Managerial Economics 8th Edition

CHAPTER ONE INTRODUCTION TO ECONOMIC DECISION MAKING OBJECTIVES 1. To introduce Managerial Economics and provide concrete examples of managerial decisions 2. To provide a framework for analyzing decisions (Six Steps to Decision Making) 4. To compare decisions of the private firm (where maximum profit is the objective) to public sector decisions (where maximum societal net benefit is the objective).

Answers to Back-of-the-Chapter Problems 1. Managerial economics is the analysis of important management decisions using the tools of economics. Most business decisions aremotivated by the goal of maximizing the firms profit. The tools ofmanagerial economics provide a guide to profit-maximizing decisions. decisions using the tools of economics. Most business decisions aremotivated by the

CHAPTER TEN GAME THEORY AND COMPETITIVE STRATEGY OBJECTIVES 1. To identify the similarities and differences among competitive situations. (Sizing up Competitive Situations) 2. To introduce game-theoretic analysis: payoff tables and equilibrium strategies. (Analyzing Payoff Tables) 3. To explore competitive strategies: entry deterrence and settings involving coordination and bargaining. (Competitive Strategy) 4. To analyze sequential and repeated competition (Sequential Competition). TEACHING SUGGESTIONS I.

Answers to Back-of-the-Chapter Problems 1. In a Nash equilibrium, each players chosen strategy is optimal, given the strategy of the other. Thus, neither side can profit by unilaterallydeviating. By comparison, a dominant strategy is optimal against any strategy the other player might choose. the strategy of the other. Thus, neither

CHAPTER ELEVEN REGULATION, PUBLIC GOODS, AND BENEFIT-COST ANALYSIS OBJECTIVES 1. To examine various market failures due to: monopoly, externalities, and imperfect information (Market Failures and Regulation). 2. To identify the class of public goods and to determine the optimal amount of these goods. (Public Goods) 3. To introduce benefit-cost analysis and the net benefit rule. (The Basics

Automobiles and Safety Since the late 1960s, the National Highway Traffic Safety Administration has set increasingly stringent standards for automobile safety. Accident avoidance standards (pertaining to brake systems, tires, and steering mechanisms) have been effective in reducing fatalities at relatively little cost. Occupant protection standards also have been crucial in saving lives, but these are much

Answers to Back-of-the-Chapter Problems 1. Although there could be some cost economies from such a merger, the main effect on consumers likely would be higher soft-drink prices. Aggressive price competition to claim market share would be a thing ofthe past. Because the merged entity would account for over

CHAPTER TWELVE DECISION MAKING UNDER UNCERTAINTY OBJECTIVES 1. To review the notions of uncertainty, probability, and expected value. (Uncertainty Probability and Expected Value) 2. To show how to draw decision trees and average them back. (Decision Trees) 3. To explore sequential decisions. (Sequential Decisions) 4. To introduce the concept of risk aversion. (Risk Aversion) 5. To show

ADDITIONAL MATERIALS I. Short Readings D. Gilbert and J. Scheck, Big Oil Companies Struggle to Justify Soaring Project Costs, The Wall Street Journal, January 29, 2014, p. A1. What are the Top Five Risks the World Faces in 2014? Knowledge@Wharton, January 22, 2014, http://knowledge.wharton.upenn.edu/article/what-are-the-top-five-risks- the-world-faces-in-2014/ J. B. Stewart, Studios Unfazed by Colossal Wrecks, The New York

Key West Fisheries Teaching Note A decision tree describing Harry Morgans basic problem is shown below. If Morgan rejects the contract, his monetary position at the end of the year depends on the price of tuna and the size of his catch. The expected value of this option is $49,500 after averaging over the

Answers to Back-of-the-Chapter Problems 1. a. The expected values at points E, D, C, B, and A in the decision tree are $15.5, $50, $30, $19.2, and $19.2. $15.5, $50, $30, $19.2, and $19.2. $15.5, $50, $30, $19.2, and $19.2. b. The manager is confused. Point D is a point of

CHAPTER THIRTEEN THE VALUE OF INFORMATION OBJECTIVES 1. To show how to incorporate new information into the manager's decision tree. (The Value of Information) 2. To show how to revise probabilities using joint probability tables and Bayes rule. (Revising Probabilities) 3. To present applications and examples of prediction pitfalls (Business Behavior and Decision Pitfalls). 4. To examine competitive bidding

II. Teaching the Nuts and Bolts A. General Tips. Assessing the value of information involves: 1) incorporating new information into the manager's decision tree, and 2) revising probabilities using joint probability tables or Bayes rule. We place at least as much emphasis on the first point as on the second.

