CHAPTER 1
INTRODUCTION TO
ECONOMIC DECISION MAKING
The following table shows the four topic sections of this chapter and the associated study
guide problems that pertain to each topic section.
Section Topic
1 Introduction
Problems M1-M2, S1.
2 Seven Examples of Managerial Decisions
Problems M3-M6, L1.
3 Six Steps to Decision Making
Problems M7-M11, S2-S5, L2-L4.
4 Private and Public Decisions
Problems M12-M15, S6-S8, L5-L7.
Multiple Choice
M1 The common element in almost all business problems is
a. Short-term profit maximization.
b. Competitive strategy.
c. Market analysis.
d. Complete and reliable information.
e. Decision making.
M2 Managerial economics can best be defined as the
a. Analysis of major management decisions using economic tools.
b. Economic analysis of internal management functions.
c. Comparison of different management styles using economic tools.
d. Impact of global economic factors on business.
e. Study of economic incentives for managers within organizations.
M3 The crux of the pharmaceutical company’s decision involved
a. Mutually exclusive R&D programs.
b. Choosing one or both of two risky R&D programs.
c. Predicting the response of government regulators.
d. Beating a close competitor to market.
e. Answers b, c, and d are all correct.
,Managerial Economics Study Guide
M4 The decision to build a new bridge illustrates a
a. Purely private profit-maximizing decision.
b. Setting in which benefit-cost analysis is appropriate.
c. Public-sector decision involving little or no uncertainty.
d. Public-sector decision involving multiple benefits and costs.
e. Answers b and d are both correct.
M5 The city’s decision to build a new bridge
a. Would inevitably increase the government’s budget deficit.
b. Was justified because it benefited commuters.
c. Involved a careful consideration of myriad (dollar) benefits and costs.
d. Should have been left in the hands of the private sector.
e. Answers b and c are both correct.
M6 Boeing’s 737 Max aircraft
a. Suffered significant cost overruns in production.
b. Beat Airbus’s rival aircraft to market.
c. Came under close government scrutiny and regulation.
d. Exhibited significant design and safety problems.
e. Answers c and d are both correct.
M7 Which of the following is not one of the suggested steps in decision making?
a. Predicting the consequences.
b. Exploring the alternatives.
c. Implementing the decision.
d. Determining the objective.
e. Defining the problem.
M8 In public-sector decisions, a government program should be undertaken
a. Provided it generates a positive profit.
b. Provided its return is worth the risk.
c. If both its profit is positive and if total benefits exceed total costs.
d. If total benefits exceed total costs, even if the government earns no profit.
e. If it provides broad public and social benefits.
M9 A sound approach for dealing with risk and uncertainty is to
a. Always choose the less risky course of action.
b. Envision the possible outcomes and assess their likelihoods.
c. Simplify the problem by ruling out very low probability events.
d. Postpone decisions until the risks are resolved.
e. Insure against most risks
, Introduction to Economic Decision Making Chapter 1
M10 Sensitivity analysis can best be defined as
a. Examining how a decision would change if key facts were altered.
b. Being sensitive to the impact of decisions on other variables.
c. Measuring results against objectives.
d. Judging the margin of error for key data used to make a decision.
e. Analyzing tradeoffs among multiple objectives.
M11 The findings of behavioral economics indicate that decisions are
a. Predominantly ultra-rational.
b. Often cooperative.
c. Marked by biases and mistakes
d. Are mainly governed by monetary considerations.
e. Answers b and c are both correct.
M12 According to the theory of the firm, the objective of top management
a. Is managing the firm’s earnings growth.
b. Sometimes involves tradeoffs between profit and other social goals.
c. Is primarily maximizing the value of the firm.
d. Is maximizing the firm’s long-run sales revenues.
e. Answers b and c are both correct.
M13 Which of the following is a leading alternative model of managerial behavior?
a. Managing the firm’s short-term stock price.
b. Maximizing total sales and market share.
c. Increasing top management’s compensation.
d. Maximizing firm growth organically and by acquisitions.
e. Answers b and d are both correct.
M14 In pursuing the goal of Corporate Social Responsibility, the firm should
a. Weigh the various impacts on its labor force.
b. Continue to maximize long-term value for shareholders.
c. Consider its environmental impacts.
d. Maximize the value of its brand.
e. Answers a and c are both correct.
