Managerial Economics: A Problem-Solving Approach (Mba Series)

345 Pages·2009·2.88 MB·English

by  Luke M. Froeb

CENGAGME S O UBTH-WAESTERN's
series
inEconomics
Managerial Economics
A Problem Solving Approach
SECOND EDITION
LUKE M. FROEB
Vanderbilt University
BRIAN T. M CANN
C
Vanderbilt University
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ManagerialEconomics:AProblemSolving ©2010,2008South-Western,CengageLearning
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BRIEF CONTENTS
Preface:TeachingStudentstoSolveProblems x
SECTION I ProblemSolvingandDecisionMaking 1
1 Introduction:WhatThisBookIsAbout 2
2 TheOneLessonofBusiness 10
3 Benefits,Costs,andDecisions 23
4 Extent(HowMuch)Decisions 40
5 InvestmentDecisions:LookAheadandReasonBack 51
SECTION II Pricing,Costs,andProfits 65
6 SimplePricing 66
7 EconomiesofScaleandScope 82
8 UnderstandingMarketsandIndustryChanges 94
9 RelationshipsBetweenIndustries:TheForcesMovingUsTowards
Long-RunEquilibrium 115
10 Strategy—TheQuesttoKeepProfitfromEroding 125
11 UsingSupplyandDemand:ForeignExchange,Trade,andBubbles 137
SECTION III PricingforGreaterProfit 151
12 MoreRealisticandComplexPricing 152
13 DirectPriceDiscrimination 163
14 IndirectPriceDiscrimination 172
SECTION IV StrategicDecisionMaking 183
15 StrategicGames 184
16 Bargaining 207
SECTION V Uncertainty 219
17 MakingDecisionswithUncertainty 220
18 Auctions 233
19 TheProblemofAdverseSelecion 244
20 TheProblemofMoralHazard 255
SECTION VI OrganizationalDesign 267
21 GettingEmployeestoWorkintheFirm’sBestInterests 268
22 GettingDivisionstoWorkintheFirm’sBestInterests 281
23 ManagingVerticalRelationships 295
SECTION VII WrappingUp 307
24 YouBetheConsultant 308
Epilogue:CanThoseWhoTeach,Do? 317
Glossary 319
Index 325
iv
TABLE OF CONTENTS
Preface:TeachingStudentstoSolveProblems x
SECTION I ProblemSolvingandDecisionMaking 1
CHAPTER 1 INTRODUCTION:WHATTHISBOOKISABOUT 2
ProblemSolving 2
EthicsandEconomics 4
EconomicsinJobInterviews 6
Summary&HomeworkProblems 8
CHAPTER 2 THEONELESSONOFBUSINESS 10
CapitalismandWealth 11
DoMergersMoveAssetsToHigher-ValuedUses? 13
DoestheGovernmentCreateWealth? 14
EconomicsversusBusiness 15
WealthCreationinOrganizations 19
Summary&HomeworkProblems 20
CHAPTER 3 BENEFITS,COSTS,ANDDECISIONS 23
Background:Variable,Fixed,andTotalCosts 23
Background:AccountingversusEconomicProfit 25
CostsAreWhatYouGiveUp 27
Fixed-orSunk-CostFallacy 28
Hidden-CostFallacy 30
EconomicValueAdded 31
DoesEVA®work? 32
PsychologicalBiasesandDecisionMaking 33
Summary&HomeworkProblems 35
CHAPTER 4 EXTENT(HOWMUCH)DECISIONS 40
Background:AverageandMarginalCosts 41
MarginalAnalysis 42
IncentivePay 45
TiePaytoPerformanceMeasuresthatReflectEffort 46
IfIncentivePayIsSoGood,WhyDon’tMoreCompaniesUseit? 47
Summary&HomeworkProblems 48
v
vi TABLEOFCONTENTS
CHAPTER 5 INVESTMENTDECISIONS: LOOKAHEADANDREASONBACK 51
HowtoDetermineWhetherInvestmentsAreProfitable 51
Break-EvenAnalysis 53
ChoosingtheRightManufacturingTechnology 55
ShutdownDecisionsandBreak-EvenPrices 56
SunkCostsandPost-InvestmentHold-Up 57
SolutionstotheHold-UpProblem 59
Summary&HomeworkProblems 60
SECTION II Pricing,Costs,andProfits 65
CHAPTER 6 SIMPLEPRICING 66
Background:ConsumerSurplusandDemandCurves 67
MarginalAnalysisofPricing 69
PriceElasticityandMarginalRevenue 71
WhatMakesDemandMoreElastic? 74
ForecastingDemandUsingElasticity 76
Stay-EvenAnalysis,Pricing,andElasticity 77
Summary&HomeworkProblems 78
CHAPTER 7 ECONOMIESOFSCALEANDSCOPE 82
IncreasingMarginalCost 83
EconomiesofScale 85
LearningCurves 86
EconomiesofScope 88
DiseconomiesofScope 89
Summary&HomeworkProblems 90
CHAPTER 8 UNDERSTANDINGMARKETSANDINDUSTRYCHANGES 94
WhichIndustryorMarket? 94
ShiftsinDemand 95
ShiftsinSupply 97
MarketEquilibrium 98
PredictingIndustryChangesUsingSupplyandDemand 99
