Mba 640 Managerial Economics

Topics: Supply and demand, Economics, Microeconomics Pages: 5 (1438 words) Published: September 23, 2010
MBA 640 (Summer IS 2010)


Exam is open book and open material.

1. Explain the interaction of Managerial Economics with other business disciplines, giving specific examples.

Managerial economics has been defined by conventional theorists as a science that "is all about how people make choices" After you’ve defined managerial economics and it’s relationship to its economic theory. Managerial economics will interact with each of these business’s disciplines at some point or another; demand, marketing, finance, accounting, management science and strategy. An example of one of the disciplines (demand or price elasticity): Ford and Honda cater to the subcompact segment (marketing segmentation) of the automobile market with their Focus and Civic models, respectively. Are Ford Focus buyers more or less price sensitive than buyers of Honda Civics? One way to answer this question is to estimate the change in quantity demanded with a $100 increase in the price of each make. But this does not compare like with like. A more consistent way of comparing the price sensitivity of Focus and Civic buyers is to use the own-price elasticity’s of the demands. The own-price elasticity’s of the demands for Focus and Civics have been estimated to be both 3.4. This indicates that Focus and Civic buyers are equally sensitive to price. For a 1% increase in price, both groups would reduce sales purchases by 3.4%.

2. Briefly describe the how the forces of supply and demand impact the allocation of resources in organizations.

Once the supply and demand has been experienced, a resource allocation strategy should be developed to which a manager can choose (capacity or demand based model) and where to expend these resources. Regardless of the specific strategy, the allocation of resources to meet specific demands results in fewer resources available to meet others supply and demands. Choose cautiously….

3. Compare and contrast Business Risk and Financial Risk, using specific examples.

Business risk refers to the stability of a company's assets if it uses no debt or preferred stock financing. Business risk stems from the unpredictable nature of doing business, i.e., the unpredictability of consumer demand for products and services produced (classic case the Ford Edsiel). When a company uses debt or preferred stock financing, additional risk—financial risk—is placed on the company's common shareholders. Thus creates a financial risk. They the (shareholders) demand a higher expected return for assuming this additional risk, which in turn, raises a company's costs.

4. Compare and contrast the stockholder wealth measurement methods of Market Value Added and Economic Value Added.

For many years, managers and shareholders have believed that growth in annual earnings per share and increases in return on equity were the best measures for maximizing shareholders wealth. However, in more recent years there has been a growing awareness that these conventional accounting measures are not reliably linked to increasing the value of the company’s shares. This occurs because earnings do not reflect changes in risk and inflation, nor do they take account of the cost of additional capital invested to finance growth. One way of viewing the "shareholder value" approach is to value the business using Economic Value Added as a valuation methodology. This can be achieved by taking the number of shares and multiplying by the share price and adding the book value of long and short-term loans net of any cash deposits. The market value at this point in time is equal to its total capital employed plus or minus the net present value of all future Economic Value Added. This present value of all future Economic Value Added is theoretically equal to Market value added. We are now able to validate economic profitability and use it as a performance measurement, which directly links strategy to value and is...
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