ECON 5370 NEW EXAM WITH COMPLETE SOLUTIONS
100% VERIFIED
What is managerial economics?
Managerial economics is the application of microeconomics to decision problems faced
in the private and public sector
How does managerial economics assist managers?
It assist managers by efficiently allocating scarce resources, planning organizational
strategy, and executing effective tactics
Managerial decision making seeks to (4):
1.Identify the alternatives
2.Select the choice that accomplishes the objective in the most efficient manner
3.Taking into account constraints
4.Likely actions and reactions of rival decision problem
Decision making elements (5)
1.Set the goals
2.Define the problem
3.Analysis of alternatives- Comparison of costs and benefits relative to each other;
consideration of relevant organizational and societal limitations
4.Sensitivity analysis
5.Choice implementation
What is a key manager characteristic?
,Teamwork ability and team motivating ability
What is economic profit?
Total sales revenue minus total economic cost
What is economic cost?
The most valuable sacrificed alternative
Why should economic cost be considered opportunity cost?
They attract resources such as investment capital from its next best alternative use
Why are economic profits important to firms?
They compensate the owners of the firm for the risk they assume; usually with a higher
rate of return
What is risk-bearing theory of profit?
It suggest that profit depends on risk taking behavior; it is explained in the context of
normal profit, where normal if defined as relative risk of alternative investments
What is temporary disequilibrium theory of profit?
Firms may find themselves earning a rate of return above or below normal return levels
due to disequilibrium in demand or cost
What is monopoly profit?
A firms ability to dominate in the market and persistently earn above-normal rates of
return
What causes this domination in the market (4)?
, 1. Economies of scale
2. Control of essential natural resources
3. Control of critical patents
4. Governmental restrictions that prohibit competition
What is innovation theory of profit?
Suggests that above normal profits are the reward for successful innovations
What is managerial efficiency theory of profit?
Suggests that profits arise because of exceptional managerial skills
What is shareholder wealth?
Shareholder wealth is measured by the market value of a firm's common stock, which is
equal to the present value of all expected future cash flows to equity owners discounted
at the shareholders required rate of return
What does agency costs include (4)?
1. Grants of stock options or restricted stock from Treasury stock so executive
compensation aligns the incentives for management with shareholder interest
2. Internal audits and accounting oversight boards to monitor managements actions
3. Bonding expenditures and fraud liability insurance to protect the shareholders from
managerial dishonesty
4. Complex internal approval processes to limit discretion, but which prevent timely
responses to business opportunities
How do principal- agents problems arise?
100% VERIFIED
What is managerial economics?
Managerial economics is the application of microeconomics to decision problems faced
in the private and public sector
How does managerial economics assist managers?
It assist managers by efficiently allocating scarce resources, planning organizational
strategy, and executing effective tactics
Managerial decision making seeks to (4):
1.Identify the alternatives
2.Select the choice that accomplishes the objective in the most efficient manner
3.Taking into account constraints
4.Likely actions and reactions of rival decision problem
Decision making elements (5)
1.Set the goals
2.Define the problem
3.Analysis of alternatives- Comparison of costs and benefits relative to each other;
consideration of relevant organizational and societal limitations
4.Sensitivity analysis
5.Choice implementation
What is a key manager characteristic?
,Teamwork ability and team motivating ability
What is economic profit?
Total sales revenue minus total economic cost
What is economic cost?
The most valuable sacrificed alternative
Why should economic cost be considered opportunity cost?
They attract resources such as investment capital from its next best alternative use
Why are economic profits important to firms?
They compensate the owners of the firm for the risk they assume; usually with a higher
rate of return
What is risk-bearing theory of profit?
It suggest that profit depends on risk taking behavior; it is explained in the context of
normal profit, where normal if defined as relative risk of alternative investments
What is temporary disequilibrium theory of profit?
Firms may find themselves earning a rate of return above or below normal return levels
due to disequilibrium in demand or cost
What is monopoly profit?
A firms ability to dominate in the market and persistently earn above-normal rates of
return
What causes this domination in the market (4)?
, 1. Economies of scale
2. Control of essential natural resources
3. Control of critical patents
4. Governmental restrictions that prohibit competition
What is innovation theory of profit?
Suggests that above normal profits are the reward for successful innovations
What is managerial efficiency theory of profit?
Suggests that profits arise because of exceptional managerial skills
What is shareholder wealth?
Shareholder wealth is measured by the market value of a firm's common stock, which is
equal to the present value of all expected future cash flows to equity owners discounted
at the shareholders required rate of return
What does agency costs include (4)?
1. Grants of stock options or restricted stock from Treasury stock so executive
compensation aligns the incentives for management with shareholder interest
2. Internal audits and accounting oversight boards to monitor managements actions
3. Bonding expenditures and fraud liability insurance to protect the shareholders from
managerial dishonesty
4. Complex internal approval processes to limit discretion, but which prevent timely
responses to business opportunities
How do principal- agents problems arise?
