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Managerial Economics

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the application of economic concepts and tools to managerial decision-making

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Constrained Optimization

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optimizing a function in the presence of some constraints on the variables

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Market Power

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when one side of a market (buyers or sellers) controls a large part of the market share

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Value

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the belief that something has worth or usefulness

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Value Creation

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the production of a good or service that consumers are willing to pay for

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Derivative

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the rate of change for one variable with respect to the rate of change for another variable

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Power Rule

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rule used to differentiate functions of a specific form

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Partial Derivative

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derivative of a function with respect to one variable, while holding other variables constant

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Value Capture

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the process of firms earning profit by selling at price ABOVE cost

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Sustainability

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the ability of an entity to exist and prosper over a length of time

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Value Proposition

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a company's unique strategy to provide value for the customer in a profitable way

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3 Key Elements of M-Econ

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1. Goal

2. Problem Type and tool.

3.Variables Impacting outcome

2. Problem Type and tool.

3.Variables Impacting outcome

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Goals of Consumers and Firms

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Consumers: Max Value or Customer Surplus(Diff between willing to pay(#) - must pay(#) = value.

Firms: Max Profit

Firms: Max Profit

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Main tool in economics:

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Marginal Analysis: the result of doing ONE more

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Marginal Benefit / Marginal Cost

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Extra positive

Extra Negative

Extra Negative

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Net

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Something has been Subtracted

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Marginal Net Benefits

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Marginal B - Marginal C

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Decision Rule

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Only take action if

MB >/ Mc

MNB >/ 0

MB >/ Mc

MNB >/ 0

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Statistical significance

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A variable that has impact

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Elasticity

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How sensitive an outcome is to certain changes

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Sunk Cost

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A cost that has no impact on the outcome

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Question 1: An entrepreneur creates a product that costs $25 to make, but no customer is willing to pay more than $15. Which of the following statements are correct about the value created?

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No value is created

Bc the customer wont reach that price there is no value created

Bc the customer wont reach that price there is no value created

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2 A firm lowers its cost of production from $40 per unit to $30 unit, yet continues to sell the good at the same price. Did this move create any more value for the customer?

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No, it stayed the same.

This only increases value capture not the price customers are buying it at

This only increases value capture not the price customers are buying it at

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According to the chapter video about Sears, what specific issue are causing losses to mount for this (and other) retailers?

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Decreasing revenue due to lower sales

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4 If 50 customers are all willing to pay $30 for an album that sells for $25, how much total value is created for the customers?

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250

Creates $5 in value for customers (30-25). $5 x 50 customers = 250

VALUE OR CONSUMER SURPLUS = Difference WIlling(#) - Must(#)

Creates $5 in value for customers (30-25). $5 x 50 customers = 250

VALUE OR CONSUMER SURPLUS = Difference WIlling(#) - Must(#)

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5 Assume a firm sells an album for $25 per copy. The firm must pay $6 in royalties and $9 in production costs for each album. If 60 copies are sold, how much profit (value capture) was the firm able to make?

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600

Total Production Costs = 15 (9+6). 25 - 15 = 10 x 60 = 600

VALUE CAPTURE:

firms earning profit by selling at price ABOVE cost

Total Production Costs = 15 (9+6). 25 - 15 = 10 x 60 = 600

VALUE CAPTURE:

firms earning profit by selling at price ABOVE cost

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6 For the output function: Q = 40L^2 - 2L what is the derivative dQ/dL?

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80L - 2

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7 For the output function: Q = L^2 - 2L + 8k what is the derivative dQ/dK?

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8

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8 For the output function: Q = 5L + 6LK^2 + 8K what is the derivative dQ/dL?

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5 + 6K^2

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9 For the output function: Q = 5L + 6LK^2 + 8K what is the derivative dQ/dK?

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12LK + 8

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10 For the output function: Q = 5LK^2N^2 (where N represents natural resources) what is the derivative dQ/dN?

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10LK^2N

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Partial Derivative if attached just keep it in EX Card: 31, 30, 29

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