
a.hat is the cost o buying a watch"'he (opportunity) cost o buying a watch is the loss o whatever else would have been purchased with theunds. b.hat is the opportunity cost o owning a watch"'he opportunity cost o owning a watch is the annual orgone return% return% such as the orgone interest rombuying rombuying a watch rather than placing the unds in a saving account% and the depreciation o the watch. c.9oes owning a watch create an economic prot p rot opportunity":es% opportunity":es% owning a watch creates an economic prot opportunity. opportunity. $ the watch appreciates at a rapid clip% sothat the gain in the value o the watch over time exceeds the normal prot rom the unds used to purchasethe watch% then owning the watch has lead to an economic prot 12team )roduction in the desi"n, manufacture, and marketin" of the 4box( Microsoft needed to determine %hat )art of desi"nin", buildin", and marketin" the 4box %ould take)lace inside of Microsoft and %hat %ould take )lace in other com)anies that Microsoft hired. Hirin"other com)anies means that Microsoft incurs the transactions costs of usin" markets. Ho%e*er,other com)anies that s)eciali9ed in different tasks ha*e economies of scale, economies of sco)e,andFor economies of team )roduction that lo%er the cost to Microsoft of hirin" them. o Microsofthad to determine %hich )arts of the 4box 560 %ould be chea)er to undertake inside of Microsoft and%hich )arts %ould be chea)er to enter the market to contract %ith other firm
72.here 72.here 9oes ;oogle ;o 723 time%? that amous one day a week that ;oogle gives itsengineers to work on whatever pro@ect they want . =e and a couple o colleagues did whatmany o the young geniuses do at ;oogleA 'hey came up with a cool idea. 5t ;oogle% whatyou oten end up with instead o resource resource allocation is a laisseB#aire mess Fortune% Fortune% +ay 7C% 7228 a.9escribe ;oogle!s method o organiBing production with their sotware engineers.$n some sense ;oogle is using a command system because ;oogle >orders? >orders? its engineers to use the >72percent time.? ,ut in a larger sense ;oogle is using an incentive system. $ one o the engineers comes up with a wildly protable idea% the engineer will benet by gaining stature and probably p robably income within;oogle. b.hat are the potential gains and opportunity costs associated with this method"'he potential gain is that the creative people working or ;oogle will apply their creativity to develop newand better products or ;oogle.
'he potential drawback is the principal#agent principal#agent problem. problem. 'he engineersmight use their 723 time or on#the#@ob leisure rather than or new% cutting edge research.
71.5 +edical ensation... hospitals continue to splurge on da Dinci surgical robots. itting comortably at a da Dinci console% surgeons could usevarious robotic attachments to perorm even the most complexprocedures. Fortune% Fortune% 5pril 78% 7228 a. 5ssume that perorming perorming a surgery with a surgical robot reuiresewer surgeons and nurses. $s using the surgical robottechnologically robottechnologically e&cient" sing the surgical robot is technology e&cient because theproduction techniue uses less labor (and more capital) than thenon#robotic techniue. b. hat additional inormation would you need to be able to saythat switching to surgical robots is economically e&cient ora hospital" 'o 'o determine i i the production techniue techniue is economically e&cient%inormation e&cient%inormation about the cost o the robot and the cost o the nursesand doctors and about the number o doctors and nurses eachproduction techniue uses is needed.
