Homework for Theory of the Firm, Fast Track MBA, Fall 2004, Dr



Homework for Theory of the Firm, Fast Track MBA, Fall 2004, Dr. Millner

Name (Please print): ______________________________

Honor Policy: This assignment is "pledged" and "open book". You may use calculators, computers, notes and books while completing the assignment. However, you may not receive assistance from anyone else; you may not look at another student's calculator, notes, book, or test nor act in a manner that allows another student to look easily at your calculator, notes, book, or test.). You may not talk with anyone other than the instructor about the assignment until after the due date.

"On my honor, I have neither given nor received aid on this assignment."

Signature: _____________________________________

Put your answers to each question on separate 8.5x11 sheets of paper. One question, drawn at random, will be collected for grading. You should be prepared to sign a pledge that you completed the work independently, without assistance from anyone else including members of your team. Good answers will earn 100 points; incorrect answers that show good effort will receive 80 points. All other answers will earn 50 points.

1. An article in the Wall Street Journal discussed the reasons for increases in price in palladium. Delays in approvals of export quotas and licenses by the Russian government disrupted the market. As a result, the price of an ounce of palladium increased from approximately $100 to $1000. Use the concepts developed in class to explain why the team working to reduce automobile emissions in the mid-1990's should have anticipated the reduction in supply wrought by the Russians. To help you, excerpts from the article follow.

"In the mid-1990s, [automobile manufactures] agreed to accelerate their adoption of tighter national emission standards as part of a deal to head off separate state-by-state rules, which would have played havoc with manufacturing and distribution. Palladium looked like the best solution, since it began cleaning exhaust sooner after starting up than platinum, then the dominant metal in catalytic converters. … The world's biggest source is Norilsk, an ice-entombed former outpost of the Soviet gulag in the Arctic Circle. … However, in 1997, after the automakers had designed cars to use palladium and proposed air emissions standards based on these designs, " … Russian exports ceased. Officials said that the export quotas and licenses -- Russian bureaucrats require both to let the metal out -- were mysteriously hung up in the approval process." While the exports resumed later that year, approval of the export quotas and licenses has been delayed every year since 1997. Now automotive engineers are working on ways to reduce the amount of palladium used in cars. "The problem is, most of the changes take time. A lot of the easy improvements already have been made, … Redesigning existing models to, say, move the catalytic converter closer to the engine so it warms up and starts working earlier, can cost hundreds of millions of dollars."

2. What is the effect on the optimal contract length in the following scenarios?

a. Marco. Inc. provides fuel injectors to Johnson Motors, a producer of gasoline engines for boats. Recent technological improvements have improved the performance of diesel engines. As a consequence, the demand for gasoline engines has become more volatile and the pressure for technological advances in gasoline engines has intensified.

b. A new “user friendly” version of your firm’s ERP software is developed that reduces the amount of training needed by employees to use the software.

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