Answers to Back-of-the-Chapter Problems 1. As tough as it may be to do, you should ignore your friends story. His experience represents a single data point. You already have gathered the best available information on the relative merits of different models.You had a clear choice based on this information; your friends singularexperience

10. a. According to the decision tree, the agency should not take the case to court: b. According to the joint table, Pr(P|Q) = .15/.31 = .484 and Pr(P|C) = .05/.69 = .07. Audit Result Padding Not Questionable .15 .16 .31 Clean .05 .64 .69 .20 .80 Questionable .15 .16 .31 Clean .05

CHAPTER FOURTEEN ASYMMETRIC INFORMATION AND ORGANIZATIONAL DESIGN OBJECTIVES 1. To show the strategic implications posed by asymmetric information. (Asymmetric Information) 2. To understand the incentive conflicts (including moral hazard) inherent in the relationship between principal and agent. (Principals, Agents, and Moral Hazard) 3. To identify the factors influencing the nature and breadth of the firm. (The Boundaries

D. A Supply Contract. (An expanded version of Problem 7) Firm S is about to contract to deliver lumber to Firm B. Firm S estimates that under normal circumstances, it can produce and deliver the lumber at a cost of $100,000. In recent months, however, the firm has been troubled by partial work

Answers to Back-of-the-Chapter Problems 1. a. We know that Pr(L) = .04, Pr(R | L) = .5, and Pr(R|N) = 1/16, where L denotes lemon, R denotes return, and N denotes normal car. The joint table is Lemon (L) Normal (N) Total Return (R) .02 .06 .08 Keep (K) .02 .90 .92

CHAPTER FIFTEEN BARGAINING AND NEGOTIATION OBJECTIVES 1. To identify the economic sources of mutually beneficial agreements -- namely, differences in values. 2. To assess the complications posed by multiple-issue negotiations (and to stress the value-maximization principle. (Multiple-Issue Negotiations) 3. To explore issues of negotiation strategy: under perfect information and under imperfect information. (Negotiation Strategy). TEACHING SUGGESTIONS I. Introduction and

VI. Negotiation Exercises Face-to-face negotiation is an excellent vehicle for engaging students and promoting learning by doing. The following exercises are good examples. To conduct the exercises, the instructor should distribute buyer and seller information sheets and pair the students. An easy way to create pairings is to hand out a chit to each

Selling a Maine House After reading these instructions, you will participate in a negotiation exercise involving two parties, a seller (you) and a potential buyer (your bargaining partner sitting next to you). The description of the bargaining setting and information about your role as seller are outlined below. In recent months you have thought about

Answers to Back-of-the-Chapter Problems 1. a. The plaintiffs expected court receipt (net of legal costs) is 50,000 - 15,000 = $35,000. The defendants expected court payment (including legal costs) is 50,000 + 15,000 = $65,000. The zone of agreement lies between these two amounts. If each side believes its winning chances are 60 percent,

CHAPTER SIXTEEN LINEAR PROGRAMMING OBJECTIVES 1. To become familiar with the types of problems that linear programming can solve. 2. To formulate LP problems. (Linear Programs) 3. To solve LP problems using graphs. (Graphing the LP Problem) 4. To relate LP to marginal analysis through the concept of shadow prices. (Shadow Prices) 5. To interpret the output from

Answers to Back-of-the-Chapter Problems 1. a. Increasing or decreasing returns to scale implies that either the objective function or some constraint is nonlinear. Thus, the LP formulation cannotbe used. function or some constraint is nonlinear. Thus, the LP formulation cannotbe used. function or some constraint is nonlinear. Thus, the LP formulation cannot be

CHAPTER SEVENTEEN AUCTIONS AND COMPETITIVE BIDDING OBJECTIVES 1. To demonstrate the potential advantages of auctions compared to posted prices, on the one hand, and to unconstrained negotiation, on the other, and to show how auctions can enhance revenue. 2. To analyze bidder strategies under various auction mechanisms including English auctions, Dutch auctions and sealed-bid auctions. 3.

Questions for Class Discussion 1. As a consultant for a major theater chain, your task is to predict the box office gross revenues (per screen) for a given film in a given city, week by week. Describe how you would set about making this kind of forecast. Which factors listed below might be relevant?

