a) the government because revenues exceed costs.
b) the government because the total benefits exceed total costs.
c) a private firm because the total benefits exceed total costs.
d) a private firm because revenues exceed direct costs.
e) a private firm because the revenues exceed indirect costs.
ANSWER: b
SECTION REFERENCE: Private and Public Decisions: An Economic View
DIFFICULTY LEVEL: Medium
b) states that a program should be undertaken only if it generates revenue.
c) states that a program should be undertaken only if total benefits exceed total costs.
d) takes into account only the direct costs of the program.
e) states that a program should be undertaken only if there are no indirect costs.
ANSWER: c
SECTION REFERENCE: Private and Public Decisions: An Economic View
DIFFICULTY LEVEL: Easy
b) the cost of building the hospital is low.
c) the profits from the hospital are positive.
d) the opportunity cost of building the hospital is zero.
e) the total benefits from the hospital exceed total costs.
ANSWER: e
SECTION REFERENCE: 4
DIFFICULTY LEVEL: Medium
b) are incapable of learning from their mistakes.
c) are prone to biases, mistakes, and pitfalls.
d) are guided solely by monetary incentives.
e) make decisions in a highly calculative and rational manner.
ANSWER: c
SECTION REFERENCE: Private and Public Decisions: An Economic View
DIFFICULTY LEVEL: Easy
SHORT ANSWERS
ANSWER: Managerial economics is the analysis of major management decisions using the tools of economics. It applies familiar concepts such as demand, cost, market structure, and resource allocation. Managerial economics emphasizes the theory of the firm and employs quantitative analysis in making decisions. Simple models are used to emphasize the most important features of the decision problem.
SECTION REFERENCE: Introduction
DIFFICULTY LEVEL: Easy
ANSWER: The decision making process can be summarized into a basic framework and used in economic analysis. Decision making can be structured into the following six steps:
(1) Defining the problem: Since decisions are not made in a vacuum, the context of the decision, the problem itself, and the decision maker need to be identified.
(2) Setting the objectives: The objectives that are set will determine the guiding rule for the decision. For example, if the objective is to maximize profit then the decision that is most likely to lead to profit-maximization will be chosen over a decision that might lead to maximization of market share.
(3) Exploring the alternatives: All the alternative courses of action need to be listed and analyzed.
(4) Predicting the consequences: Although the outcome of a decision cannot be predicted with certainty, predictive models can be used to predict outcomes with a reasonable level of certainty.
(5) Choosing an option: The right choice should be made based on all the previous steps. If the decision is not immediately clear, various methods like marginal analysis, decision trees, game theory, benefit-cost analysis, and linear programming can be used to clarify the analysis.
(6) Using sensitivity analysis: Once a choice is made, sensitivity analysis can be used to check whether and how the decision will be affected by changes in economic conditions or key assumptions.
SECTION REFERENCE: Six Steps to Decision Making
DIFFICULTY LEVEL: Easy
ANSWER: The timing of benefits and costs and the presence of risk and uncertainty are the two difficulties that complicate the objective of profit maximization. Generally speaking, many decisions involve making costly investments “up front” in return for benefits or profits in the future. This requires the decision-maker to develop comparable measures of present and future monetary values. Uncertainty underscores the fact that some outcomes are not known with complete confidence. Costs may be far larger than expected, benefits far smaller, and delays in completion may diminish profits. The manager’s task is to foresee the range of possible outcomes and to estimate the likelihood of different consequences.
b) the government because the total benefits exceed total costs.
c) a private firm because the total benefits exceed total costs.
d) a private firm because revenues exceed direct costs.
e) a private firm because the revenues exceed indirect costs.
ANSWER: b
SECTION REFERENCE: Private and Public Decisions: An Economic View
DIFFICULTY LEVEL: Medium
- In evaluating public programs, benefit-cost analysis:
b) states that a program should be undertaken only if it generates revenue.
c) states that a program should be undertaken only if total benefits exceed total costs.
d) takes into account only the direct costs of the program.
e) states that a program should be undertaken only if there are no indirect costs.
ANSWER: c
SECTION REFERENCE: Private and Public Decisions: An Economic View
DIFFICULTY LEVEL: Easy
- The government is deciding whether it should build a veteran’s hospital in an urban area. It will choose to build the hospital only if:
b) the cost of building the hospital is low.
c) the profits from the hospital are positive.
d) the opportunity cost of building the hospital is zero.
e) the total benefits from the hospital exceed total costs.
ANSWER: e
SECTION REFERENCE: 4
DIFFICULTY LEVEL: Medium
- The study of behavioral economics shows that decision makers:
b) are incapable of learning from their mistakes.
c) are prone to biases, mistakes, and pitfalls.
d) are guided solely by monetary incentives.
e) make decisions in a highly calculative and rational manner.
ANSWER: c
SECTION REFERENCE: Private and Public Decisions: An Economic View
DIFFICULTY LEVEL: Easy
SHORT ANSWERS
- Carefully define managerial economics, and explain how it is useful in decision-making.
ANSWER: Managerial economics is the analysis of major management decisions using the tools of economics. It applies familiar concepts such as demand, cost, market structure, and resource allocation. Managerial economics emphasizes the theory of the firm and employs quantitative analysis in making decisions. Simple models are used to emphasize the most important features of the decision problem.
SECTION REFERENCE: Introduction
DIFFICULTY LEVEL: Easy
- How can the decision making process be structured to analyze complicated decisions?
ANSWER: The decision making process can be summarized into a basic framework and used in economic analysis. Decision making can be structured into the following six steps:
(1) Defining the problem: Since decisions are not made in a vacuum, the context of the decision, the problem itself, and the decision maker need to be identified.
(2) Setting the objectives: The objectives that are set will determine the guiding rule for the decision. For example, if the objective is to maximize profit then the decision that is most likely to lead to profit-maximization will be chosen over a decision that might lead to maximization of market share.
(3) Exploring the alternatives: All the alternative courses of action need to be listed and analyzed.
(4) Predicting the consequences: Although the outcome of a decision cannot be predicted with certainty, predictive models can be used to predict outcomes with a reasonable level of certainty.
(5) Choosing an option: The right choice should be made based on all the previous steps. If the decision is not immediately clear, various methods like marginal analysis, decision trees, game theory, benefit-cost analysis, and linear programming can be used to clarify the analysis.
(6) Using sensitivity analysis: Once a choice is made, sensitivity analysis can be used to check whether and how the decision will be affected by changes in economic conditions or key assumptions.
SECTION REFERENCE: Six Steps to Decision Making
DIFFICULTY LEVEL: Easy
- What are the two difficulties that may make profit maximization an ambiguous guide to decision making? Explain.
ANSWER: The timing of benefits and costs and the presence of risk and uncertainty are the two difficulties that complicate the objective of profit maximization. Generally speaking, many decisions involve making costly investments “up front” in return for benefits or profits in the future. This requires the decision-maker to develop comparable measures of present and future monetary values. Uncertainty underscores the fact that some outcomes are not known with complete confidence. Costs may be far larger than expected, benefits far smaller, and delays in completion may diminish profits. The manager’s task is to foresee the range of possible outcomes and to estimate the likelihood of different consequences.