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Managerial Econ - Group

This document contains summaries of discussions from a Managerial Economics class. It includes responses to several discussion prompts: G1-1 discusses how government offices can be incentivized by exceeding targets and receiving bonuses and awards. G2-2 explains the economic concept of reservation price, using the examples of a buyer considering a house purchase and a seller willing to sell a house. G3-1 argues that a company should replace fully depreciated service vehicles rather than continue making expensive repairs, as the total repair costs would equal the cost of a new vehicle. G4-1 analyzes an extent decision around incentive pay for a railroad company's sales team, concluding that commission-based pay would

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Queenie Marie Obial Alas
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40 views

Managerial Econ - Group

This document contains summaries of discussions from a Managerial Economics class. It includes responses to several discussion prompts: G1-1 discusses how government offices can be incentivized by exceeding targets and receiving bonuses and awards. G2-2 explains the economic concept of reservation price, using the examples of a buyer considering a house purchase and a seller willing to sell a house. G3-1 argues that a company should replace fully depreciated service vehicles rather than continue making expensive repairs, as the total repair costs would equal the cost of a new vehicle. G4-1 analyzes an extent decision around incentive pay for a railroad company's sales team, concluding that commission-based pay would

Uploaded by

Queenie Marie Obial Alas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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UNIVERSITY OF IMMACULATE CONCEPTION

Jacinto St., Davao City

Queenie Marie O. Alas


Clarence Daniel C. Cawad January 19, 2019
BA207- Managerial Economics 12:00pm-3:00pm (Sat)

G1-1 GOAL ALIGNMENT WITH YOUR COMPANY

I personally think yes, because all the incentives that we receive are the
rewards for our good performance as an institution. Government offices, especially
those incoming generating agencies, are rewarded with bonuses and perks once they
exceed the previous year’s target and if they receive special awards. But still, these
benefits are regulated by the top management, Commission on Audit, GCGG, and
other agencies that look at the expenses of the offices.

G2-2 ONE LESSON OF BUSINESS (within an Organization)

To study individual transactions, we postulate a buyer and a seller. The


buyer’s value for an item is determined by how much he will pay for the item – his
“top dollar” or “reservation price.” He won’t pay more than his top dollar. The
buyer’s reservation price is determined by the opportunity cost of the transaction.

For example, if a buyer is considering purchasing a house, his reservation


price is determined by the value of his next-best alternative to buying the house. If the
buyer’s reservation price is 130,000 and the next-best alternative is living with his
parents, then the buyer would rather live with his parents than pay more than 130,000
to buy the house. For any price less than 130,000, the buyer would rather purchase
the house.

Likewise, the seller’s reservation price is determined by her next-best


alternative. Suppose that a seller is willing to sell her house for 120,000 and that her
next-best alternative to selling the house is renting it. Then the seller would rather
keep the house and rent it for any price less than 120,000. At a price of exactly
120,000, the seller is indifferent between renting and selling her house.

G3-1 FIXED COST FALLACY

One decision made by the company that involved costs that should have been
ignored is by repairing service vehicles that are fully depreciated and must be
replaced with a new one. The management thinks that buying new vehicle would
entail much cost to the company and is not practical. But compared to the service
repairs the old vehicle incurs almost every month, it would just sum up just like
buying a new one.
G4-1 EXTENT DECISION

Extent decisions are the decisions made to determine “how much” and in the
case of incentive pay, it is the decision of how hard to work. The Railroad industry is
a service oriented industry. As such, my company focuses its efforts on providing the
fastest and safest delivery of its customer’s products. Each department has its own key
performance indicators that help to drive the best service for customers. In today’s
economic landscape, business development is at the forefront of my company’s
efforts. Incentive pay for the sales team is in question. My company must currently
decide if adjustments to the pay structure will further incentivize sales people to
secure more business. The extent decision made by my company was to not offer
commission based pay to its sales team. Instead a bonus structure is offered to all
employees at the end of the year, of which performance can be taken into
consideration. Marginal analysis is required to determine the need for incentive pay.

The basis of a marginal analysis for extent decisions is to determine if the


benefits of taking another step are greater than the costs. In the case of incentive pay,
benefit refers to more sales and cost refers to commission paid on revenue sold. More
so for the purpose of the analysis is the benefit vs. cost for the sales person. In this
case, the benefit is the marginal revenue received for additional work, which is the
cost. If a proposed sales commission of .025% per contract was approved and the
average contract was 1.5 Million, the benefit of making a sale is 37K. However the
time and effort that goes into making that sale equates to 6-7 months of work,
approximately 50K based off of average Senior Sales Managers salary. The scenario
proposed to motivate the sales person with incentive pay does not benefit the sales
person to do additional work for the sale as the MC > MR. Additionally, this is the
right decision to maximize the company’s benefits for its costs. Again, the benefit to
the company is an average contract size of 1.5 Million. Costs do include salary and a
potential variability on end of year bonuses to the sales team. But the fixed cost
fallacy would suggest to ignore salary.

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