Solution Manual For Managerial Economics: Economic Tools for Today's Decision Makers, 7th Edition

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CHAPTER 1INTRODUCTIONQUESTIONS1.Scarcity is a condition that exists when resources are limited relative to the demand for their use.Another way of describing this condition is to state that scarcity exists when resources are notavailable in unlimited amounts. When resources are available in unlimited amounts, economistsconsider them to be “free” goods. Because of the scarcity of resources, choices have to be madeabout their allocation among competing uses. Each choice is considered by economists to involvean “opportunity cost” because the use of scarce resources in one activity implies that they cannot beused in an alternative one. In other words, this opportunity cost is the amount that is sacrificedwhen choosing one activity over its next best alternative.It is reasonable to assume that all organizations have to work with scarce resources, no matter howlarge or profitable. A key role that managers play is to decide how best to allocate theirorganizations’ scarce resources. From an economic standpoint, optimal decisions involve theirweighing of the benefits associated with a particular decision against the opportunity cost of thisdecision.2.“What?”—This involves deciding what goods and services to produce and in what quantities (e.g.,guns versus butter, capital goods versus consumer goods, etc.)“How?”—This involves deciding how best to allocate a country’s resources in the production ofparticular goods or services (e.g., capital intensive versus labor intensive, domestic productionversus foreign production etc.).“For whom?”—This involves deciding how to distribute a country’s total output of goods andservices (e.g., income and wealth distribution).3.a.howb.whatc.for whomd.howe.how4.Market Process: The use of supply, demand and material incentives (e.g., the profit motive) todecide how scarce resources are to be allocated. It answers the three questions of what, how and forwhom in the following ways:“What?”—Whatever is profitable will be produced. Profitability in turn depends on the strength ofa society’s demand for a particular good or service and the cost to producers of providing such agood or service.“How?”—Resources should be allocated and combined in the least costly way.“For whom?”—The output of goods and services should be allocated to whoever is willing and ableto pay for them. Of course the ability to pay depends on the country’s distribution of income. Many

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