Chp 1 Instructor Manual

Chp 1 Instructor Manual - Chapter 1 INTRODUCTION TO...

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Chapter 1 INTRODUCTION TO MANAGERIAL ECONOMICS Q1.1 Is it appropriate to view firms primarily as economic entities? Q1.1 ANSWER Yes. Firms represent a combination of people, physical assets, and information (financial, technical, marketing, and so on). People directly involved include stockholders, managers, workers, suppliers, and customers. Businesses use scarce resources that would otherwise be available for other purposes, pay income and other taxes, provide employment opportunities, and are responsible for much of the material well-being of our society. Thus, all of society is indirectly involved in the firm's operation. Firms exist because they are useful in the process of allocating resources -- producing and distributing goods and services. As such, they are basically economic entities. Q1.2 Explain how the valuation model given in Equation 1.2 could be used to describe the integrated nature of managerial decision making across the functional areas of business. Q1.2 ANSWER As seen in the text, Equation 1.2 can be written: where TR is total revenue, TC is total cost, i is an appropriate (risk-adjusted) interest rate, and t indicates the relevant time period. Thus, the value of the firm is the discounted present value of the stream of expected future profits. Each of the functional areas of business plays an important role in managerial decision making since each area provides vital input into the value maximization process. The marketing department of a firm has a major responsibility for sales, the production department a major responsibility for costs, and the finance department has a major responsibility for acquiring the capital necessary to support the firm's investment activities. There are many important overlaps among these functional areas--the marketing department, for example, can help reduce the costs associated with a given level of output by affecting the size and timing of customer orders. The production department can stimulate sales by improving quality and making new products available to sales personnel. Other departments within the firm--for example, accounting, personnel, transportation, and engineering--provide information or services vital to both continued sales growth and cost control. These ) i + (1 TC - TR = Value t t t n 1 = t
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2 Chapter 1 activities all affect the risks of the firm and thereby the discount rate used to determine present values. Thus, various decisions in different departments of the firm can be appraised in terms of their effects on the value of the firm as expressed in Equation 1.2. Therefore, the value maximization model is useful in describing the integrated nature of managerial decision making across the functional areas of business. Q1.3
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Chp 1 Instructor Manual - Chapter 1 INTRODUCTION TO...

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