Questions and Answers of Managerial Economics And Business Strategy

Suppose there is substantial variation in air quality within an urban area. If people are aware of both the nature of pollution damages and the air quality at each location, will the resource
Can you think of any positive externalities from a firm's production?
Would the results in Question 4 depend on whether the revenues from the loud party tax were actually redistributed to the neighbors? Or is that a value judgment about which people could have
How might one design a social policy relating to loud fraternity parties? Suppose the frater- nity were taxed an amount, per party, that would just compensate those damaged (leaving them on the same
Why doesn't recognition of the "free rider" problem in providing public goods cause people to contribute, on the grounds that they know they won't get the good at all without doing so? Since they all
What properties characterize a public good? If such properties hold for a good, what is the socially optimal price to charge for this good? What problem results from actually charging the socially
Why is the outcome of voluntary exchange in the market usually considered to be socially optimal? When would this outcome not be appropriate?
Why are you going to college? Is it costing you anything but time (and forgone income)? What does it cost your parents? What does it cost your school? Will the value of your services be increased
During much of human history, some people have been "human capital" in a literal sense- that is, marketable as slaves. What factors would enter into calculations of the market value of such capital
Discuss the mechanics of asset accumulation for a person who is an avid collector of old coins (treat coins as goods that cost something to maintain).
Some people save a positive percentage of their income throughout most of their lives. Draw a diagram to illustrate the preferences of such people as between present and future consump tion. (Hint:
Each of us knows people who spend everything they earn as fast as they get it and also borrow as much as their friends will lend out. Does this tell you anything about the probable magnitude of these
Would the rate of interest on saving deposits be an appropriate measure of the rate of time preference to a person who is currently paying an interest rate of 18 percent per annum on an automobile
What is meant by the term "rate of time preference"?
Suppose that someone owns outright a house whose current market value is $100,000. If this person told you that he lived "rent free," what might you tell him to correct his delusion?
How much do you think you could borrow from a bank on your present stock of human capital? From your parents? From a finance company?
Explain the various approaches to the definition of the optimum pattern of income distri- bution.
What is meant by a "social welfare function"?
What is the compensation principle? What are the limitations of the rule?
Why is it difficult to state categorically that any particular change increases economic wel- fare of society? What type of change is regarded as desirable in terms of Pareto optimum? Why is this a
In what respects is perfect competition superior to imperfect competition from the stand- point of welfare economics? In what respects is it inferior?
How would you justify, in terms of welfare economics, the following government poli-cies?(a) high excise taxes on liquor(b) municipal zoning ordinances(c) financing subway construction by taxes on
What is the significance for economic welfare of the failure of price to equal marginal cost in imperfectly competitive conditions?
Give examples of external economies of consumption.
Indicate some examples, other than those given in the chapter, of divergence between costs to the economy and costs to the individual producer.
Why does optimum adjustment of production require equality of the marginal rate of sub-stitution and the marginal rate of transformation? What requirements must be fulfilled for this equality to be
Why, in perfectly competitive markets, will firms operate, over a long-run period, at the point of lowest LRAC? Will they necessarily do so in imperfectly competitive markets? Explain.
Why is the operation of firms at the point of lowest LRAC essential for optimum efficiency in the use of resources?
What are the requirements for optimum efficiency in the use of resources?
What does the term "maximum satisfaction of wants" mean?
Why can freedom of choice never be absolute?
What are the major goals which are generally employed as a basis for welfare economics?
How are the goals selected for evaluation of welfare?
What is the nature of welfare economics?
Trace through the effect of a shift in demand from oranges to apples.
Trace the effects on the economy of an improved method of producing helicopters, which would allow them to sell for $12,000 and make them as safe as automobiles.
What are the advantages and limitations of general equilibrium theory?
Note the various assumptions upon which the simplified general equilibrium system is based, and indicate the extent to which these may be modified.
Is the general equilibrium system regarded as mathematically determinate? On what basis?
Does equality of equations and unknowns ensure a determinate system? Explain.
What are the two basic general equilibrium equations, from the supply standpoint?
Explain the budget equation and the allocation-of-consumer-expenditure equation, and explain how the usual demand function is derived from them.
When will a change in consumer preferences permanently alter factor prices?
What are some of the probable effects of the development of nylon, dacron, and orlon shirts upon the prices and outputs of other goods, and factor prices?
Trace the probable effects of an improved variety of orange, which allows a great increase in yield per acre, upon:(a) The price of apples (immediate and long run).(b) The production of apples
Distinguish between partial and general equilibrium theory.
