...CHAPTER 1—WHAT IS ECONOMICS? MULTIPLE CHOICE 1. The basic problem of economics arises when there are unlimited resources available to fulfill society's limited wants. a.|True| b.|False| ANS: B PTS: 1 NAT: Financial theories, analysis, reporting, and markets LOC: Scarcity, tradeoffs, and opportunity cost TOP: Economics | Scarcity and Choice 2. Economics is the study of choice under conditions of a.|demand| b.|supply| c.|scarcity| d.|opportunity| e.|abundance| ANS: C PTS: 1 DIF: 1 NAT: Financial theories, analysis, reporting, and markets LOC: Scarcity, tradeoffs, and opportunity cost TOP: Economics | Scarcity and Choice 3. The study of economics would be superfluous if _____ did not exist. a.|demand| b.|capital| c.|corporations| d.|profit| e.|scarcity| ANS: E PTS: 1 DIF: 2 NAT: Financial theories, analysis, reporting, and markets LOC: Scarcity, tradeoffs, and opportunity cost TOP: Economics | Scarcity and Choice 4. Which of the following disciplines is not a social science? a.|psychology| b.|mathematics| c.|economics| d.|political science| e.|sociology| ANS: B PTS: 1 DIF: 1 NAT: Financial theories, analysis, reporting, and markets LOC: The study of economics, and definitions of economics TOP: Economics | Scarcity and Choice 5. What does economics have in common with sociology? a.|Economics and sociology ask fundamentally the same questions.| b.|Economics and sociology use the same tools to analyze...
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...THEORY OF COST Economists have developed a comprehensive set of theories concerning cost, which they use to describe, explain, and predict the behavior of firms and individuals (e.g., consumers). The field of economics thus provides the underlying theory of costs, while accounting generally supplies most of the data that allow this theory to be applied in practice. The economist's idea of cost is more useful in analyzing the critical decisions made by management and government. In order to develop an appropriate costing methodology for a telecommunications service, it is important to understand both the underlying economic theory (and associated terminology) of cost, and the accountant's practical measures of cost (which do not directly correspond to elements of the theory). Assumptions of theory of cost Theory of cost rests upon several key assumptions about human behavior and environmental characteristics (Williamson, 1979; Williamson & Ouchi, 1981; Williamson, 1985). These assumptions elucidate why firms may face superior costs for market-based transactions and why firms may be relatively more efficient than markets at organizing transactions. The firm will select the governance form, from the various alternatives amongst the organizational menu, that minimizes transaction and production costs. Assumptions about human and human behavior Opportunism with guile. In neoclassical economics, humans are viewed as self-interested; individuals pursue their own self-interest...
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...and Bertil Ohlin (1933) laid the substantial developments on David Ricardo’s theory of comparative advantage by focusing on the relationships between national factor endowments and commodity trade patterns. Though there have been some attempts to use the Heckscher-Ohlin theory, it seems invalidity in most real-world international trade patterns. In order to evaluate the validity of the Heckscher-Ohlin theory in today’s environment, pros and cons of the statement are illustrated as following. In pro terms, this theory is a simple international trade model with only two nations, two products and two factors of production based on the similar technology. Because of its simplified assumption, the Heckscher-Ohlin theory can be easily applied to analyse theoretical patterns. However, some assumptions proposed in this theory such as the similar technology, constant return to scale, the same demand condition limit its range only to some particular regions, therefore, it seems very hard to apply this theory in many practical terms. In summary, today’s international trading environment is various and complicated, thus this over-simplified theory cannot be sufficient as a good predictor. The purpose of this paper is to examine the Heckscher-Ohlin theory to analyse whether it is a good predictor for international trade in today’s environment. In order to do this, I will describe the content of this theory and then ilustrate the arguments both for and against the main topic by using...
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...Dividends Policy Theories In the last decades, the valuation of companies and capital markets have been increased rapidly due to show the dynamic growth of the financial markets and the company’s growth [1]. The financial manager of any company should face three crucial decisions: the first one capital budgeting, what are the real assets the company should acquire?. The second one is the financing decision, how these real assets should be financed?. The last decision is concerned about when the company starts to generate more and more profit should the company keep this profit to reinvest it again and keep it in its retained earnings? Or it should distribute a portion of it and keep the rest for a new investments? Or should the company distribute...
