Economic terms a managerial decision assignment, Managerial Economics

Describe and answer in economic terms a managerial decision you have knowledge about (for example one that has to be made at your place of employment). Some examples of decisions are:

Should a company hire temporary workers or hire new workers to handle increased demand for the company's product?

Should a factory buy a new machine or upgrade the old one?

What is the optimal level of parts one should order and keep on the shelf?

Should one lease or buy a car?

Should one rent or buy a house?

What should one consider when starting a new business?

Note that each of the questions above can be answered in a single sentence. The answer has implications that should influence future actions. In other words, the answer is meaningful and useful. In your answer, use economic language in a manner that demonstrates your understanding of the concepts of this course. This means use economic language correctly, but also briefly explain the economic terms and concepts (Do not write for experts in business and economics).

Answer# (a):

The hiring of temporary or new workers depends entirely on the firm's perspective. In the view of cyclical movements in the corporate sector (both recovery and recession), majority of the firms tend to hire temporary workers as they do not add to the permanent payroll of the company and can be retrenched / laid off in the times of recession. So in case of increased demand for the company's product also, a company might opt for temporary workers.

Answer# (b):

The business decision between buying new machineries and upgrading the old ones by the firm would primarily depend upon the factor of depreciation cost. If the rate of depreciation for the old machineries is very high, then it would be economically feasible for the firm to buy new machineries. Otherwise, if the depreciation rate is insignificant, the firm can upgrade the old machineries in the short run.

Answer# (c):

The optimum level of parts that should be ordered depends upon the Economic Order Quantity (EOQ) model. The EOQ refers to the optimum level of goods that can be ordered which would minimize the cost of ordering. Formally, it may be expressed as:

                EOQ (Q*) = √ 2DS / H

                          where D = Number of orders,

                                     S = Fixed cost per order, and

                                     H = Holding cost per order.

Answer# (d):

Buying or leasing of a car solely depends on the buyer's economic perspective. If the buyer requires the car for a short period, then leasing would be a feasible option. However, if the buyer thinks in the long term perspective, then buying of the car might be the better option for her.

Answer# (e):

Again this issue of 'renting or buying a house' depends on the buyer's perspective. For the short term, the buyer may opt for renting a house, however, in the long term perspective; the better option for the buyer would be to buy the house. In the long run, a buyer may opt for renting a house due to her income / preference factors.

Answer# (f):

An individual should always consider about three major factors before starting a business and they are:

(i) The expected Total Revenue (TR) from the business - more specifically, the Return on Investment (ROI) from business;

(ii) The expected Total Fixed Cost (TFC) of the business; and

(iii) The expected Total Variable Cost (TVC) of the business.

If she finds out that the TR / ROI is exceeding the sum of TFC and TVC, then she can obviously start her business.

Posted Date: 7/10/2012 8:25:50 AM | Location : United States

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