Chapter 1-10 Short answer essay questions

SHORT ESSAY ANSWER QUESTIONS:

1. Stella Ann Freeman is having a difficult time deciding whether or not to purchase a new car. How would understanding the concept of opportunity costs help her make a decision?

• Referring to the table below, hiring a driver costs $10. Each machine costs $100. Which method should he use and why?

• Enron will be an example of a dysfunctional company for many years to come. It was clearly a company riddled with fraud and excess and its conduct drove it into bankruptcy. The text argues that individual behavior was not at the core of Enron’s problems. What were the problems with this corporation from an organizational architecture point of view?

• For many corporations such as utility companies, a major portion of the cost of production is fixed in the short run. Should these very large fixed costs be ignored when the executives are making output and pricing decisions? Why? 

• Choose a real-life example of a firm that you think is part of an oligopoly market and describe the characteristics of the market structure that explain why the firm would be classified as such.

Smith Jr., Clifford W.; Jerold Zimmerman; James Brickley. Managerial Economics & Organizational Architecture (Irwin Economics) (Page 363). McGraw-Hill Higher Education. Kindle Edition.

SAMPLE SOLUTION

Chapter 1-10 Short Answers Essay Questions

Use of the concept opportunity cost in decision making

Opportunity cost refers to the value of the best foregone alternative. The concept of opportunity cost arises because human needs are unlimited and resources to satisfy them are limited (Mankiw, 2014). In the case of Stella who wants to buy a new car, she has to consider if there are other urgent needs that may require being satisfied first, for example, investing in real estate. The concept of opportunity cost allows Stella to rank her needs in order of their priority. When she decides to buy a new car, then she has to forego the other needs, which becomes the opportunity cost. In this case, opportunity cost refers to a benefit that Stella could have received from other investments.

Choosing the best alternative

The total cost under each method may be compared to get the best alternative. In method 1, the total cost would be calculated by (20*10) + (10*100) =$1,200. Method 2, (50*10) + (2*100) =$700, method 3 (100*10) =$1,000 and method total cost would be (10*10) + (12*100) =$1,300.  From the analysis, method 2 is the most economical because it has the lowest total cost of $700 only

Failures of Enron Trung (2015) noted that failure of Enron was partly caused by poor cooperate governance. He identified that poor delegation of authority to make decisions and biased performance evaluation strategies contributed to dishonest management (Trung, 2015). In addition, lack of open compensation plan led to poor employee…