Managerial Economics (Chapter 1)

True

Many firms have responded to the need for ethical behavior by establishing codes of ethical behavior. True or False

Theory of the firm

The postulate that the primary goal or objective of the firm is to maximize wealth or the value of the firm.

Microeconomics.

Which of the following areas of economic theory is the single most important element of managerial economics? a. Mathematical economics b. Econometrics c. Macroeconomics d. Microeconomics

False

Managerial economics is largely independent of the internationalization of economic activity. True or False

False

Business ethics refers to enforceable laws of business conduct. True or False

False

Mathematical economics involves the application of statistical tools to estimate economic models. True or False

False

Sales taxes paid to the state by a retail firm are an example of an implicit cost. True or False

Implicit costs

The value (from their best alternative use) of the inputs owned and used by the firm.

True

A building owned by a firm has an explicit cost of zero, but its implicit cost is not zero. True or False

Model

A formal or mathematical statement of an economic theory.

False

A theoretical model attempts to identify every possible determinant of an event. True or False

False

Alternative theories of the firm have proven to be more satisfactory than the theory of profit maximization. True or False

False

An increase in the uncertainty associated with a firm's cash flows will cause a decrease in the discount rate that is applied to the valuation of the firm. True or False

Firm

An organization that combines and organizes resources for the purpose of producing goods and/or serves for sale.

True

Business ethics provides guidelines as to what is acceptable behavior in business transactions. True or False

violate social or moral standards..

Business ethics refers to any behavior by businesses that may a. be illegal. b. violate social or moral standards. c. result in the maximization of profits. d. All of the above.

explicit costs..

Business profit is equal to total revenue minus a. economic costs. b. explicit costs. c. implicit costs. d. managerial costs.

False

Business profit is equal to total revenue minus all implicit costs. True or False

True

Business profit is generally greater than economic profit. True or False

True

Business profit minus economic profit is equal to the total of all implicit costs. True or False

1. Economic profits 2. risk bearing, frictional disturbances, monopoly power, the introduction of innovations, or managerial efficiency.

Business profit refers to the revenue of the firm minus its explicit costs. The latter are the actual out-of-pocket expenditures of the firm. _______1____________equals the revenue of the firm minus its explicit and implicit costs. The later refer to the value of the inputs owned and used by the firm in its own production processes. Economic profit can result from one or a combination of the following: ________2______________. Profits provide the signal for the efficient allocation of society'es resources.

False

Businesses are taxed on the basis of their economic profit. True or False

lobbying for the abolition of laws that require ethical behavior..

Businesses have responded to incentives for ethical behavior by doing all of the following except a. lobbying for the abolition of laws that require ethical behavior. b. appointing "ethics officers" with responsibility for ensuring that employees behave in an ethical manner. c. providing training sessions in ethical behavior for employees. d. establishing codes of ethical behavior for employees.

principal-agent problem.

By tying a manager's compensation to the performance of the firm relative to that of its competitors, corporate stockholders and directors create incentives that tend to resolve the a. possibility of bankruptcy. b. hidden agenda scenario. c. principal-agent problem. d. firm's opportunity costs.

True

Economic cost is equal to the sum of explicit and implicit costs. True or False

True

Economic profit is an important mechanism for the efficient reallocation of resources in a free-enterprise economy. True or False

False

Economic profit is equal to total revenue minus all implicit costs. True or False

1. entrepreneurs, workers, and other resource owners. 2. theory of the firm 3. maximize wealth or the value 4. future profits 5. constrained optimization 6. profit or value maximization

Firms exist because the economies that they generate in production and distribution confer great benefits to ________________1_____________. The _____________2______________postulates that the primary goal or objective of the firm is to __________________3_______________of the firm. This is given by the present value of the expected ______________4___________of the firm. Since the firm usually faces many resource, legal, and other constraints, we speak of ____________5_______________. Alternative theories of the firm postulate other objectives for the firm, but _____________6________predicts the behavior of the firm more accurately than do any of its alternatives.

True

Firms exist because they facilitate the efficient organization of factors of production. True or False

False

Firms purchase goods and services from other firms, instead of producing the goods and services internally, because it will reduce transaction costs. True or False

False

Firms that operate in industries with relatively high levels of risk tend to have lower levels of profit. True or False

False

Firms typically provide employees with a list of all possible forms of unethical behavior. True or False

True

If there was no inflation, the value of a dollar received now would be greater than the value of a dollar received a year from now. True or False

business profit minus economic profit..

Implicit cost is equal to a. business profit minus economic profit. b. business profit plus economic profit. c. economic profit minus business profit. d. economic profit minus explicit cost.

True

Implicit costs refer to the value of inputs owned and used by a firm. True or False

True

In the long run, competitive firms tend to earn risk-adjusted levels of economic profit equal to zero. True or False

Profitability.

