question

Rational Actor Paradigm

answer

people act rationally, optimally, and self-interestedly and respond to incentives

question

Performance Evaluation Metric

answer

Revenue, cost, profit, or similar outcome

question

Reward Structure

answer

Commission, bonus, raise, or promotion

question

Problem solving requires 2 steps:

answer

1. Figure out what is causing the problem 2. Figure out how to fix it For both steps, predict how people behave

question

3 Questions to find the source of the problem

answer

1. who is making the bad decision? 2. Does the decision maker have enough information to make a good decision? 3. Does the decision maker have the incentive to make a good decision?

question

Solutions to incentive problems:

answer

•Letting someone with better information or incentives make the decision •Giving the decision maker more information •Changing the decision maker's incentives

question

Deontologists

answer

actions are good or ethical if they conform to a set of principles (ex: the golden rule)

question

Consequentialists

answer

actions are judged based on whether they lead to a good consequence

question

Is economics more deontologist or consequentialist?

answer

• Economics is more consequentialist o Uses analysis to understand the consequences of different solutions

question

Voluntary transactions create wealth by______

answer

moving assets from lower to higher valued uses (such as taxes, subsidies, or price controls

question

Buyers surplus

answer

buyers value minus the price

question

Seller surplus

answer

the price minus the sellers value

question

Total surplus

answer

buyer + seller surplus = difference in values

question

Wealth creating transaction corporate raider example:

answer

- see company is under-performing, gets rid of the whole management team

question

What's the governments role in wealth creation?

answer

o Enforcing property rights and contracts, legal tools that facilitate wealth creating transactions o Ensures that buyers and sellers keep gains from trade

question

Why are some countries so poor?

answer

o No property rights o No rule of law

question

Lesson of Economics

answer

an economy is efficient if all assets are employed in their highest-valued assets o This is an unattainable, but useful benchmark

question

The one lesson of business:

answer

inefficiency implies the existence of unconsummated, wealth-creating transactions --make money by identifying unconsummated wealth-creating transactions and devise ways to profitably consummate them

question

Destroying Wealth

answer

• Anything that stops assets from moving to higher valued uses is destroying wealth

question

Taxes destroy wealth

answer

• By deterring wealth-creating transactions - when the tax is larger than the surplus for a transaction

question

Price controls destroy wealth

answer

• Example: rent control (price ceiling) in NYC deters transactions between owners and renters

question

Wealth Creation in Organizations

answer

• They buy raw materials (capital, labor, etc.) and create and sell higher-valued goods and services

question

Buyer surplus

answer

- buyer is willing to pay more than the price for a product

question

Costs are associated with ___

answer

decisions, not activities

question

The opportunity cost of an alternative is

answer

the profit you give up to pursue it

question

Fixed costs

answer

do not vary with the amount of output.

question

Variable costs

answer

change as output changes.

question

Explicit costs:

answer

• Costs paid to its suppliers for product inputs • General operating expenses, like salaries to factory managers and marketing expenses • Depreciation expenses related to investments in buildings and equipment • Interest payments on borrowed funds

question

Implicit costs:

answer

• Payments to other capital suppliers (stockholders) • Stockholders expect a certain return on their money (they could have invested elsewhere)

question

Relevant costs and relevant benefits of a decision

answer

Consider all costs and benefits that vary with the consequence of a decision and only costs and benefits that vary with the decision

question

Psychological Biases:

answer

Not enough information or bad incentives are not the only causes for business mistakes. Often psychological biases get in the way of rational decision making.

question

overconfidence bias

answer

- the tendency to place too much confidence in the accuracy of your analysis

question

Decision criteria

answer

keep engaging in the activity as long as the marginal benefit is larger than the marginal cost

question

Average Cost =

answer

- the total cost divided by the number of units produced • AC = TC/Q • Average costs often decrease as quantity increases due to presence of fixed costs • Average costs are not relevant to extent decisions

question

Marginal Cost

answer

- is the additional cost to make and sell one additional unit of output • Often lower than average cost (due to fixed costs) but not always • Marginal costs MATTER in extent decisions

question

Marginal Revenue

answer

- is the additional revenue gained from producing and selling one more unit

question

If the benefits of selling another unit (MR) are bigger than the costs (MC), then

answer

sell another unit

question

Individuals with low discount rates would willingly lend to those with

answer

higher discount rates

question

Compounding

answer

- if you invest a dollar today at a 10% r, then you would expect to have $1.10 in one year

question

Rule of 72:

answer

if you invest at a rate of return r, divide 72 by r to get the number of years it takes to double your money

question

Projects with a positive NPV create __________

answer

economic profit.

question

Projects with negative NPV may create ________

answer

accounting profits, but not economic profit.

question

Break even Quantity

answer

the break even quantity is the amount you need to sell to just cover your costs • At this sales level, profit is zero

question

Long-run

answer

fixed costs become avoidable so they are included in the shutdown price

question

Short run

answer

: they are unavoidable and should not be included in the shutdown price

question

Vertical integration

answer

refers to the common ownership of two firms in separate stages of the vertical supply chain that connects raw materials to finished goods

question

Decide whether to expand an existing product into a new region is an ________

answer

Discrete decision.

question

What discount should be given on products during the upcoming holiday sale is an _______

answer

Extent decision.

question

Should the advertising budget be changed for the upcoming year? is an _________

answer

Extent decision

question

Should you develop a new product for an existing product line? is an________

answer

Discrete decision.

Managerial Economics Exam #1 – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards