PRELIMS

Question 1

What is Engineering Economy?

Answer 1

The analysis and evaluation of the factors that will affect the economic success of engineering projects to the end that a recommendation is made which will insure the best use of capital.

Question 2

What is demand?

Answer 2

The quantity of a certain commodity that is bought at a certain price at a given place and time.

Question 3

What is supply?

Answer 3

The quantity of a certain commodity that is offered for sale at a certain price at a given place and time.

Question 4

What is producers?

Answer 4

Market participants selling goods and services.

Question 5

What is consumers?

Answer 5

Market participants buying goods and services.

Question 6

Market Price

Answer 6

The economic price for which good or service is offered in the marketplace which is significantly affected by the demand, availability of substitutes and the competitive landscape.

Question 7

Equilibrium

Answer 7

The price-quantity pair where the quantity demanded is equal to quantity supplied, represented by the intersection of the demand and supply curves.

Question 8

The Law of Diminishing Returns

Answer 8

When the use of one of the factors of production is limited, either in increasing cost or by absolute quantity, a point will be reach beyond which an increase in the variable factors will result in a less than proportionate increase in output.

Question 9

Perfect Composition and examples

Answer 9

• It occurs in a situation where a commodity or service is supplied by a number of vendors and there is nothing to prevent additional vendors entering the market.
• Examples: Wheat farming and textile firm

Question 10

Monopoly and examples

Answer 10

• It is the opposite of perfect competition. It exists when a unique product or service is available from a single vendor and that vendor can prevent the entry of all others into the market.
• Examples: Public utility and patented drug

Question 11

Monopolistic Competition and examples

Answer 11

• It is characterized by a large number of firms, none of which can influence market price by virtue of size alone.
• New firms can enter and established firms can exit such an industry with ease.
• Some degree of market power is achieved by firms producing differentiated products.
• Examples: Restaurants and clothing stores

Question 12

Product Differentiation

Answer 12

It is a strategy that firms use to achieve market power and is accomplished by producing products that have distinct positive identities in consumer’s minds.

Question 13

Oligopoly and examples

Answer 13

• A form of industry (market) structure characterized by a few dominant firms.
• The behavior of any one firm in an oligopoly depends to a great extent on the behavior of others.
• It exists when there are so few suppliers of a product or service that action by one will almost inevitably result in similar action by the others.
• Examples: Manufacturing industries (automobiles, computers)

Question 14

Capital

Answer 14

It refers to wealth in the form of money or property that can be used to produce more wealth.

Question 15

Fixed Costs and examples

Answer 15

These are those unaffected by changes of inactivity level over a feasible range of operations for the capacity or capability available and does not change with an increase or decrease in the amount of goods and services.

Examples: rent for buildings or spaces, salaries for management and administrative employees, property taxes, insurance

Question 16

Variable Costs and examples

Answer 16

These are those associated with an operation that varies in total with the quantity of output or other measures of activity level. This is the corporate expense that changes in proportion to production volume.

Examples: cost of raw materials and packaging, sales commission, utility costs (electricity, water, etc.), direct labor costs (regular working hours, overtime)

Question 17

Direct Costs and examples

Answer 17

These are costs that can be reasonably measured and allocated to a specific output or work activity. The labor and material costs directly associated with a product, service, or construction activity are direct costs.

Examples: raw materials cost, wages for production staff, manufacturing supplies

Question 18

Indirect Costs and examples

Answer 18

These are costs that are difficult to allocate to a specific output or work activity. Normally, they are costs allocated through a selected formula (such as proportional to direct labor hours, direct labor dollars, or direct material dollars) to the outputs or work activities. It can also be called overhead costs.

Examples: salary for administrative employees, general repairs, taxes and fees

Question 19

Cost Estimation

Answer 19

It is an integral part in any engineering economic analysis being performed which requires the participation from engineering designers, marketing, manufacturing, finance and top management.

