MECO (No Multiple Choice) Flashcards
How do mergers create wealth?
Mergers create wealth by combining the strengths of two companies like people, resources and capabilities.
What is the role of government in wealth creation?
establish and maintain a stable legal and social framework that supports economic activity
According to the One Lesson of Economics, economic analysis should focus on:
the unintended consequences and long-term effects of policies and actions, considering the broader impact beyond immediate benefits; essentially, looking at the “invisible” ripple effects rather than just the immediate results.
How can taxes destroy wealth?
Taxes can reduce wealth if they exceed the rate at which wealth grows, or if they discourage investment.
How do businesses profit from inefficiencies in the market?
Taxes create a profit opportunity.
Subsidies create opportunity.
Price-controls create opportunity.
Costs are associated with:
to a specific activity, project, product, or service
A firm’s depreciation expense is an example of:
is an example of a non-cash expense.
Economic Value Added (EVA) is useful because:
it provides a clear measure of how much wealth a company is actually creating
A firm can increase profitability by:
reducing costs, increasing turnover, increasing productivity, and increasing efficiency.
What mistake did Big Coal Power Company make?
They switch to a low quality coal which has a lower price but also has less power because the manager thought that they can save money but instead the company profit reduced. But the company requires more coal to generate electricity
Which of the following is an example of an implicit cost?
The Cadbury Example
Which of the following is NOT an opportunity cost?
The money a student spends on rent for his apartment while attending school.
A common mistake in decision-making is:
relying heavily on readily available information
What led to Cadbury’s decision to sell unused apartments?
Because the unused apartment is still incurred. But there’s no benefit out of it. The company will earn money out of the sale of the apartment.
What is the purpose of goal alignment in a firm?
to ensure that all individuals, teams, and departments within the organization are working towards the same overarching objectives
What does the subprime mortgage crisis illustrate?
Lending money to high risk borrowers who cannot pay the loan in time. The result is that the company became bankrupt
What is the opportunity cost of using capital in a business?
refers to the potential return a company gives up by investing its capital in one project or activity instead of another
What is the opportunity cost of using capital in a business?
refers to the potential return a company gives up by investing its capital in one project or activity instead of another
The hidden-cost fallacy in business is often caused by:
Ignoring relevant cost in decision making
Why do companies use Economic Value Added (EVA)?
Loss aversion is a bias where individuals:
tend to feel the pain of losing something much more intensely than the pleasure of gaining something of equal value
Confirmation bias in business decision-making means:
the tendency for decision-makers to prioritize and interpret information that supports their existing beliefs or opinions, while overlooking or downplaying evidence that contradicts them, leading to potentially flawed decisions based on a skewed perspective
What was one unsuccessful solution that NAR tried to solve the unethical repair issue?
NAR should review the prices of its spare parts and services and come up with a fair pricing.
What is a suggested way to prevent mechanics from making unethical repair recommendations?
Add an additional performance evaluation metric to original commission scheme
The rational-actor paradigm can make students uncomfortable because it seems to:
disregard personal ethics that guide behavior
How does economics differ from deontological ethics?
Deontologists: actions are good if they conform to a set of principles. Economics uses analysis to understand the consequences of different solutions.
According to the One Lesson of Business, voluntary transactions create wealth by:
moving assets from lower-valued to higher-valued uses
What is one factor that destroys wealth?
taxes, subsidies, and price controls
In the kidney transplant example, what prevents the efficient allocation of organs?
Because kidney transplants considers compatibility with the recipient.
What is a key element of Capitalism 101 according to the chapter?
The motive to make a profit
In the housing example, what determines the surplus in a transaction?
Gains from trade
What is the anchoring bias?
Relates the effects of how the information is presented
Overconfidence bias can lead managers to:
too much credit to themselves
What was Coca-Cola’s mistake in the 1980s?
Coca-Cola decided to change its secret formula, that beloved taste savored by millions, in favor of a sweeter version, aiming to compete with the sweetness of Pepsi.
The opportunity cost of an action is always:
the value of the next best alternative that is given up when making a decision.
Why are sunk costs irrelevant in decision-making?
because they represent expenses that have already been incurred and cannot be recovered
The role of government in business includes:
establishing a legal framework, regulating market activity to ensure fair competition, protecting consumer rights, providing public goods and services, managing the economy through fiscal and monetary policies, and promoting economic stability through interventions like taxation and trade policies
A good economic decision considers:
the costs and benefits of different options, including opportunity costs,
Firms maximize profit when:
marginal revenue equals marginal cost (MR = MC)
In the National Auto Repair (NAR) case, why did mechanics recommend unnecessary repairs?
pressure from their employers to generate high sales and profits
The opportunity cost of an alternative is:
the value of the next best alternative that is given up when choosing one option over another
Which of the following costs vary with output?
Variable cost
What is an example of a fixed cost?
Rent
The fixed-cost fallacy means:
is when a business considers sunk costs, or irrelevant costs, when making decisions
Hidden-cost fallacy occurs when:
someone fails to consider all relevant costs associated with a decision
Economic profit differs from accounting profit because:
Economic profit is money earned after taking explicit and implicit costs into account. Accounting profit is the net income for a company or revenue minus expenses.