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...When to Apply Rational Choice Theory A widely used model to study human behavior, called Rational Choice Theory, helps to simplify social phenomena by assuming these properties: utility maximization, consistency, expected value, individuals as relevant agents, homogeneity, and equilibrium. Almost all social scientists, especially economists, use this model to predict human behavior, and sometimes their results may contradict the actual phenomenon; in other words, they were unaware that their experiments failed to meet one or more of the Rational Choice Theory assumptions. For example, in situations like enlisting in the military and eventually going to war, where individuals fail to maximize utility and contradicts the assumptions of the Rational Choice Theory, applying the theory would be nonsensical. However, when dealing with situations in which individuals behave rationally like sex workers in the prostitution industry, whereby all Rational Choice Theory assumptions are met, the theory explains phenomena exceptionally well. The example of soldiers going into battle clearly contradicts the assumptions necessary for the Rational Choice Theory to hold. By definition, a rational human being would choose the option that gives him the highest level of utility. In deciding to join the military and fight in war, the costs of making this decision heavily outweighs the benefits. Comparatively, this problem resembles the “Voter’s Paradox” in which Anthony Downs explained using a...
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...Dividend policy theories (By Munene Laiboni) 1. Introduction: Dividend policy theories are propositions put in place to explain the rationale and major arguments relating to payment of dividends by firms. Firms are often torn in between paying dividends or reinvesting their profits on the business. Even those firms which pay dividends do not appear to have a stationary formula of determining the dividend payout ratio. Dividends are periodic payments to holders of equity which together with capital gains are the returns for investing in a firm’s stock. The prospect of earning periodic dividends and sustained capital appreciation are therefore the main drivers of investors’ decisions to invest in equity. In this paper, we explore various theories which have been postulated to explain dividend payment behavior of firms. Major Schools of thought: At the heart of the dividend policy theories discussion are two opposing schools of thought: One side holds that whether firms pay dividends or not is irrelevant in determining the stock price and hence the market value of the firm and ultimately its weighted cost of capital. In retrospect, the opposing side holds that firms which pay periodic dividends eventually tend to have higher stock prices, market values and cheaper WACCs. The existence of these two opposing sides has spawned vast amounts of empirical and theoretical research. Scholars on both sides of the divide appear relentless on showcasing the case for their arguments. Several...
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...Chapter 7 - Positive Theory Positive Accounting Theory Philosophy of PAT Million Friedman championed positive theories in economics. He stated that: (part 3 Empirical Research in Accounts of Accounting theory from Jayne Godfrey) The ultimate goal of positive science (i.e. INDUCTIVE) is • The development of a ‘theory ‘ or ‘hypothesis’; • that yields valid and meaningful “Predictions’ • about phenomena not yet “observed”. Consistent with Friedman’s view, Watts and Zimmerman asserts that: The objective of “positive accounting theory” is to “explain” and “predict” accounting practice. • “Explanation” means providing reasons for observed practice. For example, positive accounting theory seeks to explain why firms continue to use historical cost accounting and why certain firms switch between a numbers of accounting techniques. • “Prediction” of accounting practice means that the theory predicts “unobserved phenomena”. Watts and Zimmerman start their book with a fundamental statement of The Role of Theory (Chapter 1).They asserts that the objective of positive accounting theory is to explain and predict accounting practice,(p.2) “Unobserved phenomena” are not necessarily future phenomena; they include phenomena that have occurred, but on which systematic evidence has not been collected. For example – Predicting the reaction of firms to a proposed accounting standard and an explanation of why firms would lobby for and against...
