Essay on Managerial Economics

5343 Words May 18th, 2012 22 Pages
Managerial Economics:
A Problem-Solving Approach
2nd Edition

End-of-Chapter Questions and Answers
Table of Contents

Chapters 1 and 2 - Introduction and The One Lesson of Business 5 Multiple Choice Questions 5 Multiple Choice Key 5 Short Answer Questions 6 Short Answer Key 6 Chapter 3 - Benefits, Costs, and Decisions 8 Multiple Choice Questions 8 Multiple Choice Key 8 Short Answer Questions 9 Short Answer Key 10 Chapter 4 - Extent (How Much) Decisions 11 Multiple Choice Questions 11 Multiple Choice Key 12 Short Answer Questions 12 Short Answer Key 13 Chapter 5 - Investment Decisions: Look Ahead and Reason Back 15 Multiple Choice Questions 15 Multiple Choice Key 15
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Purchase price for the company is set as 4.5 times earnings (profit), computed as average annual profitability over the next five years. Does this contract align the incentives of the new vice president with the goals of the owners?

Rent Control

Figure out how to profitably consummate the unconsummated wealth-creating transaction created by rent control.

Price Ceilings

Defenders of communist economic systems may point out that consumers pay lower prices for certain goods because the government imposes a limit on what producers may charge. Cite at least two other ways that consumers may be “paying” for these goods.


Consider a seller who values a car at $9,500 and a buyer who values the same car at $10,000. What total surplus will result from a transaction between the two when the seller is faced with the following sales tax rates: 0%, 2%, 4%, 6%, and 8%?

Short Answer Key

Property Rights

With individual ownership of property, owners keep the value they create by moving assets to higher-valued uses thereby creating an incentive to engage in such transactions.

Goal Alignment at a Small Manufacturing Company

No. Both the purchase price and the profit sharing create perverse incentives. The VP keeps $0.75 of each dollar earned up to $150,000, but only $0.10 of each dollar earned after $150K. Since earning more requires more effort (increasing marginal effort), our student has little incentive

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