Answers to Back-of-the-Chapter Problems 1. a. Each buyer should bid bi = vi. If the buyer bids above her value, it makes a difference only when she outbids an opponent who bids bj > vi, in which case she obtains the good for a price bj above her value. In

CHAPTER TWO OPTIMAL DECISIONS USING MARGINAL ANALYSIS OBJECTIVES 1. To introduce the basic economic model of the firm (A Simple Model of the Firm) - The main focus is on determining the firms profit-maximizing level of output. - The main assumption is that there is a single product (or multiple, independent products) with deterministic demand and cost. 2. To

Answers to Back-of-the-Chapter Problems 1. This statement confuses the use of average values and marginal values. The proper statement is that output should be expanded so long as marginal revenue exceeds marginal cost. Clearly, average revenue is not the same as marginal revenue, nor is average cost identical to marginalcost. Indeed, if management

CHAPTER THREE DEMAND ANALYSIS AND OPTIMAL PRICING OBJECTIVES 1. To take a closer quantitative look at demand starting with a multi-variable demand equation and continuing with a verbal description. (Determinants of Demand) 2. To present the price elasticity of demand, other elasticities, and show how elasticities can be used to predict sales (Elasticity of Demand) 3. To show the

Answers to Back-of-the-Chapter Problems 1. The fact that increased sales coincided with higher prices does not disprove the law of downward-sloping demand. Clearly, other factors an increase in population and/or income, improved play of the hometeam, or increased promotion could have caused increased ticketsales, despite higher prices. 2. a. Q =

CHAPTER FOUR ESTIMATING AND FORECASTING DEMAND OBJECTIVES 1. To introduce the art and science of empirical analysis. 2. To examine the sources of data. (Collecting Data) 3. To give the student an intuitive feel for regression analysis. (Regression Analysis) 4. To explain the statistics that are generated by regression analysis. (Interpreting Regression Statistics) 5. To introduce the student

III. Cases Good Belly (1-429-252), University of Michigan, 2012. (Using regression analysis for marketing decisions.) Nils Baker (QA-0793), Darden Business Publishing, University of Virginia, 2012. Pilgrim Bank (A) (9-602-104), Harvard Business School, 2003. Teaching Note (5-602-131). Reyem Affiar (9-895-009), Harvard Business School, 1995. Teaching Note (5-895-022). Nopane Advertising Strategy (9-893-005), Harvard Business School,

Forecasting the Nickel Market Put yourself in the position of senior management of one of the worlds largest nickel mining companies in 1990. Currently your company has about a 30 percent share of world nickel sales, and your largest mine, in Canada, produces nickel more cheaply than anyone else. The company correctly predicted the high

Answers to Back-of-the-Chapter Problems 1. Survey methods are relatively inexpensive but are subject to potential problems: sample bias, response bias, and response accuracy. Test marketing avoids these problems by providing data on actual consumer purchases under partially controlled market conditions. Test marketing is much more costly than survey methods and

CHAPTER FIVE PRODUCTION OBJECTIVES 1. To introduce the concept of production and to lay the groundwork for the later discussion about cost. (Basic Production Concepts) 2. To explain short-run concepts including fixed inputs, marginal product, and diminishing marginal returns. (Production in the Short Run) 3. To explain, long-run concepts, including returns to scale, output elasticity, and

Answers to Back-of-the-Chapter Problems 1. Maximizing average output is typically non-optimal. First, we should emphasize that maximizing total output and maximizing average output are two different things. For instance, in Table 5.2, the firms maximum output is 403 units using 120 workers. In contrast, the firm wouldmaximize its average product by using 10 workers

CHAPTER SIX COST ANALYSIS OBJECTIVES 1. To explain relevant costs and related concepts. In particular, to contrast opportunity cost and fixed costs and to contrast accounting profits and economic profits. (Relevant Costs) 2. To explain the relationship between production and cost. To apply the concepts of the short run and long run to cost. (The Cost of

Answers to Back-of-the-Chapter Problems 1. The fact that the product development was lengthier and more expensive than initially anticipated is no reason to charge a higher price. These development costs have been sunk and are irrelevant for the pricingdecision. Price should be based on the products relevant costs (themarginal cost of producing

CHAPTER SEVEN PERFECT COMPETITION OBJECTIVES 1. To examine supply and demand under perfect competition. (The Basics of Supply and Demand) 2. To examine equilibrium in the short run and long run and the dynamics of entry and exit. (Competitive Equilibrium) 3. To study the efficiency of perfectly competitive markets. (Market Efficiency) 4. To examine issues in global competition and