M15 The example of AIDS drugs in Africa shows that
a. Private firms can fashion an effective response to a global problem.
b. AIDS deaths stem from poverty and poor medical care.
c. Fighting AIDS require both low-cost medicines from drug producers and health
resources from government.
d. A combination of “carrots and sticks” is necessary to induce drug producers to
offer low-priced AIDS drugs.
e. Answers b, c, and d are all correct.
M16 Making decisions based on experience and intuition
a. Offers a sound alternative to analytical decision making.
b. Is mainly suitable for devising long-term corporate strategy.
c. Is the overwhelming norm for most top executives.
d. Is problematic because the “logic” of one’s intuition is largely uncheckable.
, Managerial Economics Study Guide
e. Answers a and b are both correct.
Short Problems and Questions
S1 Define managerial economics and explain how it is useful in decision making.
S2 Carefully define sensitivity analysis and explain why it is important in decision making.
S3 What are the two main difficulties that may make profit maximization an ambiguous
guide to decision making? Explain why they complicate the analysis.
S4 “Most managerial decisions involve more than a once-and-for-all choice from among a set
of options.” What does this mean, and how does it affect managerial decision-making?
S5 What are the main types of models used in managerial economics? How do they differ?
How does management use them in decision making?
S6 Briefly explain why the profit maximization goal might be at odds with public sector
goals.
S7 What stakeholders should the firm consider if it pursues the goal of Corporate Social
Responsibility?
S8 Compare and contrast the objectives of decision-makers in the private sector and the
public sector.
S9 Current environmental legislation relating to endangered species is phrased so as to
emphasize preserving a species regardless of economic impact or cost. Is this approach
likely to result in optimal policy decisions? Explain.
Longer Problems and Discussion Questions
L1 Put yourself in Taylor Swift’s shoes. How would you decide whether to partner with a
major movie studio or produce the concert film yourself? Is it simply a question of
dollars and cents?
L2 Although rules of thumb and maxims do not constitute systematic guides to decision
making, they can provide some wisdom and advice. Explain how each of the following
might contribute to making a decision.
a. If you don’t know where you’re going, chances are you won’t get there.
b. Look before you leap.
c. Don’t count your chickens before they hatch.
d. Always get a second opinion.
e. Don’t put all your eggs in one basket.
f. If it ain’t broke, don’t fix it.
INTRODUCTION TO
ECONOMIC DECISION MAKING
The following table shows the four topic sections of this chapter and the associated study
guide problems that pertain to each topic section.
Section Topic
1 Introduction
Problems M1-M2, S1.
2 Seven Examples of Managerial Decisions
Problems M3-M6, L1.
3 Six Steps to Decision Making
Problems M7-M11, S2-S5, L2-L4.
4 Private and Public Decisions
Problems M12-M15, S6-S8, L5-L7.
Multiple Choice
M1 The common element in almost all business problems is
a. Short-term profit maximization.
b. Competitive strategy.
c. Market analysis.
d. Complete and reliable information.
e. Decision making.
M2 Managerial economics can best be defined as the
a. Analysis of major management decisions using economic tools.
b. Economic analysis of internal management functions.
c. Comparison of different management styles using economic tools.
d. Impact of global economic factors on business.
e. Study of economic incentives for managers within organizations.
M3 The crux of the pharmaceutical company’s decision involved
a. Mutually exclusive R&D programs.
b. Choosing one or both of two risky R&D programs.
c. Predicting the response of government regulators.
d. Beating a close competitor to market.
e. Answers b, c, and d are all correct.
,Managerial Economics Study Guide
M4 The decision to build a new bridge illustrates a
a. Purely private profit-maximizing decision.
b. Setting in which benefit-cost analysis is appropriate.
c. Public-sector decision involving little or no uncertainty.
d. Public-sector decision involving multiple benefits and costs.
e. Answers b and d are both correct.
M5 The city’s decision to build a new bridge
a. Would inevitably increase the government’s budget deficit.
b. Was justified because it benefited commuters.
c. Involved a careful consideration of myriad (dollar) benefits and costs.
d. Should have been left in the hands of the private sector.
e. Answers b and c are both correct.
M6 Boeing’s 737 Max aircraft
a. Suffered significant cost overruns in production.
b. Beat Airbus’s rival aircraft to market.
c. Came under close government scrutiny and regulation.
d. Exhibited significant design and safety problems.
e. Answers c and d are both correct.
M7 Which of the following is not one of the suggested steps in decision making?
a. Predicting the consequences.
b. Exploring the alternatives.
c. Implementing the decision.
d. Determining the objective.
e. Defining the problem.
