managerial economics reviewer: fundamentals of managerial economics

1. Economics is the science of making (a) in the presence of (b).

a. a: decisions, b: scarce resources
2. Definition of ‘resources’
a. anything used to produce a good or service, or achieve a goal
3. Why are decisions important.
a. because scarcity implies trade-offs in decision-making
4. Managerial economics applies the field of economics to decision making. It is a
branch of economics that applies (a) and (b)
a. a: economic theory, b: decision science methodology
5. The manager is a person who directs (a) to achieve a stated goal.
a. a: resources
6. The manager (a) the efforts of others.
a. a: directs
7. The manager (a) inputs used in the (b) of the firm’s output.
a. a: purchases, b: production
8. The manager directs the (a) price or (b) decisions.
a. a: product, b: quality
9. What are the six basic principles of effective management.
a. (1) identify goals and constraints (2) recognize the nature and importance
of profits (3) understand incentives (4) understand markets (5) recognize
the time value of money (6) use marginal analysis
10. (a) is the first step in making sound decisions. This varies on the underlying (b) of
the manager.
a. a: Identifying goals and constraints, b: goals
11. Achieving different goals entails making different decisions. True?
a. True.
12. In identifying goals and constraints, all units within a firm must be given the same
goals. True?
 a. False. Different units within the firm may be given different goals. For
instance, Marketing Dept. and Finance Dept. might have totally different
goals.
13. (a) makes it difficult for managers to achieve goals such as maximizing profits or
increasing market share.
a. a: constraints
14. Give examples of constraints.
a. (1) available technology (2) availability of capital (3) labor (4) price of inputs
used in production
15. (a) is/are a signal to resource holders where resources are most highly valued by
society.
a. a: profit/s
16. According to Adam Smith, what is the self-interest of a firm.
a. the goal of maximizing profits
17. Adam Smith mentioned that by pursuing the firm’s self interest of maximizing
profits, it ultimately meets the needs of society. Is the statement true?
a. True.
18. Firms enter into markets where (a) is available.
a. a: economic profits
19. As more firms enter an industry, market price rises while economic profits decline.
True?
a. False. Both market prices and economic profits shrink as more firms enter
an industry.
20. Differentiate between ‘accounting profit’ and ‘economic profit’
a. accounting profit: total amount of money gained from sales minus the costs
incurred from producing the goods or services.
b. economic profit: difference between total revenue and opportunity cost.
21. Opportunity cost is comprised of two different costs: explicit and implicit.
Differentiate the two.
a. Explicit costs: costs directly incurred from producing the good/service (i.e.
wages, rent, cost of materials)
 b. Implicit costs: cost of giving up its next best alternative (i.e. forgone salary
or rent)
22. Formula for accounting profit.
a. AP = Total Revenue - Explicit Costs
23. Formula for economic profit.
a. EP = Total Revenue - Opportunity Costs (Explicit Costs + Implicit Costs)
24. The ‘five forces’ framework was pioneered by Michael Porter. Said framework can
be used to identify (a) and (b).
a. a: state of competition, b: profitability of an industry
25. What are the five forces.
a. (1) Entry (2) Power of Input Suppliers (3) Power of Buyers (4) Industry
Rivalry (5) Threat of Substitutes and Complements
26. (a) heightens competitions and reduces the margins of existing firms in a wide
variety of industry settings.
a. a: entry
27. Power of Input Suppliers. Industry profits tend to be (higher/lower) when suppliers
have the power to negotiate favorable terms for their inputs.
a. lower
28. What makes supplier power low?
a. (1) inputs are relatively standardized and relationship-specific investments
are minimal (2) input markets are not highly concentrated (3) alternative
inputs with similar marginal productivity are available
29. Power of Buyers. Industry profits tend to be (higher/lower) when customers or
buyers have the power to negotiate favorable terms for the products or services
produced in the industry.
a. lower
30. What makes buyer power high?
a. (1) if substitute products are available on the market (2) customer
purchases large volumes of standardized products from the business (3)
buyer is price-sensitive, and (4) buyer is well-educated about the product
31. Industry Rivalry. The nature and intensity of rivalry among competing firms within
an industry is a factor in determining (a)
a. a: sustainability of industry profits
32. Two factors which determine industry rivalry.
a. (1) prices and (2) product differentiation
33. What is a concentrated industry?
a. Industries with relatively few firms.
34. Rivalry tends to be (more/less) intense in concentrated industries. In effect, the
likelihood of sustaining profits is (higher/lower)
a. less, higher
35. Threat of Substitutes and Complements. Level and sustainability of industry profits
depend on the price and value of interrelated products and services. This affects
the (a) of an industry because consumers can choose to purchase the (b) instead
of the industry’s product.
a. a: profitability b: substitute
36. The rivalries limiting the bargaining position of consumers and producers in
economic transactions:
a. (1) consumer-producer rivalry (2) consumer-consumer rivalry (3) producer-
producer rivalry
37. Rivalry which arises because of the economic doctrine of scarcity.
a. Consumer-Consumer Rivalry
38. What is the implication of the economic doctrine of scarcity?
a. When limited quantities of goods are available, consumers will compete with
one another for the right to purchase the available good.
39. Firms try to offer the best-quality product at the lowest price to earn the right to
serve the customers. What kind of rivalry.
a. Producer-producer rivalry
40. Consumers attempt to negotiate or locate low prices (rip off producers), while
producers attempt to negotiate high prices (rip off consumers). What kind of rivalry.
a. Consumer-producer rivalry
41. Disadvantaged agents in the market process frequently attempt to induce (a) on
their behalf.
a. government
42. Government plays a key role in disciplining the market process. True?
a. True