James Daniel D.

Swinton
BSA 1-9

Review Questions:
1. What role does managerial economics play in shaping economic decisions? Is
profit (or shareholder wealth) maximization still represents the best overall
economic objective for today’s businesses?
2. Describe the effects of each of the following managerial decisions (or economic
influences) on the value of HealthyYou Marketing’s:
a. Through large advertising expenditures, HealthyYou increases sales
substantially.
b. A procurement of new equipment by the production department that lowers
manufacturing cost.
c. HealthyYou raises prices. Quantity demanded in the short run is unaffected,
but in the long run, sales are expected to decline.
d. The Bangko Sentral ng Pilipinas takes action that lower interest rates
dramatically.
e. An expected Executive Order on the abolition of labor contractualization.
3. Evaluate the decision maker’s approach or logic. In which of the seven decision
steps might makers have gone wrong? How would you respond in the final
decision situation?
Aryannah, Annikah and Amartya are debating how to spend their summer
vacation. Should they spend a quiet week at home, go to the beach, or go to the
mountains where their parents and several other relatives live? Unable to make
their mind, they decided to list the pros and cons of each option. The points they
care about are the (1) relaxation and quiet, (2) exercise, (3) Seeing family and
old friends. With respect to these points, they rank the alternatives as shown in
the table:
Relaxation Exercise Family/Friends
Home 1st 3rd 2nd
Beach 2nd 1st 3rd
Mountains 3rd 2nd 1st

Which is their better choice: home or beach? Since home ranks higher
than beach on two of three points, they give it two pros and one con and judges it
as the better choice. What about home vs mountains? Mountains vs beach?
4. Why may corporate managers not specifically aim at profit maximization for their
companies?
 5. What are some of the forces that cause the managers to act in the interest of the
shareholders?

Answers:
1) Managerial economics is defined as the analysis of major management decisions
using the tools of economics. Because it uses the tools and techniques of economic
analysis to solve managerial problems, it connects traditional economics with the
decision to develop vital tools. The above definition suggest that Managerial
economics is important in shaping economic decisions. It helps in selecting the best
available option and employ that particular method in the most effective and
efficient manner that helps to attain desired results. It allows the creation of
decision making that is very effective and further helps in providing good profit for the
company or the organization.
Yes, the profit or shareholder’s wealth maximization still represent the best
overall economic objective for today’s businesses. All businesses aim to maximize
profits. Profit is a necessary condition for the success of an organization. Once the
profit is achieved, organizations try to maximize it. Higher profits generated by
organizations help them in their further growth and development.

2)
a) Having a large advertising expenditure has its pros and cons. For the cons, it
is a costly function. Advertising is an indirect cost which is added into distribution
expenses. When expenses increase, the selling price of products does too. Thus,
consumers have to pay higher prices for products. Many studies have proved that
the cost of ads exceeds that of sales by a small but significant percent. In theory,
the high cost of advertising is covered by increased sales of the advertised product,
but this usually is not the case so it is important to know its limitations. On the other
hand, if the firm is able to utilize it wisely it facilitates mass production of goods
and increases the volume of sales. In other words, sales can be increased with
additional expenditure on advertising with every increase in sale, selling expenses
will decrease.
b) No matter how impressive the demand for your product, if its production
method is inefficient, you're unlikely to profit from selling it. Reducing
manufacturing costs will increase gross profit. Knowing how to reduce each of
those component costs can help in raising the profitability of the business.
c) What happens in this scenario is the price elasticity of demand. At first the
Demand tends to be more price inelastic in the short-run as consumers don’t have
time to find alternatives. However, in the long-run, consumers become more aware
of alternatives. Hence the sales started to decline
d) Lowering of interest rates may lead to a reduction in the cost of capital or
discount rate in the valuation model.
 e) Abolishing contractualization will spell doom to the business. Because of this,
the company will incur a large amount of money for regularizing workers. Also,
sometimes regularized workers tend to be lazy and deliver only the bare minimum
3) In the second step, the decision maker does not state the primary objective of
the vacation. I feel that the plan is lacking in preparation. Also, the decision maker
does not include some of the necessary steps to better decision making such as
performing sensitivity analysis and conducting an evaluation

If I were to choose, I would select going to the mountains because it is ranked

higher than the two choices on two of the three points.

4) The owners will more than likely wish to pursue to maximize the profits; however,
the managers will more than likely have their own agenda. Managers may wish to have
an easy life and therefore do not push aggressively for the profit maximization position,
but do just enough. This is because the company was not theirs to begin with so why
would they bother to maximize profits. Why would they work hard to make someone
richer?
5)
a) Management remuneration is tied to success in many companies and
executives are often given stock options that gain value as share prices increase.
Executives will thus have an interest in optimizing benefits for stockholders.
b) Managers must act in the interests of shareholders, as they have a legal
obligation to act in their interests
c) Managers may fear personal damage to reputation that would result from
failing to act in the interests of shareholders. And the board of directors can fire
managers, which in turn is elected by shareholders.