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Managerial Economics INDIVIDUAL ESSAY ASSIGNMENT
This assignment counts for 20% of your grade. Please submit a hard copy of your assignment to me no later than 2:00 pm Wednesday, March 4th at the latest.
Please discuss your topic and approach with me, in person (preferred) or by contacting me in Canvas, by February 26th at the latest.
I would like you to write about an organization that you have worked for, if at all possible. You will be evaluated by the clarity of your presentation, by your research and by the example chosen, and by your ability to apply concepts from the course to the problem that you are discussing.
The greatest weight will be placed on your ability to apply course concepts clearly. You may propose an alternative topic if you wish. I strongly prefer you to apply the course concepts to an organization with which you have first-hand experience. For any topic, 1/10 marks will be for the idea (i.e., why is this question interesting?), and 3/10 for the presentation (clarity, grammar and spelling, following format instructions). 3/3 = A+ 2.75 = A 2.5 = A- 2.25 = B+ 2 = B 1.75 = B- 1.5 = C+ etc…
Answer one of the following by writing a short essay of no more than 5 pages (double space, 12 point Times Roman font, 1 inch margins, 8 & 1/2 by 11-inch paper) excluding appendices and any charts or data (but don’t bury text in appendices; I won’t read it):
Question 1
1. Carefully consider one or more agency problems in your organization. (It is usually better to focus on one, in more depth.) Begin by briefly explaining the organization. Besides identifying principal and agent, I would like you to formally model the goals of each. Clearly define the ultimate goals (and potentially the instrumental goals – the means to achieve the ultimate goals) of both principal and agent. Show that these are not the same. Typically, we might expect top leadership to wish to maximize profit, and agents to maximize their own utility. Show how each depends on the actions of the agent (typically effort). Show that the goals are not the same.
Discuss monitoring as a solution. Explain the contracts and use marginal analysis to predict agent's choice of actions, given e.g., the extra benefits and costs of more effort. (Be sure to assume that the agent is optimizing – i.e., use marginal analysis.) Critically evaluate the current contracts and strategies and propose improvements.
Use marginal analysis to evaluate your proposal(s). Remember that the agency problem is the principal's problem: how to use monitoring and contracts that the agent will accept that will get the agent to choose the action that the principal would prefer. Don't forget to consider problems presented by imposing risks on the agent, and using incentives for one action or outcome when there is more than one that matters to the principal. 3/10 for discussion of the problem and the current solutions 3/10 for critical evaluation and new proposals (and evaluation of these)
Question 2
2. Carefully analyze the demand for one of your organization’s/firm’s/industry’s products. Begin by briefly explaining the industry or business, and the product.
Carefully define the market with respect to geographic and product boundaries. Specify the demand function (i.e., the quantity demanded of the product per period depends on the following variables: …)
Determine what you believe to be the most important demand determinants. Discuss each of the important demand determinants.
Explain why it is important, how (in principle) it could be measured, and the qualitative effect (direct or inverse). Then, if possible, discuss the relevant elasticities.
Provide any empirical evidence that you can. (If you cannot, that is okay.) 3/10 for specification of the demand function (for including the most important determinants, and for defining the market well) 3/10 for discussion, and (if possible) for evidence
Question 3
3. Evaluate a productivity measure used by your organization/firm/industry (or a firm/industry you are familiar with) for a specific product (good, service) or activity.
Begin by briefly explaining the organization, the product(s) and input(s). Clearly explain the measure of output per period and the measure of input per period. Try to provide numerical examples, show how it is used, and (if possible) benchmark (over time or against other organizations).
Critically evaluate the measure – do changes in what we mean by productivity of the input change this measure? Does the measure change, for reasons other than because of changes in what we mean by productivity of the input? This part is important; don’t ignore it. Consider alternative measures. If a productivity measure does not exist, devise one, and provide numerical examples.
Evaluate how well the existing or proposed measure corresponds to what it is trying to measure. 3/10 for the explaining the measure, providing numbers and, (if possible) for benchmarking 3/10 for critical evaluation of the measure
Question 4
4. Identify the long-run cost drivers for your organization/firm, or some part of its operation. Begin by briefly explaining the business/operation and product(s).
Discuss and illustrate the roles of economies of scale, scope and learning, where relevant.
Explain why you believe these economies exist and what the sources of the economies are. Carefully discuss the implications for firm strategy or operations, or for industry structure.
If possible, attempt to benchmark your position against that of rivals, or of other comparable organizations. 3/10 for discussion of the cost drivers and the analysis of the sources of the economies 3/10 for discussion of implications and (if possible) for benchmarking
Question 5
5. Describe and analyze one or more of the current institutional arrangements governing vertical transactions in your organization/firm/industry (for example, whether IT is contracted out, or whether you distribute your own products. It is usually better to focus on one, in more depth.)
Begin by briefly explaining the organization/firm/industry. Carefully explain the vertical relationship that you will analyze. Discuss the current arrangement (fully integrated, partially integrated, long term contract, bilateral relationship, spot market exchange etc…) Compare your firm’s arrangements to those of your rivals, if different.
Analyze the arrangements in terms of transaction cost economics or market power considerations in order to determine whether they are optimal. Using these tools, explain any differences among firms in your industry, or changes over time.
This is important; don’t ignore it! Propose and justify any profit-improving changes. 3/10 for description of the current arrangements and those of rivals (if different) 3/10 for critical evaluation, new proposals and justification of those Please note that any of these topics can apply to a non-profit or governmental organization as well as to a for-profit firm.
Please read and follow the instructions to your topic carefully. If you are confused by anything, please let me know. If your first language is not English and you have difficulty writing, please get someone to copy edit your paper before submitting. Everyone, regardless of language skills, should use the grammar and spell check functions ☺ Good luck!
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