Answers to Back-of-the-Chapter Problems 1. a. According to the law of supply and demand, the existence of a large body of Picassos artwork will tend to lower the value of anyindividual piece of work. body of Picassos artwork will tend to lower the value of anyindividual piece of work. body of Picassos artwork will

CHAPTER EIGHT MONOPOLY OBJECTIVES 1. To examine price and output decisions under pure monopoly. (Pure Monopoly) 2. To explore how monopolies are maintained through barriers to entry. (Barriers to Entry) 3. To contrast competitive and monopolistic outcomes. (Perfect Competition versus Pure Monopoly) 4. To analyze cartel behavior. (Cartels) 5. To discuss natural monopoly and regulation. (Natural Monopolies) 6. To

Answers to Back-of-the-Chapter Problems 1. a. The merger should mean the end of the prevailing cutthroat competition. The merged firm should set out to achieve the available monopoly profit. merged firm should set out to achieve the available monopoly profit. merged firm should set out to achieve the available monopoly profit. b. Formerly, cutting

CHAPTER NINE OLIGOPOLY OBJECTIVES 1. To provide an overview of Porters Five-Forces Framework. (Oligopoly) 2. To compare market structures in terms of degree of concentration. (Industry Concentration) 3. To present the basic models of quantity competition and price competition. 4. To introduce the prisoner's dilemma paradigm. (Price Wars and the Prisoners Dilemma) 5. To explore other dimensions of

Answers to Back-of-the-Chapter Problems 1. The conventional wisdom points to entry in loose oligopolies for two reasons: i) the market offers positive economic profits (unlike a perfectly competitive market), and ii) since the market is not dominatedby large firms, a new entrant has the potential to reap significantmarket-share gain over time (unlike a

When the marginal product of a variable input is zero, it implies that the firm is at the point where the total product is: a) increasing at an increasing rate. b) also equal to zero. c) at its maximum. d) decreasing at an increasing rate. e) increasing at a decreasing rate. Answer: c Answer: c Answer: c Which of

Liza is a manager of a leading soft drink manufacturing firm. Liza uses 10 months data and estimates the following demand equation: Q = 10 ' .5P + 1.5Y + .25PR (2) (.17) (.75) (.50) where P is the price of the soft drink manufactured by Liza's firm, Y refers

Amanda invests $500,000 in a new business venture. Which of the following correctly identifies the relevant opportunity cost that she faces? a) The potential profits from the business b) The discounted present value of future profits from the business c) The rate of interest that could have been earned on an a comparably

In a perfectly competitive market, industry demand is: P = 850 ' 2Q, and industry supply is: P = 250 + 4Q (Supply is the sum of the marginal cost curves of the firms in the industry). (a) Determine price and output under perfect competition. (b) Now suppose that all the firms

A manufacturer of nutritional products is formulating a new liquid vitamin supplement. A bottle of the new product must contain at least 30 units of vitamin B and 50 units of vitamin C. A unit of vegetable extract (V) contains 1.2 units of vitamin B and .8 units of vitamin C.

Provide an example of a competitive situation where there is a second-mover advantage. Answer: Suppose duopolists compete by setting prices and have identical demand and cost structures. Firm A sets its prices first, Firm B second. Clearly, Firm B has a potential second-mover advantage. It can always match Firm A's price

Predatory pricing: a) occurs when a large company sets price below cost to drive smaller firms out of business. b) is the practice of selling the same good at different prices to different consumers. c) means setting a very high price for a product to signal high product quality. d) occurs when firms in

A convenient way to represent decisions, chance events, and possible outcomes in choices under risk and uncertainty is known as a: a) probability distribution. b) decision table. c) decision tree. d) expected outcome tree. e) risk table. Answer: c Answer: c Answer: c Moral hazard occurs when: a) the principal purposely misleads the agent to obtain higher profits. b) limited information

(a) You are offered a choice between two lotteries, K and L: Lottery K: You win $1,000 with complete certainty. Lottery L: You win: $5,000 with probability .10 $1,000 with probability .75 $0 with probability .15 Compute the expected value of both lotteries, and indicate which you would choose. Explain your choice, using the concept

A price cut would increase the firm's profits by $2 million if demand is weak but would decrease profit by $3 million if demand proves to be strong. The firm's best assessment is a .3 probability that demand will be weak. The expected value of perfect information from market research

