Chapter 1: 3LO (page 27)
Explain the role of profits in the market economy.
Profits signal the producers to maximize the allocation of resources by moving them towards the consumers who valued them the most.
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You are the human resources manager for a famous retailer, and you are trying to convince the president of the company to change the structure of employee compensations. Currently, the company’s retail sales staff is paid a flat hourly wages of \(20 per hour for each eight-hour shift worked. You propose a new pay structure whereby each salesperson in a store would be compensated \)10 per hour, plus 1 percent of that store’s daily profits. Assume that, when run efficiently, each store’s maximum daily profits are $25,000. Outline the arguments that support your proposed plan.
The head of the accounting department at a major software manufacturer has asked you to put together a pro forma statement of the company’s value under several possible growth scenarios and the assumption that the company’s many divisions will remain a single entity forever. The manager is concerned that, despite the fact that the firm’s competitors are comparatively small, collectively their annual revenue growth has exceeded 50 percent over each of the last five years. She has requested that value projection be based on the firm’s current profits of $3.2 billion (which have to be paid out to stockholders) and the average interest rate over the past 20 years (6 percent) in each of the following profit growth scenarios:
a. Profits grow at an annual rate of 9 percent. (this one is tricky.)
b. Profits grow at an annual rate of 2 percent.
c. Profits grow at an annual rate of 0 percent.
d. Profits decline at an annual rate of 4 percent.
China's entry into the World Trade Organization (WTO) in 2001 created more competition between local and foreign firms, and also provided China greater access to the market for exports. This was particularly true in the market for rubber since, at the time, China was the world's second largest consumer of rubber (China is now the world's largest consumer of rubber). Shortly after joining the WTO, China eliminated its import quota on rubber. What impact do you think the import quota reduction likely had on the price of rubber and the quantity of rubber exchanged in China? What implications do you think the elimination of the quota on rubber had on China's social welfare?
Complete the following table and answer the accompanying questions.
At what level of the control variable are net benefits maximized?
What is the relation between marginal benefit and marginal cost at this level of the variable?
You are the manager in charge of global operations at Bank Global- a large commercial bank that operates in a number of countries around the world. You must decide whether or not to launch a new advertising campaign in the U.S. market. Your accounting department has provided the accompanying statement, which summarizes the financial impact of the advertising campaign on U.S. operations. In addition received a call from a colleague in charge of foreign operations, and she indicated that her unit would lose $8 million if the U.S. advertising campaign were launched. Your goal is to maximize Bank Global ’s value. Should you launch the new campaign? Explain.
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