Management decision problems are comprised of three elements. Which of the following is not one of them? a. Profitability b. Alternatives c. Constraints d. Objectives

False

Management decision problems are not encountered by government agencies or non-profit organizations. True or False

True

Management decision problems typically involve objectives and constraints. True or False

True

Managerial economics involves the application of economic theory and decision science. True or False

1. commodities 2. unprecedented dimension 3. global dimension

Many of the _______1_________ we consume are imported and American firms purchase many inputs abroad, sell an increasing share of their output to other nations, and face increasing competition from foreign firms operating in the United States. Furthermore, the international flow of capital, technology, and skilled labor has reached an _____________2_____________. In view of such a globalization of economic activity, it is essential to introduce a __________3_____________ into the study of managerial economics.

False

Most of the goods and services in the United States are produced by government and the rest are produced by firms and not-for-profit organizations. True or False

False

Profit is a constraint on the operation of a firm. True or False

False

Satisficing refers to the fact that profit maximization by corporate managers is a way of satisfying stockholders. True or False

False

The Internet has had very little impact on the way that business is conducted. True or False

Functional areas of business administration studies

The academic disciplines of accounting, finance, marketing, personnel, and production.

Explicit costs

The actual expenditures of the firm required to hire or purchase inputs.

Managerial Economics

The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.

Business ethics

The code or guidelines that prescribes acceptable behavior in business behavior and business transactions.

True

The concept of the circular flow of economic activity illustrates the point that all economic activities are interdependent. True or False

True

The costs of negotiating and enforcing contracts are transaction costs. True or False

transaction costs..

The economic term for the costs associated with negotiating and enforcing a contract is a. opportunity costs. b. real costs. c. functional costs. d. transaction costs.

False

The economic theory of the firm assumes that businesses attempt to maximize their contribution to social welfare. True or False

Econometrics

The empirical estimation and testing of economic relationships and models.

Transaction costs

The extra cost (beyond the price of the purchase) in terms of money, time, or inconvenience of conducting a transaction.

True

The firm, as an organizational structure, exists in order to reduce transactions costs. True or False

define the problem..

The first stage in the five-step decision process described in the text is to a. define the problem. b. select the best possible solution. c. determine the objective. d. identify possible solutions.

1. define the problem 2. determine the objective 3. identify possible solutions 4. select the best possible solution 5. implement the decision

The five steps in the decision-making process are;

Circular flow of economics activity

The flow of resources from resource owners to business firms and the reverse flow of goods and services from the latter to the former. Money flows from firms to resource owners to pay for resources and back to firms in payment for goods and services.

False

The frictional theory of profits holds that firms in a competitive industry can have economic profits that differ from zero for long periods of time. True or False

True

The function of a firm is to purchase resources and then to transform them into goods and services and offer them for sale. True or False

False

The functional areas of business administration are largely irrelevant to the study of managerial economics. True or False

the increase in barriers to international trade..

The globalization of business is reflected in all of the following except a. the international convergence of consumer tastes. b. the increase in barriers to international trade. c. the emphasis on global marketing-management training. d. increasing domestic competition from foreign producers.

False

The idea that profits are a form of reward for the successful introduction of a new product or process is the frictional theory of profit. True or False

implement the decision..

The last stage in the five-step decision process described in the text is to a. determine the objective. b. select the best possible solution. c. implement the decision. d. explain the decision to managers.

Sarbanes-Oxley Act

The law passed in July 2002 in response to financial scandals, such as Enron, which provides much tougher regulations on corporate governance and accounting oversight.

True

The managerial efficiency theory of profit holds that firms that enjoy higher levels of profit do so because they are more efficient than their competitors. True or False

Constrained optimization

The maximizing or the minimizing of an objective function subject to some constraints.

the value of the firm..

The modern theory of the firm holds that firms behave in a way that is designed to maximize a. profit. b. the value of the firm. c. monopoly power. d. total revenue.

False

The monopoly theory of profits argues that restricted entry into an industry tends to keep profits low. True or False

Value of the firm

The present value of all expected future profits of the firm.

True

The principal-agent problem can occur when the person who manages a firm is not the owner of the firm. True or False

Principal-agent problem

The problem that arises because the agents (managers) of a firm may seek to maximize their own benefits (such as salaries) rather than the profits or value of the firm, which is the owner's or principals' interest.

Economic profit

The revenue of the firm minus its economic costs.

Business profit

The revenue of the firm minus its explicit or accounting costs.

Globalization of economic activity

The setting up of production facilities and/or the purchase of components and parts, as well as the sale of commodities in other nations.

True

The single most important element in managerial economics is the microeconomic theory of the firm. True or False

Economic theory

The study of microeconomics and macroeconomics.

Microeconomics

The study of the economic behavior of individual decision-making units, such as individual consumers, resource owners, and business firms, in a free-enterprise system.

Mathematical economics

The study of the formal (equational) relationships among economic variables in economic models and their theoretical implications.

Macroeconomics

The study of the total or aggregate level of output, income, employment, consumption, investment and prices for the economy viewed as a whole.

principal-agent problem.

The tendency for managers to operate a firm in a way that maximizes their personal utility rather than the firm's profits is referred to as the a. consumer utility incentive. b. principal-agent problem. c. hidden agenda scenario. d. Modigliani hypothesis.

