Aldersgate College: School of Business, Management and Accountancy

Aldersgate College
Solano, Nueva Vizcaya, Philippines 3709

Telefax: (63-78) 326-5085/5390/5645
www:aldersgate-college.com
SCHOOL OF BUSINESS, MANAGEMENT AND ACCOUNTANCY

First Semester SY 2020 - 2021
T 57 (AE9) Managerial Economics
PRINCESS ZHARMAGNE V. LOPEZ zharmagne.lopez@gmail.com

09161694950
BSA-3A
September 23, 2020
Required topic: Reflection Paper, Assignment, Answer the required prolems Nos. 1&2,
case analysis
References of Answers: Course Module
Topic Proper:
I. Reflection Paper
After reading the course module, I learned what managerial economic is,
what to expect in this subject and how it works in some fields, it also help me
understand other terms related to my course such as the existence of the firm, how
firm works, which I plan to have someday, this module is such a good foundation
for building my knowledge, and widen my knowledge about putting up a business.
It also discuss the theory about profit – the main goal of a business, and also how
it is distributed, which is again a must for an Accounting student. Overall, I can
say that managerial economics is important in a way that it mainly deals with the
development of economic theory of the firm and help us to take decision smoothly with
regard to sales and profits and most importantly it helps in the development of
different leadership qualities.
II. Assignment
Module 1: The Nature and Scope of Managerial Economics
Learning Activities:
Activity-1:
1. Why do firms exist? Who benefits from their existence?
Firms exist because of There are actual organizational advantages to firms, such as
the ability to marshal a wide range of resources to address very complex problems.
This is particularly important at a time when new technologies are opening up all
kinds of opportunities to improve productivity and grow revenues. Both the
consumers and producer are benefitted from a firm's existence.
2. How does the theory of the firm differ from short-term profit maximization?
Why is the former superior to the latter?
Each firm takes decision with respect to a single goal, which is to make as much
profit as possible i.e. profit maximization. When the firm succeeds in determining
this output level and is now enjoying the highest profit, the firm is said to be in
equilibrium. The firm is said to be in equilibrium when at a particular output level,
the goal of profit maximization is achieved in production, so that the firm could
produce the same output level from one time to another, all things being equal. When
the firm is in equilibrium, it does not need to expand or reduce output level that
enables it to maximize profit.
3. What effect would each of the following have on the value of the firm?
a. A new advertising campaign increases the sales of the firm substantially.
A new advertising campaign increases the sales of the firm substantially.
The value of the firm will also increase, as its revenue and profits increase.
b. A new competitor enters the market.
A new competitor enters the market.

The value of the firm will decrease, as the sales and revenue will decrease.
c. The production department achieves a technological breakthrough that reduces

production costs.
The production department achieves a technological breakthrough, which
reduces production cost.
The value of the firm will increase, as its profits increase.
d. The firm is required to install pollution-control equipment.
The firm is required to install pollution-control equipment.

The value of the firm will decrease, as its costs increase and profits
decrease.
e. The workforce votes to unionize.
The work force votes to unionize.

The value of the firm will decrease, as the salary costs increase
f. The rate of interest rises.
The rate of interest rises.

The value of the firm increases.
g. The rate of inflation changes.
The rate of inflation changes.

The value of the firm will increase or decrease according to the increase or
decrease of inflation
4. According to Milton Friedman, “Business has only one social responsibility – to

make profits (as long as it stays within the legal and moral rules of the game established
by society). Few trends could so thoroughly undermine the very foundation of our society
as the acceptance by corporate officials of a social responsibility other than to make as
much money for their stockholders as possible.” Explain why you agree or disagree with
such statement.
Activity-2: Answer the Required Problems Nos. 1 & 2;
1. The cost of attending a private college for one year is $6,000 for tuition, $2,000 for
the room, $1,500 for meals, and $500 for books and supplies. The student could also have
earned $15,000 by getting a job instead of going to college and 10% interest on expenses
he incurs at the beginning of the year. Calculate the explicit, implicit, and the total
economic costs of attending college.
Explicit costs are: $6,000 + $2,000 + $1,500 + $500 = $10,000

