Exam 1: Introduction to Economic Decision Making

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

A research study estimates that the direct cost of constructing a bridge connecting two boroughs in a city is $10 million. The revenue from the tolls on the bridge is estimated to be $8 million. The dollar value of pollution from the construction is estimated to be $5 million but the dollar value of the benefit to the city's residents is calculated to be $20 million. The construction of the bridge is most likely to be undertaken by:

Sensitivity analysis is used by a firm to:

Managerial economics can best be defined as the:

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.

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

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.

Amanda is a troubleshooter for a major manufacturing firm. A particular facility has experienced problems with quality for several years. In addition, there have been some major problems with the facility's labor union. A bitter strike, lasting six months, occurred prior to signing the current contract. Past management teams have visited and inspected the site but have been unable to achieve change, despite detailed study and recommendations. Recently, sales of the facility's product line have declined in the face of increased import competition from an East Asian country, and this is unlikely to change in the near future. Currently, the Board is considering two new courses of action. One is retooling the facility to manufacture a new line of products. This would involve capital costs of several millions of dollars. It would also mean that there would be no production from the facility while retooling and retraining takes place. The second option is closing down the facility. This would involve costs in the form of termination benefits, as well as funding some pension benefits of senior employees. There appear to be no buyers for the plant, and it would likely remain idle for some time, while continuing to be a tax drain on the company. How would Amanda use the steps of decision-making and the concept of value maximization to recommend a course of action to the Board? Explain.

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

A beverages company wants to launch a new diet soda aimed at diabetics and health-conscious customers. It will use a _____ economic model to identify its target customers.

The study of behavioral economics shows that decision makers:

The government is deciding whether it should build a veteran's hospital in an urban area. It will choose to build the hospital only if:

In evaluating public programs, benefit-cost analysis:

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?