Question 20

Top-Down Approach

Answer 20

You review the overall scope of your project, identify the major elements of the work and make general estimations.
Key Characteristics:
* frequently used for creating rough order of magnitude (ball-park)
* used at the early stage of the project when data is limited (to be further used for data validation)
* generally takes less time and effort to produce
* uses historical data from similar projects to estimate costs, revenues, energy consumption, etc.
* generally produces larger estimates

Question 21

Bottom-Up Approach

Answer 21

You generate a detailed breakdown of the requirements down to the lowest possible level to generate your estimates. This approach covers the project scope based on the task defined.
Key Characteristics:
* frequently referred to as detailed estimating or as an engineering build-up
* usually works best when the detail concerning the desired output (a product or a service) has been defined and clarified
* generates more tangible estimates than top-down approach
* higher risk of excluding allowance for additional work needed

Question 22

Cash Flow Diagram

Answer 22

It is an indispensable tool for clarifying and visualizing a series of cash flows. It is a graphical representation of cash flows drawn on a time scale.

Question 23

Simple Interest

Answer 23

Total interest earned or charged is linearly proportional to the initial amount loaned (principal). It is calculated using the principal only, ignoring any interest accrued in preceding interest periods. It is infrequently used in modern practice.

Question 24

Ordinary Simple Interest vs Exact Simple Interest

Answer 24

Ordinary Simple Interest: It is computed on the basis of 12 months of 30 days each or 360 days a year; 1 interest period = 360 days
Exact Simple Interest: It is computed based on the exact number of days in a year, 365 days for an ordinary year and 366 days for a leap year.

Question 25

Compound Interest

Answer 25

It reflects both the remaining principal and any accumulated interest. It is commonly used in personal and professional financial transactions.

Question 26

Nominal rate of interest

Answer 26

It is a rate of interest that specifies the rate of interest and a number of interest periods.

Question 27

Effective rate of interest

Answer 27

It is rates of interest that specifies the actual or exact rate of interest on the principal.

Question 28

Discrete Compounding vs Continuous Compounding

Answer 28

Discrete Compounding: Interest is compounded at the end of each finite length period, such as a month, a quarter or a year.
Continuous Compounding: It is assumed that cash payments occur once per year, but the compounding is continuous throughout the year.

Question 29

Discount

Answer 29

The difference between the present worth (the amount received for the paper in cash) and the worth of the paper at sometime in the future (the face value of the paper or principal).

Question 30

Inflation

Answer 30

The increase in the prices for goods and services from one year to another, thus decreasing the purchasing power of money.

Question 31

Purchasing power of money.

Answer 31

It measures the value of a currency in terms of the quantity and quality of goods or services that one unit of money will purchase.

Question 32

Annuities

Answer 32

• a series of equal payments occurring at equal periods of time
• common application is in insurance payments, home mortgage payments.

Question 33

Ordinary Annuity

Answer 33

• one where the payments are made at the end of each period.
• Examples: interest payments from bonds, which are generally made semi-annually, and quarterly dividends from a stock.

Question 34

Deferred Annuity

Answer 34

• a uniform series that do not begin until some time in the future

Question 35

Annuity Due

Answer 35

• one where the payments are made at the beginning of each period

Question 36

Perpetuity

Answer 36

• an annuity in which the payment continue indefinitely

Question 37

Consumer goods and services

Answer 37

Those products or services that are directly used by people to satisfy their wants.

Question 38

Producer goods and services

Answer 38

Those are used to produce consumer goods and services or other producer goods.

Question 39

Necessities

Answer 39

Those products or services that are required to support human life and activities, that will be purchased in somewhat the same quantity even though the price varies considerably.

Question 40

Luxuries

Answer 40

Those products or services that are desired by humans and will be purchased if money is available after requires necessities have been obtained.

Question 41

Elastic Demand

Answer 41

It occurs when a decrease in selling price result in a greater than proportionate increase in sales.

Question 42

Inelastic Demand

Answer 42

It occurs when a decrease in selling price produces a less than proportionate increase in sales.

Question 43

Unitary elasticity of demand

Answer 43

It occurs when mathematical product of volume and price is constant.

Question 44

Interest

Answer 44

It is the amount of money paid for the use of borrowed capital or the income produced by the money which has been loaned.