Exam 1: Introduction to Economic Decision Making

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?

Value maximization is the main objective of top management. Briefly describe the alternative objectives.

What are the two difficulties that may make profit maximization an ambiguous guide to decision making? Explain.

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

How can the decision making process be structured to analyze complicated decisions?

Which of the following is not one of the steps in managerial decision making?

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?

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. Which of the following best explains the firm's decision?

Carefully define probabilistic and deterministic models, and explain how they differ.

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 an $18 billion per year market. Briefly describe the most important factors influencing his venture's revenues and costs. Describe the most important risks.

Which of the following correctly explains a probabilistic model?

Given that the market share of a firm depends on many unpredictable factors, a firm will use a _____ economic model to estimate the market share for one of its products.

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. 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 _____.

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

Which of the following is true of economic models?

Maximizing profit by enumerating the profit outcomes of different courses of action

Which of the following correctly describes a deterministic economic model?

According to the satisficing model of management behavior, the goal of a firm is to:

Carefully define the term "model" and explain how models are used in managerial economics.

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?