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...Week 1: The economic foundations of theories in strategy Corporate strategy; where to compete, portfolio, parent level Competitive strategy; how to compete, SBU, competitive advantage Three layers of theory: management – strategic management – economies Paradox: how is it possible to have a general statement about uniqueness? We try to have general statements about uniqueness. Theory=general statement about cause and effect Stoelhorst, J.W. (2008), Thinking about Strategy Stoelhorst: 5 Schools of thought about strategy • Prescriptive schools: ○ 1960s: Design school (strategy formulation) ○ 1970s: Planning school (strategy formulation) ○ 1980s: Positioning school (strategic analysis) ○ 1990s: Resource-based school (strategic analysis) • Descriptive school: ○ 1980s onwards: Process school Design school: Strategy formulation is a process of conception The CEO formulates a clear, simple, and unique strategy (business policy) through a deliberate process of conscious thought. There should be a fit between a firm’s strengths and weaknesses and external opportunities and threats (SWOT analysis). Strategy formulation and implementation are clearly separate activities. Planning school: Strategy formulation is a formal process ...
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...Business Model Canvas with Assumptions – Tool for Growth Map ASSIGNMENT _CHALLENGING BUSINESS ASSUMPTION Vinaya Thite | MBA 2013-14_MG6506 | December 6, 2013 PG. 0 Table of Contents Introduction ............................................................................................................................................................ 1 Key Aspects to learn ........................................................................................................................................... 1 Literature Review .................................................................................................................................................. 2 Force Field Analysis .......................................................................................................................................... 2 Figure 1 Force Field Analysis ........................................................................................................................... 2 Theory of Business ............................................................................................................................................ 2 Business model .................................................................................................................................................. 4 Integration of Theory of Business and Challenging business assumptions ....................................................... 5 Case Study - i-Secure Consultancy ....
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...Neorealism – or structural realism – is a theory of international politics which is usually associated with Kenneth Waltz and his book, Theory of International Politics. The main objective of the book is to construct a very general framework for explaining recurring patterns of state behavior and state interaction in the international system. Neorealism is the bedrock theory of International Relations. Starting from a simple set of assumptions, it seeks to explain how states, in particular the most powerful ones, behave, and how they interact with each other on the international arena. It asserts that the nature of the international structure is determined by its principle of order, anarchy, and by the distribution of capabilities which is measured by the number of great powers within the international system. The anarchic ordering principle of the international structure is decentralized, meaning there is no formal central authority; every sovereign state is formally equal in this system. These states act according to the logic of self-help, meaning states seek their own interest and will not subordinate their interest to the interests of other states. While neorealists agree that the structure of the international relations is the primary impetus in seeking security, there is disagreement among neorealist scholars as to whether states merely aim to survive or whether states want to maximize their relative power. These viewpoints are respectively of Kenneth Waltz and his defensive...
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...Transaction costs theory and the imperfect markets. Williamson’s successful complementation of the Coases approach of the firm as an alternative to reduce the cost of using the price mechanism, with Herbert Simon’s organizational theory, gave birth to the Transaction Costs Theory (TCT)1. This meant a big step, which evolved the theory of the firm, from its obsolete neoclassical toots and assumptions -of a perfect competitive market and a perfect rationality-, by adding the issues of bounded rationality and opportunism to Coases work2. Williamson opened the path to new ways of conceiving and complementing the theory of the firm in general, and the transactions costs theory in particular. By enabling to the economic theory the enhancing and the building of new connections between cognitive psychology and economics. Connections that have allowed, among other things, the development of a larger view in the roll of the firm, no only as an avoider of costs, but also as a creator of knowledge. All in better accordance with the modern firms logic of making business. In order to understand the transaction costs theory, one has to comprehend that the competitive market structure, is only a reference to be taken into account, when one analyses the observed structure of markets, which are called “imperfect competitive”, For the market is not given under a homogenous form to all economic agents, but is continuously changing under agents decisions and behaviours 3 ....
