question
A well designed organization is one in which employee incentives align with
answer
organizational goals
question
Rational Actor Paradigm
answer
assumption that people act rationally, optimally and self-interestedly
- tool for analyzing behavior-
- tool for analyzing behavior-
question
3 Questions to find source of a problem
answer
1. Who made the bad decision?
2. Did they have enough INFO to make good decision?
3. Did they have INCENTIVE to make good decision?
2. Did they have enough INFO to make good decision?
3. Did they have INCENTIVE to make good decision?
question
Value
answer
measured as amount of money one is willing to pay for a good/service
- a buyer willingly buys if the price of a good is below his value
- a buyer willingly buys if the price of a good is below his value
question
Zero Sum Fallacy
answer
assumes that if someone makes money, someone else is losing it
- used to justify limits on profitability
- used to justify limits on profitability
question
Wealth
answer
created when assets move from lower to higher value uses
- voluntary transactions create wealth
- voluntary transactions create wealth
question
Accounting Profit
answer
total revenue - explicit costs (costs included on financial statements)
recognizes only explicit costs
- doesn't necessarily correspond to economic profit
recognizes only explicit costs
- doesn't necessarily correspond to economic profit
question
Economic Profit
answer
total revenue minus total cost, including both explicit and implicit costs
question
Economic Value Added
answer
takes all capital costs into account (including cost of equity)
- helps avoid hidden cost fallacy
- helps avoid hidden cost fallacy
question
opportunity cost
answer
the opportunity cost of an alternative is the foregone opportunity to earn profit from another (next best alternative)
- arise due to resource scarcity
- arise due to resource scarcity
question
Sunk (fixed) cost fallacy
answer
occurs when you consider irrelevant costs/benefits when making a decision
(such as overhead or depreciation)
(such as overhead or depreciation)
question
hidden cost fallacy
answer
occurs when you ignore relevant costs/benefits when making a decision
Ex. 2008 crisis - firms handing out loans to people with bad credit, no proof of income, no downpayment
Ex. 2008 crisis - firms handing out loans to people with bad credit, no proof of income, no downpayment
question
Extent Decision
answer
a decision regarding "how much" or "how many" to produce
- fixed costs are irrelevant to extent decisions
- fixed costs are irrelevant to extent decisions
question
Average cost
answer
The total cost (Fixed and Variable) divided by total units produced
- If AC is rising, then MC > AC
- If AC is falling, then MC < AC
- If neither rising or falling, then MC = AC
- If AC is rising, then MC > AC
- If AC is falling, then MC < AC
- If neither rising or falling, then MC = AC
question
Marginal cost
answer
the additional cost of producing and selling one more unit
question
Marginal revenue
answer
the additional revenue gained from selling one more unit
question
Marginal analysis
answer
If MR > MC, sell more
If MR < MC, sell less
If MR = MC, you're selling right amount (maximizing profit)
If MR < MC, sell less
If MR = MC, you're selling right amount (maximizing profit)
question
Rule of 72
answer
divide 72 by the interest rate to find the # of years it will take for your money to double.
question
NPV Rule
answer
if the present value of the sum of all discounted cash flows is > 0, then the project earns more than the cost of capital
question
IRR
answer
discount rate that sets NPV to 0
question
price elasticity of demand
answer
measures how sensitive a Quantity Demanded is to a change in price
question
Five factors affect elasticity
answer
1. Products with close substitutes have more elastic demand.
2. Products with many complements have less elastic demand.
3. Demand for brands is more elastic than industry demand.
4. In the long run, demand becomes more elastic.
5. As price increases, demand becomes more elastic.
2. Products with many complements have less elastic demand.
3. Demand for brands is more elastic than industry demand.
4. In the long run, demand becomes more elastic.
5. As price increases, demand becomes more elastic.
question
Law of Diminishing Marginal Returns
answer
as output expands, marginal productivity declines
- implies increasing MC
- implies increasing MC
question
Demand curve
answer
describes buyer's behavior (market demand)
question
supply curve
answer
describes seller's behavior (market supply)
question
market equilibrium
answer
the price at which the quantity demanded equals the quantity supplied
question
Industry
answer
a group of firms producing products that are close substitutes
question
loss leader
answer
An item priced especially low to attract customers who would then buy additional items
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
