Economics, Hw1, Mid Term, Final Paper

1) Do Problem 3-5 on page 38 ("Evaluating Performance..."

ANSWER:

Accounting Profit: 1 million minus (900K + 40K) = 60 K

Economic Profit: 1 mill minus (940K + 70K+6K) = - 16K

2) A very successful ad for V-8 vegetable juice goes like this: upon finishing a soft drink, the fellow in the ad slaps his forehead and exclaims "Wow...I coulda had a V-8". What basic idea does this ad drive home?

ANSWER: Opportunity Cost

3) A software company has two divisions: Programming and Marketing, The manager wants to find and fix software bugs more quickly. S/he devises an incentive plan that pays 50TL for each bug Marketing people find and 50 TL for each bug the programmers fix. Evaluate this plan and if possible improve it.

Hint: find a good account of "Istanbul tulumbacilari.."

ANSWER: This plan has the following shortcoming: the programmers can deliberately include bugs and then fiz them and get a bonus. In the old days "tulumbacilar" would start a fire and then go to the homeowner and... IMPROVEMENT: split the programming department into two: those who write programs and those who detect bugs...Alternatively suitably punish programmers for writing faulty programs IF you can detect them (programming involves teamwork and assigning responsibility may be tricky...)

4) Travelers commonly tip shoe shiners at airports. The tips are

made after the shoe shine is complete and the traveler has no

legal obligation to make the tip.

ANSWER: Logically (= cold hearted maximize return perspective) tips earned at commuter airports should be LARGER than those earned at resort locations...Indeed from that same perspective there is NO REASON to give any tips to shoe shiners at resort airports...

5) One physician who worked for a large health maintenance organization (HMO) was quoted as saying:

"One day i was listening to a patient's heart and realized there was an abnormal rythm. My first thought was that I hoped that I did not have to refer the patient to a specialist"

ANSWER: Probably s/he was paid for TREATING patients and NOT PAID or received LESS PAYMENT or even was PENALIZED for making referrals. The point of the question is to highlight the (possible) conflict between Hippocratic oath and the incentive system...