Chapter 1

Question 1

Accounting profits

Answer 1

the total amount of money taken in from sales (total revenue, or price times quantity sold) minus the dollar cost of producing goods or services.

what show up on the firm’s income statement and are typically reported to the manager by the firm’s accounting department.

Question 2

Economic Profits

Answer 2

The difference between the total revenue and the total opportunity
cost of producing the firm’s goods or services

Question 3

Opportunity Cost

Answer 3

The explicit cost of a resource plus the implicit cost of giving up its best alternative use.

Question 4

Five Forces

Answer 4

five categories or “forces” that impact the sustainability of industry profits: (1) entry, (2) power of input suppliers,
(3) power of buyers, (4) industry rivalry, and (5) substitutes and complements

Question 5

Entry

Answer 5

Globalization strategies, a new company forming, new product lines at existing firms

Heightens competition and reduces margins of existing firms

How fast can you capture market share? Is it fast enough to justify entry into market? There are sizeable sunk costs, economies of scale, and network effects

Question 6

Power of Input Suppliers

Answer 6

Industry profits are lower when suppliers have power to negotiate favourable terms

Supplier power low when inputs relatively standardized and relationship-specific investments are minimal or alternatives available

Question 7

Power of Buyers

Answer 7

Industry profits lower when buyers have more power

If they serve a few high-volume customers then buying power is higher

Question 8

Industry Rivalry

Answer 8

Less intense in industries with relatively few firms

The level of product differentiation and the nature of the game being played—whether firms’ strategies involve prices, quantities, capacity, or quality/service attributes, for example—also impact profitability.

Question 9

Consumer-Producer Rivalry

Answer 9

Consumers attempt to negotiate or locate low prices, produces attempt to negotiate high prices

Question 9

Producer-Producer Rivalry

Answer 9

multiple sellers of a product compete- only time this works

Question 9

Substitutes and Complements

Answer 9

The level and sustainability of industry profits also depend
on the price and value of interrelated products and services.

presence of close substitutes erodes industry profitability

Question 10

Consumer-Consumer Rivalry

Answer 10

reduces the negotiating power of consumers, economic doctrine of scarcity

Competing for the right to purchase a good, and outbid each other if willing to pay more

Question 11

Time Value of Money

Answer 11

The fact that $1 today is worth more than $1 received in the future because of interest that could have been earned on that dollar

Question 12

Marginal Analysis

Answer 12

states that optimal managerial decisions involve comparing the marginal (or incremental) benefits of a decision with the marginal (or incremental) costs.

N(Q) = B(Q) − C(Q)
B benefits, C cost, of Q quantity, N net benefits

Question 13

Marginal Benefits

Answer 13

The change in total benefits arising from a change in the managerial control variable Q.

MB (Q) = N(Q) - N(Q-1)

Question 14

Marginal (incremental) Cost (MC)

Answer 14

The change in total costs arising from a change in the managerial control variable Q.

MC(Q) = C(Q) - C (Q-1)

Question 15

Marginal Net Benefits

Answer 15

Change in net benefits from (Q-1) to Q

MNB(Q) = MB(Q) - MC(Q)

MB = MC at any level of Q that maximizes net benefits

At the level of Q where the marginal benefit curve intersects the marginal cost curve, marginal net benefits are zero. That level of Q maximizes net benefits.

Question 16

Incremental Revenues

Answer 16

The additional revenues that stem from a yes-or-no decision.

Question 17

Incremental Costs

Answer 17

The additional costs that stem from a yes-or-no decision.

Question 18

Econometrics

Answer 18

the statistical analysis of economic data

Question 19

Least Squares Regression

Answer 19

The line that minimizes the sum of squared deviations between the line and the actual data points.

Question 20

The parameter estimates â and bˆ

Answer 20

represent the values of a and b that result in the smallest sum
of squared errors between a line and the actual data.

Question 21

Standard Error

Answer 21

a measure of how much each estimated coefficient would vary in regressions based on the same underlying true relationship, but with different observations.

The smaller the standard error of an estimated coefficient, the smaller the variation in the estimate given data from different outlets (different samples of data).

Question 22

t-statistic

Answer 22

The ratio of the value of a parameter estimate to the standard error of the parameter estimate.

A useful rule of thumb is that if the absolute value of a t-statistic is greater than or equal to 2, then the corresponding parameter estimate is statistically different from zero.