How would you explain the following:(a) Losses, despite general business prosperity in the economy, of some textile producers in recent decades?(b) Frequent failure of small restaurants?(c) The
What are the major causes of losses?
Why do companies sometimes operate far beyond the optimum (from a profit standpoint) time of liquidation?
Suppose that a particular firm is covering all variable costs and depreciation but not an average return on investment. If the owners are seeking to maximize their gain, at what point will they
Discuss the various meanings of the term losing money.
Indicate the major roles that profits play in the economy.
Why are pure profits not considered to be a functional return?
Why would there be no monopoly or pure profits in a perfectly competitive market?
What condition is necessary for monopoly profits to continue?
What is the difference between uncertainty and risk? Give examples of each.
Why are innovational profits not regarded as a managerial wage?
Explain the meaning of the term innovations, and give examples. How do innovational profits differ from monopoly profits? From windfall profits?
Define monopoly profit. Why are monopoly profits, in a sense, implicit costs? Why are they not true costs from the standpoint of the economy?
What is the source of monopsony profits? Why will they not be attained if monopsony powers extend to all firms in the industry?
A farmer obtains $17,000 from the sale of his crop; his expenses, including taxes, are $4,000. His farm would sell for $50,000. He could obtain a job in a local feed mill at $10,000 a year, if he
Upon what base should the necessary return on the owners' capital be figured?
Why does a large portion of business profits consist of elements that are costs from an economic standpoint?
If the supply schedule of a particular factor to a certain industry is perfectly inelastic, what portion of the payment to the owners of the factor unit is rent?
Why is a portion of the returns to a certain group of factor owners rent (in the broad sense of the term) rather than a true cost, unless the factor supply is perfectly elastic?
How is it possible for a particular payment for factor units to be a cost from the standpoint of the firm but a rent (in the broad sense of the term) from the standpoint of the economy as a whole?
Why is the concept of rent a surplus return attributable to a specific factor?
What is quasi-rent?
Would rent arise if all land were equally fertile and well located, but limited in amount relative to demand?
Why will the sale price of a house not equal the capitalized sum of the figure for which it rents?
Why will the land not sell for more than the figure given in the answer to Question 4? For less?
If a piece of land is yielding $650 a year rent and is expected to continue to do so in the future, what will be the approximate selling price of the land, assuming a real interest rate of 4 percent
Why is the market for the renting of land imperfect?
What is the nature of the supply schedule of land from the standpoint of the economy? From the standpoint of a particular industry?
How does land differ from other types of factors?
What will happen if persons seek to hold more money than there is in the economy?
Summarize the primary determinants of the supply of and demand for money capital and the nature of the supply and demand schedules.
What are some additional sources of money capital in addition to savings?
Why will persons tend to hold more money when interest rates are low than when they are high? Answer in terms of the various motives for liquidity.
Under what circumstances will persons hold wealth in liquid form for speculative rea-sons?
Explain the nature of the transactions motive for maintaining liquid balances. Explain the relationship between changes in national income (in both real and monetary terms) and the amounts of money
Why is it believed today that the rate of interest has little significance for decisions to save or consume?
What considerations influence individuals' decisions regarding the allocation of income between consumption and saving?
What is meant by liquidity preference? Time preference?
Why is the payment of interest more satisfactorily regarded as a payment for overcoming liquidity than as a payment for saving?
Why is the payment of interest necessary?
Why are payments for capital goods not in themselves factor payments? Do earned depre-ciation charges constitute factor incomes? Explain.
What are the major causes of changes in the demand for capital goods?
What is the nature of the functional relationship between the price of capital goods and the quantity demanded? Why?
What are the major determinants of the total demand for capital goods?
What is capital rationing? Why does it arise? What significance does it have for investment decisionmaking?
Why are firms more likely to undertake marginal investment projects if they have their own funds for the purpose than if they must borrow the money or sell additional stock?
Indicate the nature of the cost of money capital under the borrowing, sale of stock, and plowback methods of financing investment.
Indicate the various approaches to the introduction of risk calculations into investment decision making, along with the limitations of these approaches.
Under what circumstances is use of the "urgency of investment" rule warranted? What dan-ger is involved in its use?
What is the payback period rule? What are its limitations?
Why do many firms turn to "rule-of-thumb" methods for investment decisionmaking?
What is meant by embodiment of technological change? What role does technological change play in investment decisions?
What is the difference between capital widening and capital deepening?
What complications are created for the theory of factor pricing by the fact that durable capital goods are used over a period of years?

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