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Managerial Economics A Problem Solving Approach, 6e Luke Froeb, Brian McCann, Michael Ward, Mike Shor

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Chapter 01 Introduction: What This Books is About

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• The reduction of problems to a bad decision and then figuring out who made the decision and why they made the

decision are two steps in

• problem solving.
• performing marginal cost-benefit analysis.
• calculating the profits of an auction house.
• interviewing for a job.

ANSWER: a

• Problem solving is
• firing whomever is responsible for mistakes.
• performing marginal cost-benefit analysis.
• calculating the profits of an auction house.
• the reduction of problems to a bad decision and then figuring out who made the decision and why they made

the decision.

ANSWER: d

• A model of how humans behave, particularly "the rational actor" paradigm, is a necessary assumption for
• computerization of data within a business organization.
• the problem-solving algorithm.
• not assuming people are inherently good.
• assuming that humans are inherently altruistic.

ANSWER: b

• To follow the problem-solving algorithm, which one of the following is required?
• Computerization of data within a business organization.
• A model of how humans behave, particularly "the rational actor" paradigm.
• Not restricting human action to a set of tractable rules.
• Assuming that humans are inherently altruistic.

ANSWER: b

5. The rational actor paradigm is characterized by all of the following except:

• The assumption people act rationally.
• The assumption people act optimally.
• The assumption people act in their self-interest.
• The assumption people act in a group's best interest.

ANSWER: d

• Which of the following questions is not used to diagnose the source of a problem in the problem-solving algorithm?
• Who is making the bad decision?
• Does the development agent have enough information to make a good decision?
• Does the development agent have the incentive to make a good decision?
• Why does the development agent have any incentives outside the interests of the firm?

ANSWER: d

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• When an employee has enough information to make good decisions, and the incentive to do so, we say
• that the employee's incentives are orthogonal to the goals of the organization.
• that the employee's incentives need to be removed in order to better help the organization.
• that the employee's incentives are aligned with the goals of the organization.
• that the employee's incentives are unnecessary and only come at a cost to the firm.

ANSWER: c

• Suppose an auction house has experts that are empowered to negotiate commission rates with owners of art. Rates can

be anywhere from 10% to 30%. Auction house management soon discovers that almost all negotiated commissions are either at 10% or very close to it. Use the problem-solving algorithm to select a likely explanation below.

• The art experts negotiate low commission rates in exchange for in-kind gifts from art owners.
• The art experts are not capable of adequately identifying art that would sell for enough money at auction to

warrant higher commission rates; it is a lack of information.

• The art experts find their flat salary adequate and are happy to help their employer maximize profit.
• The art experts are adversarial with art owners and know that paying low commissions in the high-end art

world is akin to admitting relative poverty to other art owners.

ANSWER: a

• Suppose a car dealership hires dealers to sell their cars. The dealers can negotiate the sales prices of cars within certain

ranges above the manufacturer's suggested retail price (MSRP), between 2% and 10% higher. In addition, the dealers are given 5% of the total value of the car sold. The owners of the dealership, however, soon discover that almost all dealers are selling cars for only a 2% markup over MSRP. Use the problem-solving algorithm to select a likely explanation below.

• Dealers do not have enough information about which cars are likely to sell for higher markups over MSRP.
• Dealers are incapable of negotiating for higher markups due to lack of persuasive ability.
• Dealers are not to blame. Dealership management should never give them the power to negotiate sales price.
• Dealers get paid based off the price of the car sold and benefit more from selling more cars at a 2% markup

versus fewer cars at a 10% markup.

ANSWER: d

• In economics, changing incentives changes
• the technical costs associated with production within a firm.
• the productive capacity of the physical capital within a firm.
• the behavior of people within a firm.
• the entire industry that a firm is within.

ANSWER: c

• Recognizing that individuals tend toward self-interest is equivalent to encouraging selfish behavior.
• True
• False

ANSWER: False

• Recognizing that individuals tend toward self-interest is not equivalent to encouraging selfish behavior.
• True
• False 3 / 4

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ANSWER: True

• The rational actor paradigm is much more than a tool for analyzing behavior; indeed, it is a good way to live your life.
• True
• False

ANSWER: False

• The rational actor paradigm is a tool for analyzing behavior and a good way to live your life.
• True
• False

ANSWER: False

• Recognizing that individuals tend toward self-interest is not equivalent to encouraging selfish behavior.
• True
• False

ANSWER: True

• Recognizing that individuals tend toward self-interest is equivalent to encouraging selfish behavior.
• True
• False

ANSWER: False

17. The rational actor paradigm is all of the following except:

• a tool for analyzing behavior.
• a framework that models humans as tending toward rational self-interest.
• advice for people on how to live life.
• a framework that models humans as acting optimally as determined by the actors themselves.

ANSWER: c

• Judging outcomes as good or moral due to the outcomes that result from actions is a _______ approach to morality.

Judging outcomes according to their correspondence (or lack thereof) to some outside set of principles or standards is known as _______.

• consequentialist; deontology
• deontologist; consequentialism
• consequentialist; consequentialism
• deontologist; deontology

ANSWER: a

• Arguing that governments ought to regulate monopolies because they charge prices that are too high is _______

argument.

• a consequentialist
• a deontological
• neither deontological nor a consequentialist
• both a deontological and a consequentialist

ANSWER: a

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