Managerial Econ Exam 1

Total Cost

Average Cost x Quantity; Fixed Cost plus Variable Costs

For the output function

Q=40L^2 - 2L what is the derivative dQ/dL?:80L-2 The first derivative is obtained by multiplying the value of each exponent with the term and subtracting the value 1 from each exponent.

If the SSE is equal to zero, what does that tell you about the model?

The predicted values exactly match the actual.

Decision Rule

We should only take an action if the marginal benefit (greater or equal to) marginal cost

Why would a company only want to break-even?

When a new business starts out, it often loses money initially. And A short-term goal could be to break-even (equate revenue with costs), and then build to positive profitability.

Functional Form

a mathematical model to show the relationship between variables

Statistical Significance

a measure to show that the relationship between two variables is more than chance

Response Bias comes into play when

a question is asked in a biased way.

Function

a relationship involving one or more variables

Marginal

a small or limited change

Linear Regression Analysis

a statistical procedure for estimating the relationship among variables

A regression analysis is

a statistical procedure to determine the relationship among variables.

Confidence Interval

a type of interval estimate that may contain the true value of the unknown parameter

Dependent Variables

a variable whose value depends on the activity of other variables

Forecasts can be improved by

adding dummy variables.

Standard Error is

an estimate of the standard deviation of the coefficient, or the amount it varies across observations.

Variable costs

any cost that changes with output

Fixed cost

any cost that stays the same at any output (Q) levels

Linear regression models

are appropriate when the underlying data has linear relationships

Derivatives

are mathematical expressions which can help managers to make more accurate decisions

Dummy variables

are one/zero (1/0) variables that represent a specific state.

Regression coefficients

are statistically significant when the absolute value of their T-statistics are greater than 2

Response Bias

asking survey questions in biased or leading ways

Response Accuracy

asking vague or hypothetical questions

Dummy variables

can be improve the accuracy of models and forecasts

Firm can profit by

capturing some of the value they create

T-statistic

coefficient divided by the standard error; used to evaluate statistical significance of a coefficient

Care must be taken to avoid

common survey pitfalls

Problems in managerial economics are often classified as

constrained optimization problems.

Marginal Revenue

dTR/dQ

Constrained optimization

decisions where the variable can be changed only within certain constraints.

Partial Derivative

derivative of a function with respect to one variable, while holding other variables constant

One way to determine the validity of an independent variable is to

determine its statistical significance.

A firm lowers its cost of production from $40 per unit to $30 unit, yet continues to sell the good at the same price. Did this move create any more value for the customer?

no, it stayed the same

Would real-world tablet PC sales best be modeled with a linear or non-linear model?

non-linear

Companies can often gain advantage not by competing directly with existing offerings, but by

offering a different value proposition.

Red Oceans are

the fiercely contested, well-defined market spaces.

Value Capture

the process of firms earning profit by selling at price above cost

Marginal Analysis

the process of making small changes and seeing how they impact business objectives

Value Creation

the production of a good or service that consumers are willing to pay for

Derivative

the rate of change for one variable with respect to the rate of change for another variable

Standard Error

the standard deviation of a regression coefficient

Firms can only exist if

they create value for customers who are willing to pay

constrained optimization

this deals with optimizing outcomes given certain constraints.

This is the ultimate goal in forecasting

to have zero errors.

Firms use marginal analysis

to make decisions that are beneficial for their objectives.

Blue Oceans are

untapped markets that can be accessed by unique value propositions.

Managerial Economics

uses the concepts of economics to solve practical business problems.

Coefficient

values that show the mathematical relationship between an individual independent variable and the dependent variable

The sign on the coefficient represents the direction of the relationship A negative

variable means that these variables move in opposite directions.

Independent Variables

variables that are independent of other variables

Dummy Variables

variables used to represent a specific state

Market Power

when one side of a market (buyers or sellers) controls a large part of the market share

Sample Bias

when the group that is sampled is not representative of the population

Response Accuracy

when the survey question is too vague or general to glean any useful information.

