Chapter 2 - Economic Optimization

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QUESTIONS & ANSWERS Q2.1 In 2004, the second-largest U.S. long-distance telephone company eliminated about 2,000 jobs at four call centers in Colorado, Iowa, Kansas, and South Carolina. "MCI must continue to revamp its cost structure to better position the company for future success," a company spokesperson said. Does this decision reflect an application of the global or partial optimization concept? Explain. ANSWER MCI=s decision to scale back employment at four call centers is a reflection of partial optimization because its decision alternatives were constrained by past decisions. The complexity of a completely integrated decision analysis approach--or global optimization--sometimes confines its use to major planning decisions. For many day-to-day operating decisions, managers often employ much less complicated partial optimization techniques. Partial optimization abstracts from the complexity of a completely integrated decision process by concentrating on more limited objectives within the firm's various operating departments. For example, the marketing department is usually required to determine the price and advertising policy that will achieve some sales goal given the firm's current product line and marketing budget. Alternatively, a production department might be expected to minimize the cost of a specified quantity of output at a stated quality level. In both instances, the fundamentals of economic analysis provide the basis for optimal managerial decisions. Q2.2 AThe personal computer is a calculating device and a communicating device. Spreadsheets incorporate the best of both characteristics by allowing managers to determine and communicate the optimal course of action.@ Discuss this statement and explain why computer spreadsheets are a popular means for expressing and analyzing economic relations. ANSWER When tables of economic data are displayed electronically in the format of an accounting income statement or balance sheet, such tables are often referred to as spreadsheets. Microsoft Excel and other spreadsheet software programs are popular Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance. - 11 -



Chapter 2 means for expressing economic relations because they incorporate methods for manipulating and analyzing economic data. When the underlying relation between economic data is very simple, tables and spreadsheets by themselves may be sufficient for analytical purposes. In other instances, a simple graph or visual representation of the data can provide valuable insight. With spreadsheet software, creating graphs is quick and easy. When the complex nature of economic relations requires that more sophisticated methods of expression be employed, spreadsheet formulas can be used to generate equations, or analytical expressions of functional relationships, that offer a very useful means for characterizing the connection among economic variables. Equations are frequently used to express both simple and complex economic relations. When the underlying relation among economic variables is uncomplicated, equations offer a useful compact means for data description. When underlying relations are complex, equations are helpful because they permit the powerful tools of mathematical and statistical analysis to be employed. Q2.3 For those 50 or older, membership in AARP, formerly known as the American Association of Retired Persons, brings numerous discounts for health insurance, hotels, auto rentals, shopping, travel planning, etc. Use the marginal profit concept to explain why vendors seek out bargain-priced business with AARP members. ANSWER The rise (or fall) in total profit associated with a one-unit increase in output is marginal profit. The marginal profit concept is critical in managerial economics because the optimization process requires an analysis of change in one or more important economic variables. A total profit function, for...
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