True

The theory of the firm holds that the primary goal of a firm is to maximize the discounted present value of the positive difference between the firm's total revenue and the firm's total cost or to minimize the present value of the negative difference between the firm's total revenue and total cost. True or False

Satisficing behavior

The theory of the firm that postulates that managers are not able to maximize profits but can strive only for some satisfactory goal in terms of sales, profits, growth, market share, and so on.

False

The ultimate test of the value of an economic theory is whether it is based on reasonable assumptions. True or False

False

The value of a firm is equal to the sum of all future profits that will be generated by the firm True or False

True

The value of a firm under constrained optimization is generally below what it would be under unconstrained optimization. True or False

True

The value of a firm will increase if there is a reduction in the uncertainty associated with the firm's cash flows. True or False

how well the theory can predict or explain.

The value of an economic theory in practice is determined by a. how accurate the assumptions are. b. how well the theory can be represented by a graph. c. how well the theory can predict or explain. d. how parsimonious the model is.

True

The wages paid to workers employed by a firm are an example of an explicit cost. True or False

False

Transaction cost refers to the price paid for a good or service. True or False

They provide an incentive for the reallocation of resources.

What social function is served by profits in a free-enterprise system? a. Taxes on profits support government programs b. They provide an incentive for the reallocation of resources c. Profits allow individuals to accumulate wealth and engage in capital investment d. Profits result in higher levels of employment

Satisficing model.

Which of the alternatives to the modern theory of the firm holds that managers attempt to meet some goal that is defined in terms of a specified level of sales, profits, growth, or market share? a. Sales maximization model b. Management utility maximization model c. Satisficing model d. Profit maximization model

Marketing.

Which of the following functional areas of business has primary responsibility for a firm's total revenue? a. Accounting b. Finance c. Marketing d. Personnel

Should a firm use a production method in foreign countries that is banned in its home country?.

Which of the following is a question that is uniquely relevant to the subject of business ethics? a. Should a firm make false and slanderous statements about its competitior's products? b. Should a firm attempt to conceal evidence of the harmful effects of its products on the health of consumers? c. Should a firm engage in illegal practices? d. Should a firm use a production method in foreign countries that is banned in its home country?

Inadequate financial capital.

Which of the following is an example of a resource constraint? a. Pollution control laws b. Inadequate demand c. Excessive production costs d. Inadequate financial capital

The uncompensated services of the spouse of a firm's owner.

Which of the following is an example of an implicit cost? a. Dividends paid out to stockholders b. The uncompensated services of the spouse of a firm's owner c. Payments made to workers who are unproductive d. All of the above are implicit costs.

Macroeconomics.

Which of the following is defined as the study of the aggregate economy studied as a whole? a. Mathematical economics b. Econometrics c. Macroeconomics d. Microeconomics

Reduced productivity of workers.

Which of the following is not a result of the spread of information technology? a. More rapid deliveries of products to consumers b. Reduced inventories c. Reduced productivity of workers d. Reduced need for middle management

a field that applies economic theory and the tools of decision science..

Which of the following is the best definition of managerial economics? Managerial economics is a. a distinct field of economic theory. b. a field that applies economic theory and the tools of decision science. c. a field that combines economic theory and mathematics. d. none of the above.

Econometrics.

Which of the following is the discipline that studies the use of statistical tools to estimate economic models? a. Mathematical economics b. Econometrics c. Macroeconomics d. Microeconomics

Frictional theory.

Which theory of profit holds that a firm's profits can differ from zero only in the short run? a. Risk-bearing theory b. Frictional theory c. Monopoly theory d. Managerial efficiency theory

Risk-bearing theory.

Which theory of profit holds that profit will be higher in industries characterized by a high degree of variability in their revenues or their costs? a. Risk-bearing theory b. Frictional theory c. Monopoly theory d. Innovation theory

Monopoly theory.

Which theory of profit holds that profit will be higher in industries where firms in the industry are able to prevent other firms from entering the industry? a. Risk-bearing theory b. Frictional theory c. Monopoly theory d. Managerial efficiency theory

Managerial efficiency theory.

Which theory of profit views profit as a firm's reward for keeping costs below or revenues above the levels experienced by other firms in the industry? a. Risk-bearing theory b. Frictional theory c. Innovation theory d. Managerial efficiency theory

Innovation theory.

Which theory of profit views profit as a reward for introducing a new product or technique? a. Risk-bearing theory b. Frictional theory c. Monopoly theory d. Innovation theory

1. Business leaders and managers 2. global economy 3. additional special skills

____________1_____________ must also be prepared to operate-and compete-within a __________2____________ that has grown more risky, crisis-prone, and sluggish than in the past. This requires business leaders and managers to have _______3____________ to succeed in this new world.

1. Business ethics 2. Business and management ethics 3. business transactions. 4. since different people may have different values. 5. ethics codes and ethics officers

____________________1___________seeks to proscribe behavior that businesses, firm managers, and workers should not engage in. __________2_____________goes beyond the law to provide guidelines as to what is acceptable behavior in __________3________________. Being based on values, however, it is often not clear what ethical behavior is and is not, ________________4_____________. Most large corporations and professinoal associations have _______________5_____________.

managerial limitations..

firms do not continue to grow without limit because of a. managerial limitations. b. government regulation. c. income taxes. d. antitrust laws.