Chapter 1: Questions 1, 2, 7

1. Define scarcity and opportunity cost. What role do these two concepts play in the making
of management decisions?
Answers:
• Scarcity: A condition that exists when resources are limited relative to the demand
for their use. In the market process, the extent of this condition is reflected in the
price of resources or the goods and services they produce.
o In econ scarcity is normally referred to by the demand of a product this is
because if there is no demand for let’s a 1980’s Honda Civic with 5
million miles on it all the car is scares it has no demand so the scarcity of
the car in econ terms would be nothing without demand.
• Opportunity cost: The amount or subjective value forgone in choosing one
activity over the next best alternative. This cost must be considered whenever
decisions are made under conditions of scarcity.
o If a factory is running at full capacity fulfilling orders and a good friend
comes along and ask you to build them a cabinet for 50% off. The
opportunity cost would be losing 50% off another order because you’re
running at full capacity.
2. Elaborate on the basic economic questions of what, how, and for whom. Provide specific
examples of these questions with respect to the use of a country’s scarce resources.
• What good and services should be produced and in what quantities?
Goods and services should be produced in quantities depending on their demands.
Example: What is the market looking for and what is the demand of that product?
Antimony which is an element needed in electric motors is scarce around the
world and is only currently mined in China. With a global economy a country will
only mine a little bit of their resources to keep the demand high and to all ensure
that they don’t run out of that resource.
• How should these goods and services be produced?
Goods and services should be produced depending on the level of scarcity and
also should be produced depending on their environmental impact.
• For whom should these goods and services be produced?
Scarce resources should be produced for a select category. Depending on time and
need for instant if you are at war you might need people to produce vehicles for
war and not for domestic travel at home.
7. Compare and contrast microeconomics with macroeconomics. Although Managerial
economics is based primarily on microeconomics, explain why it is also important for
managers to understand macroeconomics.
• Microeconomics is generally the study of individuals and business decisions;
macroeconomics looks at higher up country and government decisions.
Macroeconomics, on the other hand, is the field of economics that studies the
behavior of the economy as a whole and not just on specific companies, but entire
industries and economies. This looks at economy-wide phenomena, such as Gross
National Product (GDP) and how it is affected by changes in unemployment,
national income, rate of growth, and price levels. Knowing macroeconomics can
play a large factor in managerial economics and makes managers look beyond the
microeconomics aspects to predict feature trends.

This study source was downloaded by 100000838752151 from CourseHero.com on 03-02-2022 02:49:27 GMT -06:00

https://www.coursehero.com/file/8637636/Econ-HW-1/
 Chapter 2: Questions 4, 7, 9, 11, 12, 15
4. Discuss the difference between profit maximization and shareholder wealth
maximization. Which of these is a more comprehensive statement of a company’s
economic objectives?
Shareholder wealth is talking about the value of the company generally expressed in the company’s
equity. Profit maximization refers to how much profit can be made per each dollar spent. It might
seem like making as much profit as possible would yield the highest value for the stock but that is
not always the case.
When investors look at a company they not only look at dollar profit but also profit margins, return on
capital and other indicators of efficiency. Say there are two companies doing the same thing.
Company A had sales of $100 million and profit of $10 million. Company B had sales of $200 million
and profit of $12 million. Wall Street could look at Company B and say they are less valuable
because they clearly do no operate as efficiently as Company A. So even though Company B had
more profit Company A will have more shareholder value.
And to answer the next question, yes companies often decide to forgo marginal increases in profit if
they feel the lower margins on the incremental gains in profit will have a negative impact share price.
They actually increase shareholder value by NOT making more profit.

Chapter 3: Questions 1, 2 (Hint: this was the demand function and supply function we talked
about in class), 8, 9

Chapter 3: Problems 1, 2, 3, 5, 10, 13

nAntimony which is an element needed in electric motors is scarce around the world and is only
currently mined in China. With a global economy a country will only mine a little bit of their
resources to keep the demand high and to all ensure that they don’t run out of that resource.

This study source was downloaded by 100000838752151 from CourseHero.com on 03-02-2022 02:49:27 GMT -06:00

https://www.coursehero.com/file/8637636/Econ-HW-1/
Powered by TCPDF (www.tcpdf.org)