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...Financing and investment are two major decision areas in a firm. In the financing decision the manager is concerned with determining the best financing mix or capital structure for his firm. Capital structure could have two effects. First, firms of the same risk class could possibly have higher cost of capital with higher leverage. Second, capital structure may affect the valuation of the firm, with more leveraged firms, being riskier, being valued lower than less leveraged firms. If we consider that the manager of a firm has the shareholders' wealth maximisation as his objective, then capital structure is an important decision, for it could lead to an optimal financing mix which maximises the market price per share of the firm. Capital structure has been a major issue in financial economics ever since Modigliani and Miller (henceforth referred to as MM) showed in 1958 that given frictionless markets, homogeneous expectations, etc., the capital structure decision of the firm is irrelevant. This conclusion depends entirely on the assumptions made. By relaxing the assumptions and analysing their effects, theory seeks to determine whether an optimal capital structure exists or not, and if so what could possibly be its determinants. If capital structure is not irrelevant, then there is also another thing to consider: the interaction between financing and investment. But in order to try to distinguish the effects of various determinants on capital structure, it is assumed in this...
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...The Development of Modern Finance "A Short History of Value" David Roubaud & Jean-Charles Bagneris 10/2011 The Main Steps of the Theory Building • Portfolio Selection (Markowitz, 1952) • CAPM (Sharpe, 1963) • Financing and Dividend Decisions Neutrality (Modigliani et Miller, 1958, 1961,1963) • Efficient Markets (Fama, 1965, 1970) • Options Pricing Theory (Black & Scholes, 1973, Myers, 1977) • Agency Theory (Jensen, Meckling, 1976) • Efficient Markets II (Fama, 1991) • Behavioural Finance (Kahneman & Tversky, 1979, Shiller, 1981, 2000) Portfolio Selection • Investors are rationals and risk averse • Diversification lowers specific risk • Any portfolio is a combination of the market portfolio and the riskless asset The CAPM Capital Asset Pricing Model • Systematic risk of an asset is measured by its beta coefficient • The model calibrates the risk-return relationship • Simple, elegant and linear model => big success • Low explaining power (strong assumptions) • Alternative models are difficult to use 1 The Development of Modern Finance 2 Financial Markets Efficiency "At any given point in time, assets prices on financial markets account for all available information." • Strong assumptions on: – markets organization – investors behaviour • One consequence of EMH is Random Walk Hypothesis • Assumptions are not always true: 3 forms of efficiency (strong, semi-strong, weak) The irrelevance of financing and dividends decisions In a world without taxes and with perfect financial markets...
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...The role of positive accounting theory. PAT has been the most significant accounting research agendas during the past four decades (Kabir). Before the arrival of PAT, normative accounting research had been the leading research tradition in accounting. Normative accounting theorists concentrated in developing accounting principles for recognition and measurement issues. In contrast with normative accounting theory which deals with “should” kind questions, PAT deals with “is” kind questions. According to Watts and Zimmerman “the objective of positive accounting theory is to explain and predict accounting practice. It explains why financial reports are prepared. Positive accounting theorists have explained the accounting practices by including the measures accountants employ to calculate total assets, total liabilities, owners' equity and net income. Moreover, they also claim that positive accounting theory provides a scientific explanations of accounting practice that is that their findings are empirically test. PAT also examines the effects of accounting standards on management’s self-interest hence PAT recognizes management biased attitude on accounting standards which are likely to affect corporates lobbying on accounting standards. Pat also identifies certain factors that are expected to affect a firms cash flows and share price .These factors are taxes, political costs and information production and management compensation. PAT theoretically played its role in examining...
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...Public interest theory seeks to establish a method of understanding the interests of public groups based on a number of assumptions. Typically actions that are deemed in the public interest generally occur when governments seek to intervene in situations where market failure occurs. Market failure may arise due to monopolies, barriers to entry for new businesses, and information gaps. Public interest theory makes three assumptions. First, interest of consumers is translated into legislative action through operation of the internal marketplace. Secondly, agents will seek regulation on behalf of public interest. The third assumption being that government has no independent role to play in the development of regulation. In 2002 the Sarbanes-Oxley Act was created in America to enforce greater regulation and compliance for financial reporting and corporate governance. This Act was created in response to corporate scandals involving larger companies like Enron and Tyco International, and thus public interest theory suggests the government’s response was as a result of market failure due to inaccurate auditing and accounting procedures. The premise of private interest theory is that governmental bodies and political leaders use their power to coerce businesses through taxation, regulation, and subsidies. The Basic assertion of privation interest theory is the law of diminishing returns which exists between group size, and costs of using political process. A second assumption is government...
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