MANAGERIAL ECONOMICS AND BUSINESS
STRATEGY FINAL EXAM PAPER COMPLETE
QUESTIONS AND VERIFIED ANSWERS
2026
• Managers make decisions . Answer: - Managerial economics uses
formal models to analyze managerial actions and their effect on firm
performance
- Enables analysis of cost, demand, profit, competition, pricing,
compensation, and market entry strategy
- Goal: understand both shore and long term consequences of managerial
actions
• Theory of the firm . Answer: - Ideally, the goal of the firm is the goal
of the managers: to increase the value of the firm.
- In a profit-oriented organization, the goal is to increase the net present
value of future cash flows
• Maximize present value of future profits . Answer: Profit equals total
revenue minus total cost
π = TR - TC
- Managerial decisions help to determine both total revenues and total
costs of a firm. - For example, marketing managers work to increase
revenues, while production managers and manufacturing engineers work
to decrease cost
, - Resources are scarce: trade offs must be made
• Economic Profit . Answer: = accounting profit - implicit costs
- is profit over and above what the owner's labor and capital employed in
the business could earn elsewhere
- A firm making zero economic profit can in fact be paying its owner a
good and fair salary
- useful for analyzing decision making, the rational choices among
competing alternatives
• Accounting Profit . Answer: Total Revenues - Total costs
- used for business reporting and tax purposes
• Explicit Cost . Answer: Direct payment made to others in the course of
running a business: wage, rent, materials
• Implicit Cost . Answer: Opportunity cost equal to what the firm must
give up in order to use a factor of production
• Economic costs . Answer: = explicit costs + implicit costs
• Managers are asked to make decisions in the face of risk . Answer: -
Future outcomes of decisions are unknown
- Customer reactions and the reactions of rivals are hard to predict
- Macro-trends may affect profitability in unpredictable ways
STRATEGY FINAL EXAM PAPER COMPLETE
QUESTIONS AND VERIFIED ANSWERS
2026
• Managers make decisions . Answer: - Managerial economics uses
formal models to analyze managerial actions and their effect on firm
performance
- Enables analysis of cost, demand, profit, competition, pricing,
compensation, and market entry strategy
- Goal: understand both shore and long term consequences of managerial
actions
• Theory of the firm . Answer: - Ideally, the goal of the firm is the goal
of the managers: to increase the value of the firm.
- In a profit-oriented organization, the goal is to increase the net present
value of future cash flows
• Maximize present value of future profits . Answer: Profit equals total
revenue minus total cost
π = TR - TC
- Managerial decisions help to determine both total revenues and total
costs of a firm. - For example, marketing managers work to increase
revenues, while production managers and manufacturing engineers work
to decrease cost
, - Resources are scarce: trade offs must be made
• Economic Profit . Answer: = accounting profit - implicit costs
- is profit over and above what the owner's labor and capital employed in
the business could earn elsewhere
- A firm making zero economic profit can in fact be paying its owner a
good and fair salary
- useful for analyzing decision making, the rational choices among
competing alternatives
• Accounting Profit . Answer: Total Revenues - Total costs
- used for business reporting and tax purposes
• Explicit Cost . Answer: Direct payment made to others in the course of
running a business: wage, rent, materials
• Implicit Cost . Answer: Opportunity cost equal to what the firm must
give up in order to use a factor of production
• Economic costs . Answer: = explicit costs + implicit costs
• Managers are asked to make decisions in the face of risk . Answer: -
Future outcomes of decisions are unknown
- Customer reactions and the reactions of rivals are hard to predict
- Macro-trends may affect profitability in unpredictable ways
