ADVANCED MANAGERIAL ECONOMICS

Lecturer
DR. Victor B. Mariano

BY
Andi Thahir
11-613176

GRADUATE SCHOOL
JOSÉ RIZAL UNIVERSITY
80 SHOW BOULLEVARD, MANDALUYONG CITY
MANILA, 2010
 1
1. The demand function Px = 20 - Qx
2
5
The supply function  Sx = 12 + Qx
4
a) What is the equilibrium Px and Qx?
1
b) If the demand shifted to PX = 30 - Qx?
2

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

remains the same?
5
If the supply function shifted to Sx = 6 + Qx, what would be new
4
equilibrium Px and Qx

a) Equilibrium refers to a condition when demand equal with supply (D = S)

So : Px = Sx
1 5
20 - Qx = 12 + Qx
2 4
5 1
20 - 12 = Qx + Qx
4 2
5 2
8 = Qx + Qx
4 4
7
8 = Qx
4
7
8÷ = Qx
4
4
8 x = Qx
7
32
= Qx
7
32 32
Qx = (It means quantity of the equilibrium is )
7 7

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

1
Px = 20 - Qx
2

1 32
= 20 - ( x )
2 7
 32
= 20 - ( )
14

16
= 20 - ( )
7

140 16
= -
7 7

124 124
= (it means price of the equilibrium is )
7 7

1
b) Px = 30 - Qx
2

5
Sx = 12 + Qx
4

Equilibrium refers to Px = Sx

Px = Sx

1 5
30 - Qx = 12 + Qx
2 4

5 1
30 - 12 = Qx + Qx
4 2

5 2
18 = Qx + Qx
4 4

7
18 = Qx
4

7
18 ÷ = Qx
4

4
18 x = Qx
7

72 72
Qx = (it means quantity of equilibrium is )
7 7
 1
Px = 30 - Qx
2

1 72
= 30 - ( x ))
2 7

36
= 30 -
7

210−36
=
7

174 174
= (it means price of the equilibrium is )
7 7

72 174
So the equilibrium refers to ( , )
7 7

5
c) Sx = 6 + Qx
4

1
Px = 20 - Qx
2

Equilibrium refers to Px = Sx

Px = Sx

1 5
20 - Qx = 6 + Qx
2 4

5 1
20 - 6 = Qx + Qx
4 2

5 2
14 = Qx + Qx
4 4

7
14 = Qx
4
 7
14 ÷ = Qx
4

4
14 x = Qx
7

56 56
= Qx (it means quantity of the equilibrium is )
7 7

1
Px = 20 - Qx
2

1 56
= 20 - ( x )
2 7

28
= 20 -
7

140−28
=
7

112 112
= (it means price of the equilibrium is ¿
7 7

56 112
So the equilibrium refers to ( , ¿
7 7

2. The cross price elasticity of product X and Y is Ex 1y = -0.38 for Py $10, the Qx =
30 units, if the price of y increase to $12, what would be new Qx?
E x 1y = -0,38
P y1 = $10
Qx1 = 30 Unit
P y2 = $12

ΔQx P y 1
E x 1y = x
Δ Py Q x 1
 Q x 2−Q x 1 P y 1
-0,38 = x
P y 2− P y1
Q x1

Q x 2−30 10
-0,38 = x
12−10 30

Q x 2−30 1
-0,38 = x
2 3

Q x 2−30
-0,38 =
6

-0,38 x 6 = Q x 2 - 30

-2,28 = Q x 2 - 30

-2,28 + 30= Q x 2

Q x 2 = 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

FV
PV = FV =¿ $150.000/5 years
( 1+ i )n

( 150.000 x 2 )
PV = i=0
( 1+i )10

300.000
PV = n=10
110

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).

200,000 2 500,000 2 400,000 2

HHI= HHI =10,000( ( 1,100,000) (
+
1,100,000
+ )(
1,100,000 )
)=¿3719,00

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

500.000 2 600,000 2
HHI =10,000( ( 1,100,000
+)(
1,100,000 )
)=¿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 = 12
c. The firm’s maximum profits is P=60 and Q=7 (MR =MC)
d. The managers should be increasing price and decreasing cost

References

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