Managerial economics and strategy 3rd Edition By
Jeffrey M. Perloff James A. Brander WITH QUICK
REVISION FORMULAS AND WELL VERIFIED ANSWERS
CHAPTER 1: Introduction to Managerial Economics
1. What is managerial economics?
Answer:
Managerial economics is the application of economic theories, concepts, and quantitative
methods to business decision-making. It helps managers make decisions about pricing,
production, investment, resource allocation, and strategy.
2. What is opportunity cost?
Answer:
Opportunity cost is the value of the next-best alternative forgone when making a decision.
Example: If you spend KSh 10,000 on a business project instead of investing it in a savings
account that would earn KSh 800, the KSh 800 is part of the opportunity cost.
3. Distinguish between explicit and implicit costs.
Answer:
Explicit costs involve actual monetary payments, such as wages, rent, and electricity.
,Implicit costs represent the opportunity cost of resources owned by the firm, such as the
owner's time or capital.
4. What is the difference between positive and normative economics?
Answer:
Positive economics describes and explains what is or what will happen.
Normative economics deals with what should happen and involves value judgments.
5. What is marginal analysis?
Answer:
Marginal analysis compares the additional benefit from an activity with its additional cost.
A manager should generally undertake an additional activity when:
$$ MB > MC $$
where:
MB = marginal benefit
MC = marginal cost
The optimal point is usually where:
$$ MB = MC $$
6. A firm can earn an additional KSh 50,000 by producing one more unit, while the additional
cost is KSh 35,000. Should it produce the unit?
, Answer:
Yes.
$$ MB = 50,000 $$ $$ MC = 35,000 $$
Since:
$$ 50,000 > 35,000 $$
the additional benefit exceeds the additional cost.
Net benefit:
$$ 50,000-35,000=15,000 $$
The firm should produce the additional unit.
CHAPTER 2: Supply and Demand
7. What is the law of demand?
Answer:
The law of demand states that, holding other factors constant, the quantity demanded of a
good generally decreases as its price increases and increases as its price decreases.
Jeffrey M. Perloff James A. Brander WITH QUICK
REVISION FORMULAS AND WELL VERIFIED ANSWERS
CHAPTER 1: Introduction to Managerial Economics
1. What is managerial economics?
Answer:
Managerial economics is the application of economic theories, concepts, and quantitative
methods to business decision-making. It helps managers make decisions about pricing,
production, investment, resource allocation, and strategy.
2. What is opportunity cost?
Answer:
Opportunity cost is the value of the next-best alternative forgone when making a decision.
Example: If you spend KSh 10,000 on a business project instead of investing it in a savings
account that would earn KSh 800, the KSh 800 is part of the opportunity cost.
3. Distinguish between explicit and implicit costs.
Answer:
Explicit costs involve actual monetary payments, such as wages, rent, and electricity.
,Implicit costs represent the opportunity cost of resources owned by the firm, such as the
owner's time or capital.
4. What is the difference between positive and normative economics?
Answer:
Positive economics describes and explains what is or what will happen.
Normative economics deals with what should happen and involves value judgments.
5. What is marginal analysis?
Answer:
Marginal analysis compares the additional benefit from an activity with its additional cost.
A manager should generally undertake an additional activity when:
$$ MB > MC $$
where:
MB = marginal benefit
MC = marginal cost
The optimal point is usually where:
$$ MB = MC $$
6. A firm can earn an additional KSh 50,000 by producing one more unit, while the additional
cost is KSh 35,000. Should it produce the unit?
, Answer:
Yes.
$$ MB = 50,000 $$ $$ MC = 35,000 $$
Since:
$$ 50,000 > 35,000 $$
the additional benefit exceeds the additional cost.
Net benefit:
$$ 50,000-35,000=15,000 $$
The firm should produce the additional unit.
CHAPTER 2: Supply and Demand
7. What is the law of demand?
Answer:
The law of demand states that, holding other factors constant, the quantity demanded of a
good generally decreases as its price increases and increases as its price decreases.
