Why might studying economics be particularly good preparation for being a top ma

Question

Why might studying economics be particularly good preparation for being a top manager of a corpora, running your own business, orking in international public organisations or having a leading role in government? Do you agree or disagree with the following ssertion: The problem with economics is that it assumes consumers and firms always make the correct decision. But we know everyone^,s human, and we all make mistakes.' Suppose Dell is currently selling 250 000 Inspiron laptops per month. A manager at Dell argues: 'The last 10 000 laptops we produced increased our revenue by $8.5 million and our costs by $8.9 million. However, because we are making a substantial total rofit of $25 million from producing 250 000 laptops, I think we are producing the optimal number of laptops.'Briefly explain whether you agree with the manager's reasoning. From 2009 onwards movie studios began to release a number of films in 3D format. To show films in this format cinemas have to purchase 3D equipment that costs around $75 000 for each projector. Usually, cinema owners charge about $4 more for a ticket to a 3D movie than for a movie in the conventional 2D format. If you owned a cinema discuss how you would go about deciding whether to invest in 3D equipment.

Explanation / Answer

1.4. We do not agree with given assertion.

Reason – In the given assertion, it has been stated that the problem with economics is that it assumes consumers and firms always make the correct decisions.

This is wrong notion about economics because, in economics, it is never been assumed that consumers and firms always make the correct decisions. On the other hand, in economics, it is assumed that firms and consumers make rational decisions. Rational decisions do not imply that decision taken is correct decision. It simply implies that consumers and firms by taking into account all information they have make the decisions that are best in their own interest.

So, according to economics, firms and consumers make decisions that maximize their interest and not the decisions that are always correct. The decisions taken can turn out to be wrong as well.

1.5. Optimal quantity refers to that quantity at which marginal cost equals marginal revenue.

In the given case, the additional (marginal) revenue from last 10,000 laptops is $8.5 million while additional (marginal) cost from last 10,000 laptops is $8.9 million.

Since, MC is greater than MR, firm is not producing the optimal quantity.

Even though it is earning substantial total profit by producing 250,000 laptops, it must reduce production as it will reduce MC and will raise MR and must keep reducing production until production to that stage where MR = MC because profit at that level would not only be greater than the present total profit but also be maximum as well.

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