ECON 3125 Test 1 - Custom Scholars
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# ECON 3125 Test 1

question
Value of The Firm
The present value of all future expected profits. The Managements primary goal is to Maximize Value.
question
Managerial Economics
The analysis of major management decisions using the tools of Economics.
question
Model
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
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
-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)
question
Determine the Objective
-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)
question
Explore Alternative Actions
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?
question
Predict the Consequences
-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?
question
Make Decision
-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"
question
Perform Sensitivity Analysis
("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
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.)
question
What does the Derivative of an equation represent?
The Slope
question
What does Marginal Mean?
To take the Derivative
question
How does Marginal Relate to the Slope?
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
Price x Quantity
question
Formula to find Total Costs
Fixed Costs + Variable Costs
question
Formula to Find Profit
Total Revenue - Total Cost
question
What do Coefficients tell us?
magnitude of the relationship
question
What do the Signs tell us?
Tell you direction of relationship to Q-- which way demand will shift
question
What do the Constants tell us?
Tell you how many (increase or decrease)
question
What causes the demand curve to SHIFT?
Change in the Determinants result.
question
What causes MOVEMENT to the demand curve?
If all determinants are held constant then a price change results.
question
Unconstrained Equations
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
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
Ex. Coke and Pepsi;
If Po is + then Q +
If Po is - then Q -
question
Complementary Goods
Ex. Coke and Popcorn; Coffee and Creamer
If Po + then Q -
If Po - then Q +
question
Normal Good
Ex. Gasoline
If Y + then Q +
If Y - then Q -
question
Inferior Good
Ex. Peanut Butter; Cheap Food
If Y + then Q -
If Y - then Q +
question
Elasticity of Demand using Point Method
Q2-Q1
--------
Q1
question
Price Elasticity of Demand (Ep) Formula
Will always be Negative

% Change in Q
------------------
% Change in P
question
Cross Price Elasticity of Demand (Ecp) Formula
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
% Change in Q
------------------
% Change in Y
question
Factors Affecting Ep
1.) Type of Good
2.) Availability of Substitutes
4.) Proportion of income spent on a good
question
Perfectly Inelastic
Vertical Demand Line 1
1
1
question
Perfectly Elastic
Horizontal Demand Line ------------
1 of 35
question
Value of The Firm
The present value of all future expected profits. The Managements primary goal is to Maximize Value.
question
Managerial Economics
The analysis of major management decisions using the tools of Economics.
question
Model
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
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
-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)
question
Determine the Objective
-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)
question
Explore Alternative Actions
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?
question
Predict the Consequences
-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?
question
Make Decision
-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"
question
Perform Sensitivity Analysis
("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
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.)
question
What does the Derivative of an equation represent?
The Slope
question
What does Marginal Mean?
To take the Derivative
question
How does Marginal Relate to the Slope?
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
Price x Quantity
question
Formula to find Total Costs
Fixed Costs + Variable Costs
question
Formula to Find Profit
Total Revenue - Total Cost
question
What do Coefficients tell us?
magnitude of the relationship
question
What do the Signs tell us?
Tell you direction of relationship to Q-- which way demand will shift
question
What do the Constants tell us?
Tell you how many (increase or decrease)
question
What causes the demand curve to SHIFT?
Change in the Determinants result.
question
What causes MOVEMENT to the demand curve?
If all determinants are held constant then a price change results.
question
Unconstrained Equations
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
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
Ex. Coke and Pepsi;
If Po is + then Q +
If Po is - then Q -
question
Complementary Goods
Ex. Coke and Popcorn; Coffee and Creamer
If Po + then Q -
If Po - then Q +
question
Normal Good
Ex. Gasoline
If Y + then Q +
If Y - then Q -
question
Inferior Good
Ex. Peanut Butter; Cheap Food
If Y + then Q -
If Y - then Q +
question
Elasticity of Demand using Point Method
Q2-Q1
--------
Q1
question
Price Elasticity of Demand (Ep) Formula
Will always be Negative

% Change in Q
------------------
% Change in P
question
Cross Price Elasticity of Demand (Ecp) Formula
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
% Change in Q
------------------
% Change in Y
question
Factors Affecting Ep
1.) Type of Good
2.) Availability of Substitutes
4.) Proportion of income spent on a good
question
Perfectly Inelastic
Vertical Demand Line 1
1
1
question
Perfectly Elastic
Horizontal Demand Line ------------

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