Lesson 1.1 (Chp 1 - 2)

Question 1

formula for Expected net present value of profits

Answer 1

sum of (total revenue in time t - total cost at time t / (1 + i)^t)

Question 2

economists definition of profit

Answer 2

profit over and above what the owner’s labour and capital in the business could be used elsewhere (opportunity cost)

Question 3

what is principal agent problem?

Answer 3

where managers (agents) pursue their own interests at the cost of the owners (principals)

Question 4

draw demand-supply curve

Answer 4

y axis is price, x axis is quantity demanded, Demand curve is downward sloping, supply curve is upward sloping

Question 5

what does the demand curve show?

Answer 5

total demand for a product at various prices, not for a specific firm; pertains to a specific time period

Question 6

5 factors that affect demand curve

Answer 6

income; prices of substitutes and complements, advertising expenses, product quality, government fiat

Question 7

how do we interpret elasticity of demand

Answer 7

how a 1% change in price affects QD

Question 8

elasticity of demand formula

Answer 8

n = (dQ/dP) * (P/Q) = % change in quantity / % change in price = (-1/b) * (a - bQ / Q)

Question 9

why are elasticities of demand negative?

Answer 9

since demand curve is downward sloping

Question 10

classify elastics of demand

Answer 10

n > -1 -> inelastic, 1% change in price –> less than 1% change in Q
n = -1 -> unitary elastic, 1% change in price –> 1% change in Q
n < -1 -> elastic, 1% change in price -> more than 1% change in Q

Question 11

where on demand curve is price inelastic?

Answer 11

to the bottom

Question 12

price elasticity of 0

Answer 12

demand curve vertical, QD unaffected by price

Question 13

price elasticity of - infinity

Answer 13

demand curve horizontal, unlimited amount sold at a price, nothing sold at other prices

Question 14

price equation

Answer 14

P = a - bQ

Question 15

demand equation

Answer 15

Q = a/b - 1/bP

Question 16

total revenue equation

Answer 16

TR = P x Q = aQ - bQ^2

Question 17

marginal revenue formula

Answer 17

MR = derivative of TR fn with respect to Q = a - 2bQ = P(1 + 1/n)

Question 18

MR curve vs Demand curve

Answer 18

MR curve has the same y intercept as demand curve, but slope is 2x demand curve

Question 19

for what quantities/MR will demand be price elastic

Answer 19

MR is positive, Q < a / 2b

Question 20

for what quantities/MR will demand be unitary elastic

Answer 20

MR = 0, Q = a / 2b

Question 21

for what quantities/MR will demand be price inelastic

Answer 21

MR negative, Q > a / 2b

Question 22

explain normal goods vs inferior goods

Answer 22

normal - income rises, demand rises (income elasticity of demand is +ve); inferior - income rises, demand lowers (income elasticity of demand is -ve)

Question 23

explain substitute goods vs complementary goods vs independent goods

Answer 23

substitute - cross price elasticity of demand +ve, complementary - cross price elasticity of demand -ve; independent - cross price elasticity of demand 0

Question 24

what happens to price elasticities when demand curve is linear?

Answer 24

vary along the demand curve

Question 25

explain constant elasticity demand function

Answer 25

elasticities are constant regardless of values of the variables (using exponents)

Question 26

explain the exponents in the constant elasticity demand function

Answer 26

own price elasticity of demand is negative, cross price elasticity either positive or negative, income elasticity is mostly positive, advertising elasticity is positive

Question 27

when is TR maximized?

Answer 27

MR = 0

Question 28

when is advertising not a waste of money?

Answer 28

if n > 1 (MR is positive)

Question 29

how does managerial economics differ from microeconomics

Answer 29

microeconomics focuses on description, managerial economics is prescriptive

Question 30

2 things managerial economics does

Answer 30

is an integrative course - brings various functional areas of business together in a single analytical framework; and exhibits economies of scope - integrates material from other disciplines and reinforces and enhances understanding of those subjects

Question 31

what is the managerial objective

Answer 31

make choices that increase value of firm

Question 32

3 managerial choices

Answer 32

- influence TR by managing demand - influence TC by managing production - influence relevant interest rate by managing finances and risk

Question 33

3 managerial constraints

Answer 33

available tech, resources scarcity, legal or contractual limitations

Question 34

what are 2 measures of profit

Answer 34

economic profit, accounting profit

Question 35

3 traits of accounting profit

Answer 35

historical cost, legal compliance, reporting requirements

Question 36

3 traits of economic profit

Answer 36

market value, opportunity or implicit cost, more useful measure for managerial decision making

Question 37

profit and its affect on managers

Answer 37

1) measures quality of managers decision making skills | 2) encourages good management decisions by linkage with incentives

Question 38

3 sources of profit

Answer 38

innovation, risk taking, exploiting market inefficients

Question 39

source of profit: innovation

Answer 39

producing products that are better than existing products in terms of functionality, tech and style

Question 40

source of profit: risk taking

Answer 40

future outcomes and their likelihoods are unknown as are the reactions of rivals

Question 41

source of profit: exploiting market inefficiencies

Answer 41

building barriers to entry, employing sophisticated pricing strategies, diversifying, making good strategic production decisions

Question 42

how can you address the principal-agent problem

Answer 42

give managers a financial stake in the business

Question 43

explain moral hazard

Answer 43

moral hazard exists when people behave differently when they are not subject to the risks associated with their behaviour

Question 44

how does moral hazard relate to managers

Answer 44

managers who do not maximize the value of a firm may do so because they do not suffer as a result of their behaviour

Question 45

define market

Answer 45

a group of firms and individuals that interact with each other to buy or sell a good

Question 46

define demand function

Answer 46

QD relative to Price, holding other possible influences constant

Question 47

what does the market rely on

Answer 47

binding, enforceable contracts

Question 48

define supply function

Answer 48

quantity supplied relative to price, holding other possible influences constant; for period of time

Question 49

influences held constant for the supply function

Answer 49

tech and cost of production inputs (land, labour, capital)

Question 50

define equilibrium

Answer 50

when the market is in balance because everyone who wants to purchase the good can and every seller who wants to sell the good can

Question 51

define invisible hand

Answer 51

when no gov agency is needed to induce producers to drop or increase prices

Question 52

define market demand schedule

Answer 52

table showing the total quantity of the good purchased at each price

Question 53

determinants of market demand curve

Answer 53

consumer taste, consumer income, population size, time period

Question 54

is primary objective of a firm's owner to maximize firm's profit or firm's value?

Answer 54

value

Question 55

Information on the quantities that would be purchased at different prices, holding all other factors constant, in a given time period from a group of firms is shown in a:

Answer 55

market demand curve

Question 56

The demand for costume jewelry has been estimated to be Q = 100P^(–2)E^2, where E is the price of real gem jewelry. Costume jewelry and real gem jewelry are:

Answer 56

cross price elasticity of demand = 2 -> substitute

Question 57

define elasticity

Answer 57

Measures the percentage change in one factor given a small (marginal) percentage change in another factor

Question 58

define demand elasticity

Answer 58

Measures the percentage change in quantity demanded given a small (marginal) percentage change in another factor that is related to demand

Question 59

cross price elaticity of demand formula

Answer 59

(dQx)/d(Qy) (Py/Px)

Question 60

what is cross price elasticity of demand when the goods are substitutes?

Answer 60

n > 0

Question 61

cross price elasticity of demand when the goods are independent

Answer 61

n = 0

Question 62

What is the relationship between economic and accounting profit?

Answer 62

economic profit may be less than or equal to accounting profit

Question 63

where is there excess supply

Answer 63

prices above equilibrium price