Managerial Economics

In Class Exercise One

1.  Why might the study of purposeful human action (economics) apply to both society at large and also to a manager of a business firm?

2.  If wealth is defined as "anything that people value" -- why do mainstream economists usually assume that a firm is more efficient if it increases monetary profit?  Is there a contradiction between the two definitions?

3.  According to Koch, a successful manager doesn't just deal with change, he or she embraces change.  Why is this important?

4.  You are trying to decide if you should purchase a new machine that makes larger (family size) umbrellas.

            The new machine costs $40,000. For simplicity, we assume that the machine lasts one year, and is then useless.  You can put the machine in a slot where a now defunct standard machine sits.  Old machine removal and recycling costs are $5,000, and must be borne independent of whether or not you buy the new machine. 

Installation costs for the new machine are $4,000.  Variable costs for the new umbrellas are $8 per umbrella for materials and energy and $4 per umbrella for labor.  Suppose that you can reasonably expect to sell 2000 of these umbrellas next year, at $35 each.  Is the machine a good investment?  Show numbers to back up your answer.