Managerial Economics Concepts

Please answer the following questions by using POINT form.

1. What information do prices communicate? How much information can we deduce about

consumer preferences from prices? What does price discrepancy communicate? How can a firm

use price discrepancy to find profit opportunity?

2. What do profits and losses tell a firm? How does profit margin serve a social function? How

does Milton Friedman’s essay The Social Responsibility of Business is to Maximize its Profits

address this problem? Is Freidman right? What are some limitations to his approach?

3. What are the exchange and allocation paradigm? How do they differ? Under what scenarios is it

constructive to use an allocation paradigm vs an exchange paradigm in addressing business

issues (hint, think costs)?

4. What are private property rights (3 characteristics)? How do imperfections in these

characteristics affect incentives and information? Why is the expected outcome in a commons

for a resource to be overused (think property rights and incentives)?

5. What information if available to a firm to help guide it toward profits? What information is not

available but important? How do rules help to fill this void? What are the tradeoffs of

implementing rules? How does the degree of separation from affect the tradeoffs faced with

making rules within a business (think Knowledge and Decisions).

6. What do economists mean when they refer to administration as the 4th factor of production? Is

this factor necessarily complementary to the others? Does it demonstrate diminishing marginal

returns? How can a manager tell?

Answer preview…….. What information do prices communicate?

The information that prices communicate pertains to how consumers should make their economic decisions. Prices also communicate information about the availability of commodities.

How much information can we deduce about consumer preferences from prices?

Information that can be deducted about consumer preferences from price is that consumers always price sensitive an increase in price would shift their choice to a more affordable bundle of goods and vice versa……

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