Deck 1: Introduction to Economic Decision Making

Question 1

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?

A) Satisficing behavior.
B) Price discrimination.
C) Social responsibility.
D) A sensitivity analysis.
E) Revenue maximization.

Answer 1

E

Question 2

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

A) firms in the private sector usually do not aim at profit maximization.
B) the goal of profit maximization contradicts the goal of satisfying the firm's shareholders.
C) of the presence of risk and uncertainty.
D) profit-maximization ignores social costs and benefits.
E) None of the above answers is correct.

Answer 2

C

Question 3

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

A) Is only applicable to problems with a small number of alternatives.
B) Becomes increasingly costly as the number of choices increase.
C) Always discovers the best possible choice.
D) Provides a useful shortcut to finding the optimal choice.
E) Answers becomes increasingly costly as the number of choices increase and always discovers the best possible choice are both correct.

Answer 3

B

Question 4

Sensitivity analysis is used by a firm to:

A) analyze the impact of a change in the price of the good on the demand for the good.
B) examine the static effects of an economic decision on the firm's profitability.
C) analyze the social costs and benefits of an economic decision.
D) examine the opportunity costs of an economic decision.
E) examine how an optimal decision is affected if key economic facts vary.

Question 5

Which of the following correctly explains a probabilistic model?

A) A probabilistic model gives a description of real world economic phenomena.
B) A probabilistic model shows the possibility of a range of outcomes.
C) A probabilistic model examines the changes in economic variables over a period of time.
D) A probabilistic model is based on value judgments.
E) A probabilistic model is used to explain long-run economic phenomena

Question 6

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 _____.

A) a sensitivity analysis
B) an enumeration study
C) a benefit-cost analysis
D) a contingent valuation study
E) a strategic analysis

Question 7

Which of the following is true of economic models?

A) Models are too theoretical to be applicable in real world decisions.
B) Models are not useful because uncertainty prevents accurate forecasts.
C) Models are simplified descriptions of processes, relationships, or other phenomena.
D) Models describe real world situations in complete detail.
E) Models are not useful because they do not take into account complicating and less important features of a problem.

Question 8

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

A) maximize short-term profit, even if this sacrifices long-term profit.
B) maximize the value of the firm.
C) increase production to the highest possible level.
D) increase the market share of the firm.
E) diversify into as many product lines as the firm can.

Question 9

The study of behavioral economics shows that decision makers:

A) are not limited by cognitive constraints.
B) are incapable of learning from their mistakes.
C) are prone to biases, mistakes, and pitfalls.
D) are guided solely by monetary incentives.
E) make decisions in a highly calculative and rational manner.

Question 10

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.

A) deterministic
B) dynamic
C) qualitative
D) stochastic
E) probabilistic

Question 11

Managerial economics can best be defined as the:

A) macroeconomics and microeconomics for managers.
B) study of economic incentives on consumer behavior and demand.
C) analysis of the labor market through the behavior of workers and managers.
D) analysis of major management decisions using economic tools.
E) study of the strategic interaction between firms in a market.

Question 12

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

Question 13

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?

A) David will make decisions based on the value generated to shareholders.
B) Ann will not have to factor in risk or uncertainty when making a decision.
C) David will make decisions based on maximization of profit.
D) Ann's decisions will be guided by the motive of social welfare.
E) David will make decisions based on benefit-cost analysis.

Question 14

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) deterministic
B) dynamic
C) qualitative
D) probabilistic
E) comparative statics

Question 15

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:

A) the government because revenues exceed costs.
B) the government because the total benefits exceed total costs.
C) a private firm because the total benefits exceed total costs.
D) a private firm because revenues exceed direct costs.
E) a private firm because the revenues exceed indirect costs.

Question 16

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

A) satisfy customers, employees, and shareholders.
B) maximize the gain to society and not just to shareholders.
C) achieve a satisfactory level of performance against a benchmark.
D) maximize sales revenue and not necessarily the value of the firm.
E) maximize its market share even at the cost of profit.

Question 17

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

A) Predicting the consequences of a decision.
B) Exploring the alternatives to the decision.
C) Defining the problem and the objectives of the decision.
D) Negotiating a consensus to implement the decision.
E) Performing sensitivity analysis.

Question 18

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:

A) the hospital generates positive revenues.
B) the cost of building the hospital is low.
C) the profits from the hospital are positive.
D) the opportunity cost of building the hospital is zero.
E) the total benefits from the hospital exceed total costs.

Question 19

Which of the following correctly describes a deterministic economic model?

A) A deterministic model is a model for which the outcome is predicted with certainty.
B) A deterministic model can only be used to explain short-run economic phenomena.
C) A deterministic model is most useful in identifying long-term trends.
D) A deterministic model is used in the study of normative economics.
E) The outcome of a deterministic model is random and has probabilities attached.

Question 20

In evaluating public programs, benefit-cost analysis:

A) takes into account only the benefits that society gains from public programs.
B) states that a program should be undertaken only if it generates revenue.
C) states that a program should be undertaken only if total benefits exceed total costs.
D) takes into account only the direct costs of the program.
E) states that a program should be undertaken only if there are no indirect costs.

Question 21

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.

Question 22

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

Question 23

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

Question 24

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.

Question 25

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

Question 26

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

Question 27

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?

Question 28

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?

Question 29

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.

Question 30

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

Question 31

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?

Question 32

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

Question 33

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

Question 34

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.