ECON 3125 Test 1

question

Value of The Firm

answer

The present value of all future expected profits. The Managements primary goal is to Maximize Value.

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Managerial Economics

answer

The analysis of major management decisions using the tools of Economics.

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Model

answer

A simplified description of a process, relationship, etc.
-Purpose is to explain and predict.
-Must make assumptions to control other Variables

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6 Step Decison Making Process

answer

1.) Define the Problem
2.) Determine the Objective
3.) Explore Alternative Actions
4.) Predict the Consequences
5.) Make Decision
6.) Perform Sensitivity Analysis

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Define the Problem

answer

-Ask: who are you? are we new or established? Domestic or international?
-What environment are you in? (Regulatory, consumer)
-Are there enough inputs, necessary skills?
-Who's making the decision? What level?
(Politics, individual incentive, competition, self-interest)

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Determine the Objective

answer

-Ultimate goals:
Private → maximize profit
Public → maximize profit social welfare
-The broader the problem definition, the more objectives and the more decision makers.
-Issues:
1.) Timing of costs (immediate) and benefits (delayed).
2.) Uncertainty and risk (what can happen)

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Explore Alternative Actions

answer

A.) What are the limits?
(Regulatory, ethical, budget, personnel, etc.)
B.) What does/does not the decision maker control?
-What actions may achieve the objectives based on the two bullet points above?

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Predict the Consequences

answer

... of the actions (good+bad)
-Objectivity assess the likelihood of success/failure
-Build models
-Are any of the actions contextually dependent?
(Dependent on the environment you are in)
-What additional info is needed and from where?

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Make Decision

answer

-In economics this is done by computation
-Determine your costs and demand (statistically)
-Run your models and determine optimal actions
-Many ways you can do this:
1.) Marginal analysis: the last good produced (where profit = 0); Good produced is MR=MC
2.) Decision Trees
3.) Game Theory
4.) Linear Programing
5.) Cost Benefit Analysis (Most Public) Mostly public/government type "stuff"

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Perform Sensitivity Analysis

answer

("what if" stage)
What if:
-New info
-Changes in the facts
-Changes in assumptions
-Changes in context/environment (i.e. CEO gets fired so change in decision making)

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Barriers to Optimal Decision Making

answer

1.) Self interest of decision makers
(Prestige, job security, legal exposure, politics, financial, etc.)
2.) Insufficient Information
3.) Inability to Implement
(Poor management, lack of skilled labor or resources)
4.) Other objectives
(Maximize revenue/ growth, market share, social responsibility, etc.)

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What does the Derivative of an equation represent?

answer

The Slope

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What does Marginal Mean?

answer

To take the Derivative

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How does Marginal Relate to the Slope?

answer

Marginal Value of a variable Y, is the change in Y per the change in X (Change in benefit or cost)

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Formula To Find Total Revenue

answer

Price x Quantity

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Formula to find Total Costs

answer

Fixed Costs + Variable Costs

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Formula to Find Profit

answer

Total Revenue - Total Cost

question

What do Coefficients tell us?

answer

magnitude of the relationship

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What do the Signs tell us?

answer

Tell you direction of relationship to Q-- which way demand will shift

question

What do the Constants tell us?

answer

Tell you how many (increase or decrease)

question

What causes the demand curve to SHIFT?

answer

Change in the Determinants result.

question

What causes MOVEMENT to the demand curve?

answer

If all determinants are held constant then a price change results.

question

Unconstrained Equations

answer

Can sell as much as you would like. X + Y ----> oo

Ex. Have $10 to spend on food or beer
How to: Take Derivative, Set equal to 0 and solve.
20-2x=0
16-4y=0

question

Constrained Equations

answer

Have a Constraint on the total you can sell. X + Y = Something

How to: Set function Equal to each other, and solve for each. Ex. x+y=8
1.) 20-2x=16-4y
2.)x+y=8 (Solve for x; x=8-y)
3.) Plug into each other and solve for y

question

Substitute Goods

answer

Ex. Coke and Pepsi;
If Po is + then Q +
If Po is - then Q -

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Complementary Goods

answer

Ex. Coke and Popcorn; Coffee and Creamer
If Po + then Q -
If Po - then Q +

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Normal Good

answer

Ex. Gasoline
If Y + then Q +
If Y - then Q -

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Inferior Good

answer

Ex. Peanut Butter; Cheap Food
If Y + then Q -
If Y - then Q +

question

Elasticity of Demand using Point Method

answer

Q2-Q1
--------
Q1

question

Price Elasticity of Demand (Ep) Formula

answer

Will always be Negative

% Change in Q
------------------
% Change in P

question

Cross Price Elasticity of Demand (Ecp) Formula

answer

Responsiveness of Demand of one good in response to a price change of another good.
% Change in Qa
-------------------
% Change in Pb

