categories of risk are most crucial for the firm’s profit? Provide examples of
strategies to eliminate, mitigate, or insure against these risks.
2. Review the scenario on page 576 of your text labeled
“Discussion Question.” Ford believed that the major fault was with
Firestone’s tires. Firestone contended that its tires were absolutely safe
under its recommended operating conditions and that the Explorer’s design and
operation were major culprits. What kind of information would one gather to
assess these rival arguments? Explain.
3. In the world of managerial economics, what is perfect
information? What industry examples would you pose and why?
4. Consider the concept of maximizing the number of
competitors and letting price be determined by “what the market will
bear.” How do you interpret this statement? What is a good example of this
at play?
5. Many, if not most, investment projects have a time
element with a typical investment project involving initial outlays followed by
cash inflows. How is this time element best determined and why?
6. In order to make sound decisions, the manager must also
assess his or her own (or the company’s) attitude toward risk. What questions
should a manager ask before assuming a risk and why? What example would you
pose in deciding to take on risk?
7. In summarizing your experience with the concepts covered
in this course, which do you think you will most practically apply and why?
8. Indicate what concepts of managerial economics and
decision making you believe you will need to emphasize now and in the future.
Why?
Samuelson, W.F. & Marks, S.G. (2009). Managerial
Economics.(7th ed). Hoboken NJ: John Wiley & Sons, Inc.
Discussion Question
In August 1999, Bridgestone/Firestone Inc. recalled 6.5
million tires in the wake of a number of tire-related rollover accidents in the
Explorer SUV produced by Ford Motor Company. Although Firestone tires have an
admirable overall quality record and the Explorer ranks second in its safety
record among eight leading brands of SUV, 88 fatalities in the United States
and as many as 50 fatalities overseas have been linked to the combination of
Firestone tires (three particular brands) mounted on the Explorer. A review of
the Firestone/Ford debacle shows that both companies (as well as the National
Highway Safety Administration) lacked the data to allow early recognition of
this accident risk. (To this day, there is no way to “prove” the
exact causes of the tire failures. Evidence and analysis of the safety risk is
purely statistical.)
a. Ironically, the low overall rate of tire-related
accidents made it more difficult to detect the particular Firestone/Ford risk.
Why would this be the case? Until 1999, Firestone relied exclusively on the low
rate of tire claims under warranty to conclude that its tires were safe. Why
might reliance on warranty data alone be a mistake?
b. The rate of tire failure is associated with multiple
factors. The Explorer accidents with Firestone tires tended to occur at high
speeds and at high temperatures. In addition, low tire pressures, recommended
by Ford to increase ride comfort, tended to create more road friction and heat.
(Carrying heavy loads has the same effect.) Precisely because the risk was
associated with multiple, simultaneous factors, it was much more difficult to
detect. Why would this be the case? (Hint: Screening factors individually
produced no obvious warning signals.)
c. Ford believed that the major fault was with Firestone’s
tires. Firestone contended that its tires were absolutely safe under its
recommended operating conditions, and that the Explorer’s design and operation were
the major culprits. What kind of information would one gather to assess these
rival arguments? Explain.
