Managerial Economics: A Problem-Solving Approach, Essay Example

Property Rights:

Property rights provide the initial legal framework from which trade and transactions can develop. That is, individuals pursuing value through trade is the foundation of how wealth is created in modern societies. With property rights, not only can individuals claim ownership of goods (and services) that can then be traded, but also have recourse if others attempt to appropriate their property without permission.

Goal Alignment of a Small Manufacturing Company:

This contract may not align incentives in the most optimal way between the current owners and the current manager (future owner). From the perspective of the current owners, they would like to sell the business in five years at a price that maximizes the potential value of the firm. From the perspective of the current manager (and likely future owner), he/she would like to buy the company at the lowest price possible.

The current contract incentives the general manager to work hard up to the first $150,000 in profits (from which he/she derives 75% of the proceeds), after that, however, the threshold plunges to 10% after. From the perspective of the current owners, they probably want a larger profit level from which to sell their holdings; from the perspective of the current manager, however, it makes sense to work hard up to $150,000 profit, but put in little effort afterwards. The current owners would be better served to give the manager greater incentives to grow the business, and receive a greater price when it is sold in five years. 

Rent Control:

Rent control presents a situation in which an apartment is kept at an artificially low rental price, usually due to administrative regulations. The potential wealth latent in the situation is: if the land lord is able to remove the rent control provisions, the price of the apartment (either in rent or sale terms) would increase exponentially. Thus, on the supply side the landlord would benefit from receiving a higher price that would likely lead to better maintenance and upkeep of the apartment. At the same time, renters or buyers would be willing to pay more- thus, the solution is to remove the rent ceiling.

Price Ceilings: 

The proponent of communist pricing systems is correct to point out that with a price ceiling, individuals may pay less than the “true” price for goods. However, consumers would pay in (at least) two other ways:

1) There is a misutilization of materials that may lead to higher prices elsewhere

Price controls disrupt the pricing mechanism from working: The price mechanism ensures that materials are used efficiently, that is, they are to put to the best use. Since this is disrupted in the price ceiling, materials will not be put to their greatest use resulting in a misallocation of goods.

2) Scarcity

With price controls, goods will simply become more scarce as producers will choose not to produce at the price (if it is below the equilibrium). The market will not offer as many or useful goods for consumers.

Taxes

0%- The total surplus will be $500: the difference between the value assigned by the seller and buyer

2%- The total surplus will be $490- the original surplus minus a two percent discount for taxation

4% The total surplus will be $480- the original surplus minus a four percent discount for taxation

6% The total surplus will be $470- the original surplus minus a six percent discount for taxation

Day Care Incentives:

The number of late pick-ups increased with an increase in fees is not surprising. That is, the addition of the fee simply has turned a gray economic area into a normal economic service. Before, parents may have been embarrassed that they would come late when they were not paying extra- they would exert more effort to be on-time. However, with the price of that service now being paid, they have no incentive to be on-time, and might even feel less guilt in the process.