Managerial economics

1.Characteristics of modern business?

Effective use of information (knowledge) – Global concepts (organized on a global scale) – Interactions among economic agents and business networks (customers included), virtual networks,(   knowladge technology and relationship management)

2. how would you implement LAW of requisite variety in managerial practice?

- Build up of a structural complexity (hierarchy, procedures, systems)?

o Business systems turned unmanageable

o Empower organizational units and employees to solve problems


o Management to solve residual variety, issues that cannot be solved by


 Management by exceptions

 Eg. SBU and subsidiary management

3. Strategic level of systematic control. What do you follow and measure?                                                                  Asses prerequisites for future profits – competitive position – Competitive position determined by value creation potentials

Measure: Critical success factors: market share, relative market share, qualitycustomer benefits, power of the brand, core competencies, flexibility, adaptability, technology

Follow: Effectiveness

4.Differences between positive and normative approacs. Disciplines?

Postive: – Explains what is!

- Provide models, generate hypotheses, test them against data on the

phenomenon in question

- Cuts through complexities of real life in order to get to the essence of the way in

which the world works

- Identify the most important factors and exclude the rest

- Theoretically explained firm need bear no similarity to any real firm

- Real firm as assumed to behave “as if” they conform to model assumptions

- Assumes perfect knowledge

o Eg. Cost and demand conditions known, manager sets output and prices

on the basis of the rule MR=MC to maximize profits

- Dominant in mainstream economics

Negative: – What should be!

- Decision making in real environment

- Reality: uncertainty, no perfect knowledge

o Management!

- Basic economic logic is still important

- No “off-the-shelf” solutions for complex business problems

- “Economics: a way of thinking about problems, rather than a set of solutions”

5. Explain the difference between accounting and economic profits.

Accounting profits: total revenue (price times quantity sold) minus total cost of producing goods and/or services

Economic profits: total revenue (TR) – accounting (explicit) costs – implicit costs (accounting (explicit) costs – implicit costs) = economic costs

6. How to determine/calculate the value of a firm? (1)

The value of the firm takes into account the long-term impact of managerial decisions

on profits. The formula is the essence of all managerial decision-making: 

7. Explain Freeman’s contribution regarding the stakeholder theory. (2)

Stakeholders: “any group or individual that can affect or be affected by the

realization of a company’s objectives” (Freeman, 1984)

- Managers to perform a value analysis

- Identify congruency or fit between the firm and its stakeholders

- Not about ethics but corporate strategic management

- Identify type of effects that stakeholders have on the firm and that the firm has

on stakeholders

o Effects: economic, technological, social, political, and managerial

8. How could we make the neoclassical model applicable in managerial practice? (1)

- Model as short-run model

- Maximize profits in the short run

o Short run

 period in which the firm is restricted to a given set of equipment

and plant

 fix costs cannot be avoided by ceasing production

9. Explain Baumol’s sales revenue maximizing model. How do managers implement it? What could occur? What could the shareholders request? (3)

Observation: managers’ salaries, status and rewards more closely linked to: size od the

company measured by sales revenue, than to their profitability

Managerial objective: increase size=revenues, not profits!

- Revenue maximizer will produce mode and charge less than a profit-maximizer

- Condition for revenue maximization: marginal revenue MR = 0

- Condition for profit maximization: MR = MC

- MR for profit-maximizer greater than MR for revenue-maximizer

Maximizing revenues may imply losses!

Profit constraint must be added

- Minimum profit constraint set by shareholders

PC1 (profit constraint 1):

- constraint does not “bite”

- enough profit is made to satisfy shareholders


- insufficient profit is made

- output is reduced


- profit constraint equals maximum profit that can be made

- reduce output even more

- behavior exactly as in the profit maximization model

10. Reasons that lead to X-inefficiency

Internal:Non-efficient contracts between principals and agents (managers and employees), Larger firms more difficult to control, bureaucracy

- External:Too big company – no serious threat,High industry entry barriers

11. Reverse engineering as source of knowladge and new technology.

working backwards: take the product produced by a competitor and devise a method of producing a similar product

result: slightly different product and slightly different production function

12. which profit theories are useful for describing business performance of Amazon and why?

Monopoly theory of economic profits. economies of scale, high capital requirments,patents, Monopoly profits can arise because of being in the right industry in the right time

13. Stages of production for labor. In which stage should and efficient manager produce and why?

Production range divided into 3 stages, Stage 1 o From the origin to APL max – Stage 2 o From APL max to MPL = 0 – Stage 3 o MPL < 0 o Variable inputs are over-utilized

Manager should produce in : 2nd stage of production because MPL and MPK is positive but declining

14. In order to determine how many workers to hire, manager should besadethe weekly wage, determine what?

number of employees, Price of output Marginal product of labor MPL Value marginal product of labor Unit cost of Labor (wage)