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Income Elasticity of Demand (Ey) Formula

answer

% Change in Q
------------------
% Change in Y

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Factors Affecting Ep

answer

1.) Type of Good
2.) Availability of Substitutes
3.) Time of Adjustment
4.) Proportion of income spent on a good

question

Perfectly Inelastic

answer

Vertical Demand Line 1
1
1

question

Perfectly Elastic

answer

Horizontal Demand Line ------------

1 of 35

question

Value of The Firm

answer

The present value of all future expected profits. The Managements primary goal is to Maximize Value.

question

Managerial Economics

answer

The analysis of major management decisions using the tools of Economics.

question

Model

answer

A simplified description of a process, relationship, etc.
-Purpose is to explain and predict.
-Must make assumptions to control other Variables

question

6 Step Decison Making Process

answer

1.) Define the Problem
2.) Determine the Objective
3.) Explore Alternative Actions
4.) Predict the Consequences
5.) Make Decision
6.) Perform Sensitivity Analysis

question

Define the Problem

answer

question

Determine the Objective

answer

question

Explore Alternative Actions

answer

question

Predict the Consequences

answer

question

Make Decision

answer

question

Perform Sensitivity Analysis

answer

("what if" stage)
What if:
-New info
-Changes in the facts
-Changes in assumptions
-Changes in context/environment (i.e. CEO gets fired so change in decision making)

question

Barriers to Optimal Decision Making

answer

question

What does the Derivative of an equation represent?

answer

The Slope

question

What does Marginal Mean?

answer

To take the Derivative

question

How does Marginal Relate to the Slope?

answer

Marginal Value of a variable Y, is the change in Y per the change in X (Change in benefit or cost)

question

Formula To Find Total Revenue

answer

Price x Quantity

question

Formula to find Total Costs

answer

Fixed Costs + Variable Costs

question

Formula to Find Profit

answer

Total Revenue - Total Cost

question

What do Coefficients tell us?

answer

magnitude of the relationship

question

What do the Signs tell us?

answer

Tell you direction of relationship to Q-- which way demand will shift

question

What do the Constants tell us?

answer

Tell you how many (increase or decrease)

question

What causes the demand curve to SHIFT?

answer

Change in the Determinants result.

question

What causes MOVEMENT to the demand curve?

answer

If all determinants are held constant then a price change results.

question

Unconstrained Equations

answer

Can sell as much as you would like. X + Y ----> oo

Ex. Have $10 to spend on food or beer
How to: Take Derivative, Set equal to 0 and solve.
20-2x=0
16-4y=0

question

Constrained Equations

answer

question

Substitute Goods

answer

Ex. Coke and Pepsi;
If Po is + then Q +
If Po is - then Q -

question

Complementary Goods

answer

Ex. Coke and Popcorn; Coffee and Creamer
If Po + then Q -
If Po - then Q +

question

Normal Good

answer

Ex. Gasoline
If Y + then Q +
If Y - then Q -

question

Inferior Good

answer

Ex. Peanut Butter; Cheap Food
If Y + then Q -
If Y - then Q +

question

Elasticity of Demand using Point Method

answer

Q2-Q1
--------
Q1

question

Price Elasticity of Demand (Ep) Formula

answer

Will always be Negative

% Change in Q
------------------
% Change in P

question

Cross Price Elasticity of Demand (Ecp) Formula

answer

Responsiveness of Demand of one good in response to a price change of another good.
% Change in Qa
-------------------
% Change in Pb

question

Income Elasticity of Demand (Ey) Formula

answer

% Change in Q
------------------
% Change in Y

question

Factors Affecting Ep

answer

1.) Type of Good
2.) Availability of Substitutes
3.) Time of Adjustment
4.) Proportion of income spent on a good

question

Perfectly Inelastic

answer

Vertical Demand Line 1
1
1

question

Perfectly Elastic

answer

Horizontal Demand Line ------------

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ECON 3125 Test 1

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