Sample Bias is

when the wrong group of people is surveyed. A sample should be used that is representative of the population that is of interest.

marginal analysis

where a firm makes small changes to see how this affects firm objectives.

The sign on the coefficient represents the direction of the relationship A positive sign

would mean that these variables move together.

Dummy variables are useful when

you have predictable changes in variables.

Proper demand forecasting allows

a firm to produce goods on time and in the expected amount.

Firms wanting to make profit over the long-run

must consider the various aspects of sustainability

all factors in a business

must ultimately lead to the production of value for the customer.

Key elements to (managerial) decision making

(1) Have a well-defined goal (2) Understand the nature of the choice before us (what the problem is) and also what tools to use (to deal with the problem) (3) know/understand the different variables that impact an outcome and also how they impact the outcome

Fixed values

(costs) that do not change the outcome

R-squared (R2) lies between

0 and 1; the closer to 1, the more the model closely fits the actual data

If SSE is 432 and TSS is 800, what is the R-squared?

0.46

An optimal allocation would then meet the following criteria

A firm can maximize Total Profit by setting the Marginal Benefit from each segment equal to each other. In other words, the Marginal Profit from each segment should be equal.

long-run sustainability

Companies must remain flexible as customer preferences will change over time. And obvious threat of companies which can create a different value proposition to gain market share.

2 methods for maximizing profit

Compare values: find the highest profit Marginal analysis: focus in the change from giving one more/or less

Average Cost

Cost per unit; Total Cost divided by Quantity

According to the chapter video about Sears, what specific issue are casing losses to mount for this (and other) retailers?

Decreasing revenue due to lower sales. Sears and other retailers continue to face lower sales and therefore lower revenue.

If 50 customers are all willing to pay $30 for an album that sells for $25, how much total value is created for the customers?

Each customer gains $5 in value ($30 - $25 = $5). Across 50 customers, this: $5 x 50 = $250

Total Cost

Fixed Cost + Variable Costs (or Average Cost x Quantity)

Key element to (managerial) decisions making

Have a well-defined goal Understand the nature of the choice before us, what the problem is and also what tools to use to deal with the problem

Would mistakenly using a linear instead of a quadratic equation be more problematic in the short or long-term?

Long-term

Total Revenue is maximized when

Marginal Revenue equals zero.

If R-squared equals zero, what does that mean?

Model predicts no better than the average.

An entrepreneur creates a product that costs $25 to make, but no customer is willing to pay more than $15. Was there value created?

No value is created

Total Revenue

Price x Quantity

For the output function

Q = 40L + 2KL + 3K2 what is the derivative dQ/dK?:To find the derivative, we can go term by term to see the effect of K on output.The first term has no K so the derivative of that term with respect to K is zero.For the second term, 2KL, the derivative is simply 2L. While we don't know what L is, it is part of the coefficient for K. When applying the power rule, the 2L will remain.For the third term, 3K2, we can apply the power rule to get 6K. All together, we have:dQ/dK = 2L + 6K

For the output function

Q = 5L + 6LK^{2} + 8K what is the derivative dQ/dK?:12LK+8 This is a partial derivative where only the second and third terms have a K variable.

For the output function

Q = 5L + 6LK^{2} + 8Kwhat is the derivative dQ/dL?:5+6k^2 This is a partial derivative where only the first two terms have an L term.

For the output function

Q = 5LK^{2}N^{2} (where N represents natural resources) what is the derivative dQ/dN?:10LK^2N Use the power rule to find the correct response.

For the output function

Q = L^(2)- 2L + 8K what is the derivative dQ/dK?:8 The first two terms do not have a K variable, so they can be ignored. The derivative of 8K with respect to K is simply 8.

Assume the price of a good affects its sales. The generic linear form would be

Q=a + x1 PRICE A regression is performed, and it yields the results that a=200 and x1= -3 Interpret the meaning of x1= -3: This means for every one dollar the price is increased, 3 less units will be sold.

A student surveys a representative group of citizens, "Don't you agree that Senator Smith has a strong track record on environmental issues?" This survey exhibits what pitfall?

