Exam 1: Introduction to Economic Decision Making

A cosmetics company is conducting a second-year review of one of its newest products.The marketing department expects that the firm will continue to earn profits from the sale of the product in the third year as it did in the past two years.The senior management,however,feels that the profit projections would vary based on other factors such as the price of the competitor's products,the actual level of sales,and the possibility of cost reductions.In other words,the senior management is undertaking _____.

The study of behavioral economics shows that decision makers:

One of the major steps in decision-making is to explore the alternatives.Do most managerial decisions have a few,limited number of options? Explain.Illustrate your answer with an appropriate example.

In striving to make the best possible decisions,a firm's CEO always relies on a highly analytical approach.However,the firm's Chairman of the Board argues that in his experience,the analytical approach can only go so far.He advocates analysis as only one of several decision approaches.What is your view? Discuss and explain.

A small nation is considering upgrading its air force to incorporate new technology.It faces two main choices.The first is to acquire a fleet of the latest fighter aircraft,with the newest electronics and weapons.The cost of the acquisition (assuming that the U.S.President and Congress agree to the sale)is $45 million per plane,including a stock of spare parts that should last five years.The second choice is to buy an electronic upgrade for existing aircraft,with a complete overhaul of the airframes.The cost of such an upgrade is $8 million per plane,with about a 10% loss of fleet because of damage beyond repair and "cannibalization" to obtain the highest number of flyable planes.The upgrading of existing planes results in aircraft with about 90% of the capability of the new aircraft. Top pilots in the small country's air force are concerned that they may not be flying the best aircraft,and could face a disadvantage in combat against newer planes flown by a potential enemy.However,they acknowledge that if a numerical superiority against the enemy can be obtained,an overall victory is still likely.Their theory is that three of the upgraded planes should be able to win against one of the newer planes flown by an enemy (although the pilots expect higher losses in combat).How would an economic consultant advise the defense ministry of the small country in deciding how best to spend its available budget for air defense? What objective(s)are important for this decision? What are the pros and cons of the available options?

Which of the following is true of economic models?

Profit maximization is an ambiguous guide to decision making in the private sector because:

Sensitivity analysis is used by a firm to:

A coffee shop decides that it will increase its market share to 55% by the end of the year by lowering the price of a cup of coffee.The price cut will certainly result in an increase in the firm's share but will lower its profits and revenues.Which of the following best explains the firm's decision?

Assume that the government is deciding whether it should build a hospital in one of the main cities in the country.It will choose to build the hospital only if:

Mike heads a new startup firm that decides to open a number of clinics that perform laser eye surgery to correct common vision problems.He hopes that over time his company can claim a substantial share of what is estimated to be a $8 billion per year market. Briefly describe the most important factors influencing his venture's revenues and costs.Describe the most important risks.

Carefully define managerial economics,and explain how it is useful in decision-making.

Carefully define sensitivity analysis,and provide three examples of how a manager might use it.

How does decision making in the private,for-profit sector differ from decision making in the public sector?

Ecotopia is a developing country that is facing a growing need for energy to power its industries and fuel its development.The Ecotopian government's proposal to set up a nuclear energy plant has drawn widespread protests from environmental activists across the country.Since this is an issue that affects a large number of people,how would one weight the benefits and costs to make a decision that is best for the society as a whole?

A company is thinking about significantly expanding its production capacity.What variables would it consider in making this decision? What might be useful sources of information for estimating the potential profit impact of the expansion?

How can the decision making process be structured such that complicated decisions can be analyzed using a common approach?

Which of the following correctly explains a probabilistic model?

According to the theory of the firm,the management's ultimate objective is to:

Ann is a manager at a private construction company.David works in the city planning department of the government.Based on this information,which of the following is most likely to be true?