Managerial Economics – Chapter 1

question

Theory of the Firm

answer

Basic model of business

question

Expected Value Maximization

answer

Optimization of profits in light of uncertainty and the time value of money

question

Value of the Firm

answer

Present value of the firm's expected future net cash flows

question

Present Value

answer

Worth in current dollars

question

Business profits

answer

Residual of sales revenue minus the explicit accounting costs of doing business

question

Normal rate of return

answer

Average profit necessary to attract and retain investment

question

Economic profit

answer

Business profit minus the implicit costs of capital and any other owner rovided inputs

question

Profit margin

answer

Accounting net income divided by sales

question

Return on Stockholder's Equity

answer

Accounting net income divided by the book value of total assets minus total liabilities

question

Frictional profit theory

answer

Abnormal profits observed following unanticipated changes in demand or cost conditions

question

Monopoly profit theory

answer

Above-normal profits caused by barriers to entry that limit competition

question

Innovation profit theory

answer

Above-normal profits that follow successful invention or modernization

question

Compensatory profit theory

answer

Above-normal rates of return that reward efficiency

question

Optimal decision

answer

Decision alternative that produces a result most consistent with managerial objectives

question

Marginal revenue

answer

Change in total revenue associated with a 1-unit change in output.

question

Revenue maximization

answer

Occurs at the output level that generates the greatest total revenue.

question

Revenue maximizing level

answer

Set MR = 0 and solve for Q

question

Cost functions

answer

...

question

Short run cost functions

answer

used for day-to-day operating decisions,

question

Long run cost function

answer

used for long-term planning

1 of 20

question

Theory of the Firm

answer

Basic model of business

question

Expected Value Maximization

answer

Optimization of profits in light of uncertainty and the time value of money

question

Value of the Firm

answer

Present value of the firm's expected future net cash flows

question

Present Value

answer

Worth in current dollars

question

Business profits

answer

Residual of sales revenue minus the explicit accounting costs of doing business

question

Normal rate of return

answer

Average profit necessary to attract and retain investment

question

Economic profit

answer

Business profit minus the implicit costs of capital and any other owner rovided inputs

question

Profit margin

answer

Accounting net income divided by sales

question

Return on Stockholder's Equity

answer

Accounting net income divided by the book value of total assets minus total liabilities

question

Frictional profit theory

answer

Abnormal profits observed following unanticipated changes in demand or cost conditions

question

Monopoly profit theory

answer

Above-normal profits caused by barriers to entry that limit competition

question

Innovation profit theory

answer

Above-normal profits that follow successful invention or modernization

question

Compensatory profit theory

answer

Above-normal rates of return that reward efficiency

question

Optimal decision

answer

Decision alternative that produces a result most consistent with managerial objectives

question

Marginal revenue

answer

Change in total revenue associated with a 1-unit change in output.

question

Revenue maximization

answer

Occurs at the output level that generates the greatest total revenue.

question

Revenue maximizing level

answer

Set MR = 0 and solve for Q

question

Cost functions

answer

...

question

Short run cost functions

answer

used for day-to-day operating decisions,

question

Long run cost function

answer

used for long-term planning

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Managerial Economics – Chapter 1

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