Response Bias

Assume a firm sells an album for $25 per copy. The firm must pay $5 in royalties and $9 in production costs for each album. If 50 copies are sold, how much profit (value capture) was the firm able to make?

The firm's cost to produce an album is: $5 + $9 = $14. The firm sells the album for $25, giving them a profit (value capture) of $11. Across 50 customers, this is: $11 x 50 = $550

Is McDonald's strategy of lowering prices a blue ocean or red ocean strategy?

This is a red ocean strategy, since McDonald's is trying to compete primarily on price. Price is certainly a well-defined factor in contested market spaces like the fast food industry. In fact, after McDonald's announced its lower pricing, a number of competitors did the same.

Total Profit

Total Revenue minus Total Cost

Error

difference between a forecasted value and the actual value

Marginal cost

does change our decision

Fixed cost

does not change our decision

Marginal

extra, additional charge from having one more

Agent

hired manager (who acts on the principle's behafe)

Managerial economics

how to use or allocate scarce (limited) resources in the most efficient way to reach a set goal

Limited resources

in a business create the need to make better decisions

The power rule

is a simple calculus ruled used to differentiate functions with exponents.

Regression analysis

is a technique to determine the statistical relationship between independent variables and a dependent variable

R-squared

is a way to measure the goodness-of-fit of a model

value proposition

is each company's unique strategy to provide value for the customer.

A confidence interval

is just as it sounds - it produces an interval from which you are confident that the actual value lies within.

Statistical significant

is something is going to be important or not

Managerial Economics

is the application of economic concepts to solve managerial problems

Marginal Revenue

is the change in Total Revenue from one more unit sold.

Economics

is the science of scarcity, showing how people make decision given limited resources.

The purpose of a business

is to create value for a customer.

Role of managers

make choices

Tool

marginal analysis also known as cost benefit analysis.

Marginal net benefit =

marginal benefit - marginal cost

Stated goal of any business

maximize profit

R-squared

measures the goodness-of-fit for the linear regression model

The best model for a given set of data

minimizes total errors

Firms that want to be profitable in the long-run

must consider how they will sustain this profit over time.

The quality of a forecast depends

on the underlying appropriateness of the model.

Constrained Optimization

optimizing a function in the presence of some constraints on the variables

Principle

owner(s) of a firm (the principle wants to maximize profit)

Well-done surveys can

provide useful information about demand

Power Rule

rule used to differentiate functions of a specific form

Elasticity

sensitivity to certain changes

Firms can maximize Total Profit by

setting Marginal Profit equal to zero, or by setting Marginal Revenue equal to Marginal Cost

Firms can maximize Total Revenue by

setting Marginal Revenue equal to zero.

Marginal Cost

shows the cost of produce one additional unit

A partial derivative

shows the relationship between two variables while holding all other variables constant.

A derivative

simply calculates the rate of change for one variable with respect to the change of another variable.

A regression

simply executes a set of mathematical commands. If you include a new independent variable into your regression, it will produce a coefficient for this variable, regardless of whether this variable is valid or not.

Total of Squares

sum of the differences between the actual value and the average for each observation

Sum of Squared Errors

sum of the differences between the predicted value and the actual value for each observation

Marginal analysis implies

that firms should only make moves that benefit them, i.e. that increase their profit.

Statistical Significance

that there is a high statistical probability that the true value of the Coefficient is NOT zero and lies within the confidence interval.

The amount of the error is simply the difference

the Predicted Value minus the Actual Value.

Sustainability

the ability of an entity to exist and prosper over a length of time

Managerial Economics

the application of economic concepts and tools to managerial decision-making

Value

the belief that something has worth or usefulness

Marginal Cost

the change in Total Cost from one more unit produced; the derivative of Total Cost with respect to Q; dTC/dQ

Marginal Profit

the change in Total Profit from one more unit produced and sold; the derivative of Total Profit with respect to Q; dπ/dQ

Marginal Revenue

the change in Total Revenue from one more unit sold; the derivative of Total Revenue with respect to Q; dTR/dQ

Diminishing Returns

the declining increase in production from one more unit of an input