M8 In public-sector decisions, a government program should be undertaken
a. Provided it generates a positive profit.
b. Provided its return is worth the risk.
c. If both its profit is positive and if total benefits exceed total costs.
d. If total benefits exceed total costs, even if the government earns no profit.
e. If it provides broad public and social benefits.
M9 A sound approach for dealing with risk and uncertainty is to
a. Always choose the less risky course of action.
b. Envision the possible outcomes and assess their likelihoods.
c. Simplify the problem by ruling out very low probability events.
d. Postpone decisions until the risks are resolved.
e. Insure against most risks
, Introduction to Economic Decision Making Chapter 1
M10 Sensitivity analysis can best be defined as
a. Examining how a decision would change if key facts were altered.
b. Being sensitive to the impact of decisions on other variables.
c. Measuring results against objectives.
d. Judging the margin of error for key data used to make a decision.
e. Analyzing tradeoffs among multiple objectives.
M11 The findings of behavioral economics indicate that decisions are
a. Predominantly ultra-rational.
b. Often cooperative.
c. Marked by biases and mistakes
d. Are mainly governed by monetary considerations.
e. Answers b and c are both correct.
M12 According to the theory of the firm, the objective of top management
a. Is managing the firm’s earnings growth.
b. Sometimes involves tradeoffs between profit and other social goals.
c. Is primarily maximizing the value of the firm.
d. Is maximizing the firm’s long-run sales revenues.
e. Answers b and c are both correct.
M13 Which of the following is a leading alternative model of managerial behavior?
a. Managing the firm’s short-term stock price.
b. Maximizing total sales and market share.
c. Increasing top management’s compensation.
d. Maximizing firm growth organically and by acquisitions.
e. Answers b and d are both correct.
M14 In pursuing the goal of Corporate Social Responsibility, the firm should
a. Weigh the various impacts on its labor force.
b. Continue to maximize long-term value for shareholders.
c. Consider its environmental impacts.
d. Maximize the value of its brand.
e. Answers a and c are both correct.
M15 The example of AIDS drugs in Africa shows that
a. Private firms can fashion an effective response to a global problem.
b. AIDS deaths stem from poverty and poor medical care.
c. Fighting AIDS require both low-cost medicines from drug producers and health
resources from government.
d. A combination of “carrots and sticks” is necessary to induce drug producers to
offer low-priced AIDS drugs.
e. Answers b, c, and d are all correct.
M16 Making decisions based on experience and intuition
a. Offers a sound alternative to analytical decision making.
b. Is mainly suitable for devising long-term corporate strategy.
c. Is the overwhelming norm for most top executives.
d. Is problematic because the “logic” of one’s intuition is largely uncheckable.
, Managerial Economics Study Guide
e. Answers a and b are both correct.
Short Problems and Questions
S1 Define managerial economics and explain how it is useful in decision making.
S2 Carefully define sensitivity analysis and explain why it is important in decision making.
S3 What are the two main difficulties that may make profit maximization an ambiguous
guide to decision making? Explain why they complicate the analysis.
S4 “Most managerial decisions involve more than a once-and-for-all choice from among a set
of options.” What does this mean, and how does it affect managerial decision-making?
S5 What are the main types of models used in managerial economics? How do they differ?
How does management use them in decision making?
S6 Briefly explain why the profit maximization goal might be at odds with public sector
goals.
S7 What stakeholders should the firm consider if it pursues the goal of Corporate Social
Responsibility?
S8 Compare and contrast the objectives of decision-makers in the private sector and the
public sector.
S9 Current environmental legislation relating to endangered species is phrased so as to
emphasize preserving a species regardless of economic impact or cost. Is this approach
likely to result in optimal policy decisions? Explain.
Longer Problems and Discussion Questions
L1 Put yourself in Taylor Swift’s shoes. How would you decide whether to partner with a
major movie studio or produce the concert film yourself? Is it simply a question of
dollars and cents?
L2 Although rules of thumb and maxims do not constitute systematic guides to decision
making, they can provide some wisdom and advice. Explain how each of the following
might contribute to making a decision.
a. If you don’t know where you’re going, chances are you won’t get there.
b. Look before you leap.
c. Don’t count your chickens before they hatch.
d. Always get a second opinion.
e. Don’t put all your eggs in one basket.
f. If it ain’t broke, don’t fix it.
