Managerial economics

1 Introduction To Economic Decision Making 1 Seven Examples of Managerial Decisions 2 Six Steps to Decision Making 4 Step 1: Define the Problem 5 Step 2: Determine the Objective 6 Step 3: Explore the Alternatives 6 Step 4: Predict the Consequences 7 Step 5: Make a Choice 8 Step 6: Perform Sensitivity Analysis 9 Private and Public Decisions: an Economic View 10 Public Decisions 12 Things to Come 13 2 Optimal Decisions Using Marginal Analysis 17 A Simple Model 18 A Microchip Manufacturer 19 Marginal Analysis 24 Marginal Analysis and Calculus 25 Marginal Revenue and Marginal Cost 27 Marginal Revenue 27 Marginal Cost 29 Profit Maximization Revisited 29 Sensitivity Analysis 31 Asking What If 32 Appendix to Chapter 2: Calculus and Optimization Techniques 42 Special Appendix to Chapter 2: Optimization Using Spreadsheets 50 3 Demand Analysis and Optimal Pricing 53 Determinants of Demand 54 The Demand Function 54 The Demand Curve and Shifting Demand 55 General Determinants of Demand 57 Elasticity of Demand 58 Price Elasticity 58 Factors Affecting Price Elasticity 61 Other Elasticities 61 Price Elasticity and Prediction 62 Demand Analysis and Optimal Pricing 63 Price Elasticity, Revenue, and Marginal Revenue 63 Maximizing Revenue 66 Optimal Markup Pricing 67 Price Discrimination 69 Information Goods 72 Appendix to Chapter 3: Consumer Preferences and Demand 84 4 Estimating and Forecasting Demand 90 Collecting Data 91 Consumer Surveys 91 Controlled Market Studies 92 Uncontrolled Market Data 93 Regression Analysis 94 Ordinary Least-Squares Regression 94 Interpreting Regression Statistics 100 Potential Problems in Regression 104 Forecasting 107 Time-Series Models 107 Fitting a Simple Trend 109 Barometric Models 115 Forecasting Performance 116 Final Thoughts 118 Appendix to Chapter 4: Regression Using Spreadsheets 129 Special Appendix to Chapter 4: Statistical Tables 133 5 Production 135 Basic Production Concepts 136 Production in the Short Run 136 Optimal Use of an Input 140 Production in the Long Run 142 Returns to Scale 142 Least-Cost Production 143 Measuring Production Functions 148 Linear Production 148 Production with Fixed Proportions 149 Polynomial Functions 149 The Cobb-Douglas Function 150 Other Production Decisions 151 Multiple Plants 151 Multiple Products 152 6 Cost Analysis 163 Relevant Costs 164 Opportunity Costs and Economic Profits 164 Fixed and Sunk Costs 167 The Cost of Production 169 Short-Run Costs 170 Long-Run Costs 173 Returns to Scale and Scope 177 Returns to Scale 177 Economies of Scope 181 Cost Analysis and Optimal Decisions 183 A Single Product 183 The Shut-Down Rule 184 Multiple Products 186 Appendix to Chapter 6: Transfer Pricing 195 7 Perfect Competition 198 The Basics of Supply and Demand 199 Shifts in Demand and Supply 201 Competitive Equilibrium 203 Decisions of the Competitive Firm 203 Market Equilibrium 206 Market Efficiency 208 Private Markets: Benefits and Costs 208 International Trade 215 Tariffs and Quotas 215 President Trump’s Tariffs 218 8 Monopoly 227 Pure Monopoly 228 Monopoly Behavior 228 Barriers to Entry 230 Perfect Competition versus Pure Monopoly 232 Cartels 234 Natural Monopolies 237 Monopolistic Competition 239 9 Oligopoly 248 Oligopoly 249 Five-Forces Framework 250 Industry Concentration 251 Concentration and Prices 255 Quantity Competition 257 A Dominant Firm 257 Competition among Symmetric Firms 257 Price Competition 261 Price Rigidity and Kinked Demand 261 Price Wars and the Prisoner’s Dilemma 262 