Dominique M. Valdoria Dr. Abraham Camba Jr.

BSA 1-2 Managerial Economics

REVIEW QUESTIONS
1. What role does Managerial Economics play in shaping business decisions? Is profit (or
shareholder wealth) maximization still represents the best overall economic objective for
today’s businesses?
1.1. The following are the roles of Managerial Economics in shaping
decisions:
a. Study of economic pattern at macro-level and analysis its
significance to the organization and its functioning
b. Examine how the changing environment is profitable to ones
organization in the best possible way
c. Helps is making sound decision by choosing the best available
alternative in case of choices.
d. Many managerial economic tools and analysis models are used to
help make investing decisions both for corporations and savvy
individual investors. These tools are used to make stock market
investing decisions and decisions on capital investments for a
business.
e. Assists businesses in determining pricing strategies and appropriate
pricing levels for their products and services. Some common analysis
methods are price discrimination, value-based pricing and cost-plus
pricing
f. Assists the management in the decisions pertaining to internal
functioning of a firm such as changes in price, investment plans, type
of goods /services to be produced and inputs to be used.
g. Analyse changes in macroeconomic indicators such as national
income, population, business cycles, and their possible effect on the
firm’s functioning.
h. The most significant function of a managerial economist is to conduct
a detailed research on industrial market.
 i. He also provides management with economic information such as tax
rates, competitor’s price and product, etc. They give their valuable
advice to government authorities as well.
j. Uncertainty exits in every business and managerial economics can
help reduce risk through uncertainty model analysis and decision-
theory analysis. Heavy use of statistical probability theory helps
provide potential scenarios for businesses to use when making
decisions.
1.2. Profit maximization can be not the best overall economic objective in
today’s businesses for there are lot of key metrics such as overall revenue
performance are used instead, or if profit is utilized it’s on a short-term
basis.
2. Describe the effects of each of the following managerial decisions (or economic influences)
on the value of HealthyYOU Marketing’s:
a. Through large advertising expenditures, HealthyYOU increases sales substantially.
b. A procurement of new equipment by the production department that lowers
manufacturing costs.
c. HealthyYOU raises prices. Quantity demanded in the short run is unaffected, but in the
long run, sales are expected to decline.
d. The Bangko Sentral ng Pilipinas (BSP) takes actions that lower interest rates
dramatically.
e. An expected Executive Order on the abolition of labor contractualization.
3. Evaluate the decision makers’ approach or logic. In which of the 7 decision steps might the
decision makers have gone wrong? How would you respond in the final decision situation?

Aryannah, Annikah and Amartya are debating how to spend their summer vacation.
Should they spend a quiet week at home, go to the beach, or go to the mountains, where
their parents and several other relatives live? Unable to make up their mind, they decide to
list the pros and cons of each option. The points they care about are (1) relaxation and
quiet, (2) some exercise, and (3) seeing family and old friends. With respect to these points,
they rank the alternatives as shown in the table:

Relaxation Exercise Family/Friends

 Home 1st 3rd 2nd
Beach 2nd 1st 3rd
Mountains 3rd 2nd 1st

Now they are ready to compare the options. Which is their better choice: home or beach?
Since home ranks higher than beach on two of the three points, they give it two pros and
one con and judges it the better choice. What about home versus mountains? Mountains
versus beach?

Between home and mountain, mountain got two pros than the other and if
they were to compare mountain and beach, they gave two pros for beach. With
the three comparisons, each had one more advantage to the other in which was
shown in the table that each of the alternatives ranked 1 st in each of their key
metrics. The three cannot fulfil their decision making in these results because
first of, they failed to determine their objective or goal because after defining their
problem they already jumped into exploring their alternatives for the defined
problem.

4. Why may corporate managers not specifically aim at profit (or wealth) maximization for
their companies?
It's hard for a business to pinpoint their precise profit maximising output,
as they cannot accurately calculate marginal revenue and marginal cost. Day-to-
day pricing decisions are taken on the basis of “estimated demand" or “rules of
thumb". Businesses can also take advantage of their market experience when
setting prices. A business might look to add a profit margin on top of average
cost – this is known as “cost-plus pricing." When demand is price inelastic, the
profit margin can be higher.

5. What are some of the forces that causes managers to act in the interest of shareholders?
To create a convergence between the interests of stockholders and managers, and
thus cause managers to be interested in maximizing a corporation's profits or value:
a. Competitive pressures could lead to stock price declines for nonperforming
company, and again result in take overs, and proxy contest.
b. In many corporations, management remunerations are tied to the performance
and managers frequently are awarded stock options which gain value as the
price of shares rises. Thus, managers will have an interest in maximizing
stockholder welfare.
c. Corporate shares are not only owned by widely dispersed stockholders but by
large institutional holders such as: banks, insurance companies, mutual funds,
pension funds, etc. These organizations employ analysts who continually study
stock performance. Nonperforming companies would be sold from these
institutions' portfolios, and lead to decreased prices of these stocks. This could
lead to the dismissal of present management.