Question 1 (Introduction to Managerial Economics) Elaborate on the basic economi

Question

Question 1 (Introduction to Managerial Economics) Elaborate on the basic economic questions of what, how and for whom. Following are examples of typical economic decisions made by the managers of a firm. Determine whether each is an example of what, how, or for whom. a.   Should the company make its own spare parts or buy them from an outside vendor? b.   Should the company continue to service the equipment that it sells or ask customers to use independent repair companies? c.   Should a company expand its business to international markets or concentrate on the domestic market? d.   Should the company replace its own communications network with a “virtual private network” that is owned and operated by another company? e.   Should the company buy or lease the fleet of trucks that is uses to transport its products to market?

Explanation / Answer

The basic economic question of What to produce is concerned with choice regarding which good to be produced. Such choice is faced not only by economy but also by any one engaging in process of production. It is limited quantity of resources that compel this choice as any increase in quantity produced of one good requires decrease in quantity produced of other good as resources are limited.

The basic question of How to produce is concerned with choice regarding techniques of production. In other words, this question dvelve into the how process of production should be run. The cost underlying each production technique helps the firm in making this decision. For example, an economy can engange in labor-intensive production process or capital-intensive production process.

The basic question of For whom to produce is concerned with choice of markets to which firm will cater.

(a) In this case, company is deciding between whether to produce spare parts on its own or buy them from an outside vendor. As company is contemplating whether to produce spare parts or not, this is an example of what to produce.

(b) In this case, company is deciding whether it should continue servicing the equipment it is selling or ask customers to use independent repair companies. As companuy is contemplating how to provide the after-sale service, this is an example of how to produce.

(c) In this case, Company is deciding whether it should expand its business to international markets or concentrate on the domestic market. As company is contemplating about the choice of market to serve, this is an example of for whom to produce.

(d) In this case, company is deciding whether to replace own communication network with a "virtual private network" that is owned and operated by another company. This decision will be based on cost consideration. If company will find that going with "virtual private network" that is owned and operated by another company results in lesser cost than having its own communication network then it will go for "virtual private network" otherwise not. Cost consideration plays important role in how to produce question. So, this is an example of how to produce question.

(e) In this case, company is deciding whether to buy or lease the fleet of trucks that is uses to transport its products to market. This decision will be based on cost consideration. If leasing turns out to be low cost option than outright purchase then company will go for lease otherwise not. Cost consideration plays important role in how to produce question. So, this is an example of how to produce question.

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