Chapter 1: Fundamentals

Question 1

Managerial Economics

Answer 1

The study of how to direct/allocate scarce resources in the way that most efficiently achieves a managerial goal.

Question 2

Manager

Answer 2

A person who directs resources to achieve a stated goal.

Question 3

Economics

Answer 3

The science of making decisions in the presence of scarce resources.

Question 4

Resources

Answer 4

Anything used to produce a good or service or, more generally, to achieve a goal.

Question 5

Accounting Profits (Gross Profits)

Answer 5

Sales – Costs of Goods Sold.

Question 6

Economic Profits

Answer 6

The difference between total revenue and total opportunity cost.

Question 7

Opportunity Cost

Answer 7

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

Question 8

Incremental Revenues

Answer 8

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

Question 9

Incremental Costs

Answer 9

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

Question 10

Time Value of Money

Answer 10

The fact that $1 today is worth more than $1 received in the future.

Question 11

Present Value Formula

Answer 11

PV = FV / (1 + i)n i = rate of interest

Question 12

Net Present Value

Answer 12

NPV = PV -C0 C0 = current cost

Question 13

Profit Maximization

Answer 13

Expand output until the revenue earned on the last unit sold equals the cost of that unit (e.g., where marginal benefit equals marginal cost): MB > MC (profitable), once MB = MC Profit is maximized.

Question 14

Marginal Benefit

Answer 14

The additional benefits that arise by producing an additional unit.

Question 15

Marginal Cost

Answer 15

The additional cost incurred by producing an additional unit.

Question 16

Marginal Principal

Answer 16

So long as marginal benefits exceed marginal costs, an increase in quantity adds more to total benefits than it does to total costs.

Question 17

Marginal Net Benefits

Answer 17

MNB(Q) = MB(Q) − MC(Q)

Question 18

Five Forces Framework and Industry Profitability

Answer 18

“Forces” that impact the sustainability of industry profits:
i. entry
ii. power of input suppliers
iii. power of buyers
iv. industry rivalry,
v. substitutes and complements.

Question 19

Profits

Answer 19

Profits signal where resources are most highly valued by society, and, therefore best allocated.

Question 20

Markets

Answer 20

There are two sides to every transaction in a market: For every buyer of a good, there is a corresponding seller. The final outcome of the market process, then, depends on the relative power of buyers and sellers in the marketplace.

Question 21

Consumer-Producer Rivalry

Answer 21

Consumers attempt to negotiate or locate low prices, while producers attempt to negotiate high prices.

Question 22

Consumer-Consumer Rivalry

Answer 22

When limited quantities of goods are available, consumers will compete with one another for the right to purchase the available goods (bidding).

Question 23

Producer-Producer

Answer 23

Given that customers are scarce, producers compete with one another for the right to service the customers available.

Question 24

Incentives

Answer 24

Within a firm, incentives affect how resources are used and how hard people work.

The key is to design a mechanism such that if the manager does what is in Y’s own interest, he will indirectly do what is best for X.

If the firm does well, the CEO receives a large bonus. If the firm does poorly, the CEO receives no bonus and risks being fired by the stockholders.

Bonuses (bonuses are in direct proportion with the firm’s profitability).