77.ong Geviled% +erit Hay ;ains 5mong 'eachers school districts in doBens o states experiment with plans thatcompensate teachers partly based on classroom perormance rather than their years on the @ob and coursework completed. ork with mentors to improve their instruction and get bonusesor raising student achievement encourages eforts to raiseteaching uality 'he
'he principal#agent problem problem with teachers teachers in public education is theconcern that teachers will not work hard in the class room.'eachers! eforts are di&cult to monitor and so teachers have theincentive to shirk by working less diligently and teaching theirstudents less. +erit pay links the teachers! pay to their students!achievement% presumably perormance on standardiBed exams. ith thislinkage teachers will be paid more the better their students!perormance students!perormance which gives the teachers the sel#interested sel#interested incentiveto work diligently to instruct their students
7M. tudyGeading ,etween the inesabout ;oogle and :ahooN on pp.766O76P% and then answer the ollowing uestionsAa. hat are a re the products that ;oogle and :ahooN sell":ahooN and ;oogle provide search services or consumers.b. =ow do $nternet search engine providers generate revenue andearn a prot":ahooN and ;oogle generate revenue rom advertising.c. hat is the distinction between paid search advertising anddisplay advertising" hat types o rms use the latter"$ a consumer clicks on an advertising search link% the companydoing the advertising pays the $nternet search provider. provider. 'hispayment is called Kpaid search advertising.L ;oogle specialiBes inpaid search s earch advertising. 9isplay advertising reers toadvertisements toadvertisements that appear on the web page o the $nternet searchprovider. :ahooN specialiBes in display advertising. arge% wellknown companies% companies% such as Ford Ford +otor% tend to use displayadvertising.d. hy do you think ;oogle has bought :ou'ube" =ow will this
2 3
b o u t Go o g l ea n dY a h o o ! o np p . 2 4 4 – 2 4 5 , a n dt h e na n s we r t h ef ol l owi ng Re a d i n gBe t we e nt h eL i n e sa ques t i ons : a.Wh at a r et h ep r o du c t st h at Go og l ea ndY a ho o! s e l l ?Ya ho o! a ndGo og l ep r o v i d es e ar c h s er v i c esf o r c on s ume r s .b.Ho wd oI n t e r n e t s e a r c he n g i n ep r o v i d e r sg e n e r a t er e v e n u ea n de a r na p r o fi t ?Y a h o o ! a n dGo o g l eg e n e r a t er e v en u ef r o ma d v e r t i s i n g .c .Wh a t i st h ed i s t i n c t i o nb e t we e n p a i ds ea r c ha d v e r t i s i n ga n dd i s pl a ya d v e r t i s i n g ?Wh a t t y pe soffi r msus et h el a t t e r ?I f a c o n s ume r c l i c k so na na d v e r t i s i n gs ea r c hl i n k , t h ec o mp a n yd o i n gt h ea d v e r t i s i n gp a y st h e I n t e r n e t s ea r c hp r o v i d e r . Th i sp a y me me n t i sc al l e d“ p a i ds ea r c ha d v er t i s i n g . ” Go o g l es pe c i a l i z esi n p a i ds ea r c ha d v e r t i s i n g . Di s pl a yad v e r t i s i n gr e f e r st oa d v e r t i s eme n t st h a t a p p e a r o nt h ewe b p a g eo f t h eI n t e r n e ts e a r c hp r o v i d e r . Y a h o o ! s pe c i a l i z esi nd i s pl a yad v er t i s i n g . L a r g e , we l l k no wn c o mp a ni e s , s u c ha sFo r dMo t o r , t e ndt ou s ed i s p l a yad v e r t i s i n g .d.Wh ydoy o ut h i n kGo o g l e h a sbo u gh t Y o u T ub e ?Ho wwi l l t h i sp ur c h a s een ab l eGo o gl et oi n c r e a s ei t sr e v en u ean d p r o fi t ?Go og l epu r c h as e dYo uT u b eb ec a us eGo og l ewa nt e dt oga i nad v er t i s i n gr e v e n uef r o m d i s p l a ya d v e r t i s i n go nYo u T ub e ’ swe bs i t e . Go o g l ea l s owa n t e dt oa t t r a c t n e wu s er san dg a i n
n e wt e c hn o l o g i e sf o r a d v e r t i s i n g . Su c ht e c h n o l o g i e smi mi g h t b e c o mei n c r e a s i n g l yi mp o r t a n t b e c au s eb i gc omp a n i e so f t e nu s eon l i n ev i d e oad v e r t i s i n g .