Other Dimensions of Competition 267 Strategic Commitments 267 Advertising 269 Appendix to Chapter 9: Bundling and Tying 278 10 Game Theory and Competitive Strategy 282 Sizing Up Competitive Situations 283 Analyzing Payoff Tables 286 Equilibrium Strategies 288 Competitive Strategy 292 Market Entry 294 Bargaining 295 Sequential Competition 296 Repeated Competition 299 Appendix to Chapter 10: Mixed Strategies 312 11 Regulation, Public Goods, and Benefit-Cost Analysis 317 I. Market Failures and Regulation 318 Market Failure Due to Monopoly 318 Government Responses 319 Market Failure Due to Externalities 324 Remedying Externalities 326 Promoting Positive Externalities 330 Market Failure Due to Imperfect Information 332 II. Benefit-Cost Analysis and Public Goods Provision 333 Public Goods 333 Public Goods and Efficiency 333 The Basics of Benefit-Cost Analysis 335 Applying the Net Benefit Rule 335 Dollar Values 336 Efficiency versus Equity 336 Evaluating a Public Project 337 Public Investment in a Bridge 337 Valuing Benefits and Costs 339 Market Values 339 Nonmarketed Benefits and Costs 339 12 The Economics of Non-Profit Organizations 350 The World of Non-Profits 351 A Simple Model of the Non-Profit Firm 353 Production and Pricing 353 Potential Differences between Non-Profits and For-Profits 357 The Non-Profit’s Goal when the World is Uncertain 358 When do Non-Profits and For-Profits Take Identical Actions? 360 Appendix to Chapter 12: The Firm’s Long-Term Value 368 13 Decision Making Under Uncertainty 373 Uncertainty, Probability, and Expected Value 374 Probability 374 Expected Value 375 Decision Trees 376 An Oil Drilling Decision 377 Features of the Expected-Value Criterion 378 Sequential Decisions 382 Risk Aversion 388 Expected Utility 390 Why the Expected-Utility Method Works 392 Expected Utility and Risk Aversion 394 14 The Value of Information 404 The Value of Information 405 The Oil Wildcatter Revisited 405 Imperfect Information 406 Revising Probabilities 408 Bayes’ Theorem 409 Other Applications 411 Predicting Credit Risks 412 Business Behavior and Decision Pitfalls 414 Auctions and Competitive Bidding 417 Private-Value Auctions 418 Common-Value Auctions 419 Expected Auction Revenue 421 15 Asymmetric Information and Organizational Design 433 Asymmetric Information 434 Adverse Selection 434 Signaling 435 Principals, Agents, and Moral Hazard 436 Organizational Design 440 The Nature of the Firm 440 The Boundaries of the Firm 441 Assigning Decision-Making Responsibilities 442 Monitoring and Rewarding Performance 446 Separation of Ownership and Control in the Modern Corporation 449 16 Bargaining and Negotiation 460 The Economic Sources of Beneficial Agreements 461 Resolving Disputes 463 Differences in Values 465 Contingent Contracts 467 Multiple-Issue Negotiations 468 Negotiation Strategy 472 Perfect Information 473 Imperfect Information 474 Repetition and Reputation 475 17 Linear Programming 485 Linear Programs 486 Graphing the LP Problem 488 A Minimization Problem 490 Sensitivity Analysis and Shadow Prices 493 Changes in the Objective Function 493 Shadow Prices 495 Optimal Decisions and Shadow Prices 497 Formulation and Computer Solution for Larger LP Problems 499 Production Decisions 499 Computer Solutions 502 18 Auctions and Competitive Bidding Available Online The Advantages of Auctions Bidder Strategies English and Dutch Auctions Sealed-Bid Auctions Common Values and the Winner’s Curse Optimal Auctions Expected Auction Revenue Competitive Procurement Index I-1