ExplainingIndustryChangesUsingSupplyandDemand 102
PricesConveyValuableInformation 105
MarketMaking 107
Summary&HomeworkProblems 110
CHAPTER 9 RELATIONSHIPSBETWEENINDUSTRIES:THEFORCESMOVINGUSTOWARDSLONG-RUNEQUILIBRIUM 115
CompetitiveIndustries 116
TheIndifferencePrinciple 118
Monopoly 122
Summary&HomeworkProblems 123
TABLEOFCONTENTS vii
CHAPTER 10 STRATEGY—THEQUESTTOKEEPPROFITFROMERODING 125
StrategyIsSimple 126
SourcesofEconomicProfit 127
TheThreeBasicStrategies 132
Summary&HomeworkProblems 134
CHAPTER 11 USINGSUPPLYANDDEMAND:FOREIGNEXCHANGE,TRADE,ANDBUBBLES 137
TheMarketforForeignExchange 138
PurchasingPowerParity 140
TheEffectsofaCurrencyDevaluation 141
Bubbles:PastPerformanceIsNoGuaranteeofFutureSuccess 143
Summary&HomeworkProblems 147
SECTION III PRICINGFORGREATERPROFIT 151
CHAPTER 12 MOREREALISTICANDCOMPLEXPRICING 152
PricingCommonlyOwnedProducts 153
RevenueorYieldManagement 155
AdvertisingandPromotionalPricing 157
PsychologicalPricing 158
Summary&HomeworkProblems 159
CHAPTER 13 DIRECTPRICEDISCRIMINATION 163
Introduction 163
Why(Price)Discriminate? 164
DirectPriceDiscrimination 167
Robinson–PatmanAct 168
ImplementingPriceDiscriminationSchemes 169
OnlySchmucksPayRetail 170
Summary&HomeworkProblems 170
CHAPTER 14 INDIRECTPRICEDISCRIMINATION 172
IndirectPriceDiscrimination 174
VolumeDiscountsasDiscrimination 176
BundlingDifferentGoodsTogether 178
Summary&HomeworkProblems 179
SECTION IV STRATEGICDECISIONMAKING 183
CHAPTER 15 STRATEGICGAMES 184
Sequential-MoveGames 185
Simultaneous-MoveGames 188
WhatCanILearnfromStudyingGamesLikethePrisoners’Dilemma? 194
OtherGames 196
Summary&HomeworkProblems 201
viii TABLEOFCONTENTS
CHAPTER 16 BARGAINING 207
BargainingasaGameofChicken 208
HowtoImproveYourBargainingPosition 210
Summary&HomeworkProblems 214
SECTION V UNCERTAINTY 219
CHAPTER 17 MAKINGDECISIONSWITHUNCERTAINTY 220
RandomVariables 220
UncertaintyinPricing 224
RunNaturalExperimentstoReduceUncertainty 226
MinimizingExpectedErrorCosts 227
RiskversusUncertainty 228
Summary&HomeworkProblems 229
CHAPTER 18 AUCTIONS 233
OralAuctions 234
Second-PriceAuctions 235
First-PriceAuctions 236
BidRigging 237
Common-ValueAuctions 239
Summary&HomeworkProblems 240
CHAPTER 19 THEPROBLEMOFADVERSESELECTION 244
InsuranceandRisk 244
AnticipatingAdverseSelection 245
Screening 247
Signaling 250
AdverseSelectionandInternetSales 251
Summary&HomeworkProblems 252
CHAPTER 20 THEPROBLEMOFMORALHAZARD 255
Insurance 256
MoralHazardversusAdverseSelection 257
Shirking 258
MoralHazardinLending 260
MoralHazardandthe2008FinancialCrisis 261
Summary&HomeworkProblems 262
SECTION VI ORGANIZATIONALDESIGN 267
CHAPTER 21 GETTINGEMPLOYEESTOWORKINTHEFIRM’SBESTINTERESTS 268
Principal–AgentRelationships 268
PrinciplesforControllingIncentiveConflict 270
MarketingversusSales 272
TABLEOFCONTENTS ix
Franchising 273
AFrameworkforDiagnosingandSolvingProblems 274
Summary&HomeworkProblems 277
CHAPTER 22 GETTINGDIVISIONSTOWORKINTHEFIRM’SBESTINTERESTS 281
IncentiveConflictbetweenDivisions 281
TransferPricing 283
FunctionalSilosversusProcessTeams 285
BudgetGames:PayingPeopletoLie 287
Summary&HomeworkProblems 290
CHAPTER 23 MANAGINGVERTICALRELATIONSHIPS 295
DoNotBuyaCustomerorSupplierSimplyBecauseTheyAreProfitable 296
EvadingRegulation,Bundling,Tying,andExclusion 297
EliminatingtheDoubleMarkup 298
AligningRetailerIncentiveswiththeGoalsofManufacturers 299
PriceDiscrimination 301
Outsourcing 302
Summary&HomeworkProblems 303
SECTION VII WRAPPINGUP 307
CHAPTER 24 YOUBETHECONSULTANT 308
ExcessInventoryofProstheticHeartValves 308
HighTransportationCostsataCoal-BurningUtility 309
OverpayingforAcquiredHospitals 310
LargeE&OClaimsatanInsuranceCompany 312
LosingMoneyonHomeowner’sInsurance 314
QuantityDiscountsonHipReplacements 315
WhatYouShouldHaveLearned 316
Epilogue:CanThoseWhoTeach,Do? 317
Glossary 319
Index 325