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Chapter 2 ECONOMIC OPTIMIZATION QUESTIONS & ANSWERS Q2.1 What is the difference between global and partial optimization? Q2.1 ANSWER The complexity of a completely integrated decision analysis approach—or global optimization—sometimes confines its use to major planning decisions. For many day-to-day operating decisions, managers often employ much less complicated partial optimization techniques. Partial optimization abstracts from the complexity of a completely integrated decision process by concentrating on more limited objectives within the firm’s various operating departments. For example, the marketing department is usually required to determine the price and advertising policy that will achieve some sales goal given the firm’s current product line and marketing budget. Alternatively, a production department might be expected to minimize the cost of a specified quantity of output at a stated quality level. In both instances, the fundamentals of economic analysis provide the basis for optimal managerial decisions. Q2.2 Why are computer spreadsheets a popular means for expressing economic relations? Q2.2 ANSWER When tables of economic data are displayed electronically in the format of an accounting income statement or balance sheet, such tables are often referred to as spreadsheets. Microsoft Excel and other spreadsheet software programs are popular means for expressing economic relations because they incorporate methods for manipulating and analyzing economic data. When the underlying relation between economic data is very simple, tables and spreadsheets by themselves may be sufficient for analytical purposes. In other instances, a simple graph or visual representation of the data can provide valuable insight. With spreadsheet software, creating graphs is quick and easy. When the complex nature of economic relations requires that more sophisticated methods of expression be employed, spreadsheet formulas can be used to generate equations, or analytical expressions of functional relationships, that offer a very useful means for characterizing the connection among economic variables. Equations are frequently used to express both simple and complex economic relations. When the underlying relation among economic variables is uncomplicated, equations offer a useful compact means for data description. When underlying relations are complex, equations are helpful because they permit the powerful tools of mathematical and statistical analysis to be employed.
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12 Instructor’s Manual to accompany Managerial Economics, 10e Q2.3 Describe the relation between totals and marginals, and explain why the total is maximized when the marginal is set equal to zero. Q2.3 ANSWER A total reflects the sum or whole of an important economic variable. The marginal is the change in the total for a one-unit expansion in the activity level. Just as there is this simple arithmetic relation between totals and marginals, so too there is a corresponding geometric relation.
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This note was uploaded on 04/02/2010 for the course ECON 305 taught by Professor Jung during the Spring '10 term at Ohio State.

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