Implicit costs are: $15,000 + 0.1 * ($6,000 + $2,000 + $500 + $1500) = $16000
Total economic costs: $10,000 + $15,850 = $25,850
2. A woman managing a duplicating (photocopying) establishment for $25,000 per

year decides to open her own duplicating place. Her revenue during the first year of
operation is $120,000, and her expenses are as follows: Salaries to hired
help$45,000Supplies15, 000 Rent10, 000 Utilities 1,000Interest on bank loan 10,000
Calculate: the explicit costs, implicit costs and the business profit. The economic profit,
and the normal return on investment in this business.
Explicit Costs = $45,000 + $15,000 + $10,000 + $1,000 + $10,000 = $81,000

Implicit Costs = Opportunity Cost – which is her salary foregone = $25,000
Business Profit- $120,000 - $81,000 = $39,000
Economic Profit- $120,000 - $81,000 - $25,000 = $14,000
Normal return on investment- $25,000
Activity-3: Submit case analysis on the following Integrated Case;
Samantha Jones has a job as a pharmacist earning $30,000 per year and she is deciding
whether to take another job as the manager of another pharmacy for $40,000 per year or
to purchase a pharmacy that generates revenue of $200,000 per year.
To purchase the pharmacy, Samantha would have to use her $20,000 savings and borrow
another $80,000 at an interest rate of 10% per year.
The pharmacy that Samantha is contemplating purchasing has additional expenses of

$80,000 for supplies, $40,000 for hired help, $10,000 for rent, and $5,000 for utilities.
Assume that income and business taxes are zero and that the repayment of the principal
of the loan does not start before three years.
(a) What would be the business and economic profit if Samantha purchased the
pharmacy?
Business profit = total revenue – total business cost
= revenue – supplies – interest on loan – utilities – hired help – rent
= 200, 00 – 80,000 – (80,000*.1) – 50,000 – 40,000 – 10,000 = $57000
Economic profit = business profit – interest rate forgone on saving amount –

opportunity cost of purchasing pharmacy
= 57,000 – (20,000*.1) – 40,000 = $15000
(b) Should Samantha purchase the pharmacy?
Samantha should purchase the pharmacy because economic profit is positive.

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Aldersgate College

Solano, Nueva Vizcaya, Philippines 3709

SCHOOL OF BUSINESS, MANAGEMENT AND ACCOUNTANCY

T 57 (AE9) Managerial Economics

PRINCESS ZHARMAGNE V. LOPEZ zharmagne.lopez@gmail.com

Module 1: The Nature and Scope of Managerial Economics

1. Why do firms exist? Who benefits from their existence?

a. A new advertising campaign increases the sales of the firm substantially.

A new advertising campaign increases the sales of the firm substantially.

b. A new competitor enters the market.

A new competitor enters the market.

c. The production department achieves a technological breakthrough that reduces

d. The firm is required to install pollution-control equipment.

The firm is required to install pollution-control equipment.

e. The workforce votes to unionize.

The work force votes to unionize.

f. The rate of interest rises.

The rate of interest rises.

g. The rate of inflation changes.

The rate of inflation changes.

4. According to Milton Friedman, “Business has only one social responsibility – to

Explicit costs are: $6,000 + $2,000 + $1,500 + $500 = $10,000

2. A woman managing a duplicating (photocopying) establishment for $25,000 per

Explicit Costs = $45,000 + $15,000 + $10,000 + $1,000 + $10,000 = $81,000

The pharmacy that Samantha is contemplating purchasing has additional expenses of

Business profit = total revenue – total business cost

= revenue – supplies – interest on loan – utilities – hired help – rent

= 200, 00 – 80,000 – (80,000*.1) – 50,000 – 40,000 – 10,000 = $57000

Economic profit = business profit – interest rate forgone on saving amount –

= 57,000 – (20,000*.1) – 40,000 = $15000

(b) Should Samantha purchase the pharmacy?

Samantha should purchase the pharmacy because economic profit is positive.

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