A firm will maximize profits and revenues at the same price when: a) the marginal cost is negligible or zero. b) the fixed costs are zero. c) the marginal revenue is zero. d) the demand for the good is unit elastic. e) the demand for the good is highly elastic. Answer: a Answer: a Answer: a An investor estimates

A monopolist maximizes profit by producing: a) on the inelastic portion of the demand curve b) at the level where average cost is minimized c) at the point where the cost of producing the last unit of output equals price. d) at the output level where marginal revenue equals marginal cost e) at the level

Demand in a market dominated by two firms (a Cournot duopoly) is determined according to: P = 300 ' 4(Q1 + Q2), where P is the market price, Q1 is the quantity demanded by Firm 1, and Q2 is the quantity demanded by Firm 2. The marginal cost for each firm

Firm X is currently selling a consumer good at a standard price, but is also considering cutting its price. The main risk facing the firm concerns the course of the economy in the near-term: whether the economy will grow at a steady pace (G) or whether it will experience a

In evaluating public programs, benefit-cost analysis: a) takes into account only the benefits that society gains from public programs. b) states that a program should be undertaken only if it generates revenue. c) states that a program should be undertaken only if total benefits exceed total costs. d) takes into account only the direct

The following figure shows the domestic demand and supply curves for a good. With free trade, the price of the good in the domestic market is P3. The government introduces a 5% tariff in the market which raises the domestic price to P2. Figure 7-1 Refer to Figure 7-1. If the government

How can the quality of a product serve as an entry barrier in a market? Answer: In some industries, the quality of the product serves as an entry barrier. New firms cannot expect to match the existing quality of the product and therefore cannot profitably enter themarket. Note that these differences

Which of the following auctions are strategically equivalent for bidders holding private values? a) The English and Dutch auctions. b) The sealed-bid and second-price auctions. c) The English and Vickrey auctions. d) The Vickrey and Dutch auctions. e) The Vickrey and sealed-bid auctions. Answer: c Answer: c Answer: c The following table lists the payoffs for Firm 1 and

An individual is uncertain whether to bet on a football game. He believes that the probability of his team winning is 40%. If his team wins, he will receive $180. If his team loses, he'll pay $120. If the decision is based on the expected value criterion, then the individual

Carefully explain why adjusted R2is always less than R2. Answer: Mathematically, the formula for adjusted R2is such that for a finite number of observationsN, the adjusted R2will always be less than R2. The adjustment corrects for the fact that adding explanatory variables necessarily increases the proportion of explained variation in the

Consumer surveys indicate that 40% of newspaper readers read automobile ads and 5% of those who read the ads actually purchase automobiles. On the other hand, 50% of magazine readers read automobile ads but only 3% of those who read the ads actually buy a car. Among those who do

What are the assumptions of the kinked demand curve model? What is its main conclusion about oligopoly behavior? How realistic is the model? Answer: The kinked demand curve model presumes that the firm determines its price behavior based on a prediction about its rivals' reactions to potential price changes. The firm

Most people believe that monopolies always have excessive profits, yet some unregulated monopolies might have very low earnings. (a) Why might a monopoly have little or no economic value? Explain. (b) If you were given a chance to enter a perfectly competitive industry, or a monopolistic industry, which would you choose? Explain Answer:

Use economic reasoning to comment on the following statement: 'In a market where products appear to be similar but significant quality and performance differences exist, lack of information about product quality by some proportion of customers justifies government intervention.' Answer: Decisions about government intervention in such markets involve value judgments. The

Which of the following is true of a decision tree? a) It's the basis for making logical decisions in the absence of uncertainty. b) It represents decisions, chance events, and possible outcomes in choices under risk and uncertainty. c) It's use to show the sequential moves and countermoves of strategic rivals. d) It calculates

The minimum price that a seller is willing to accept for his product and the maximum price a buyer is willing to pay for the product are referred to as their: a) bid prices. b) reservation prices. c) offer prices. d) aspiration prices. e) take it or leave it offers. Answer: b Answer: b Answer: b A regression analysis

Carefully explain how short-run equilibrium and long-run equilibrium in monopolistic competition differ. Use graphs to illustrate your answer. Answer: The short-run equilibrium for the monopolistic competitor is akin to that of monopoly. Thefirm can expect to earn positive economic profit, as shown by P* and Q* in the first graph.However, in

Given that digital music players are used to play music downloaded from the Internet, a fall in the price of digital music players will lead to: a) an increase in the price of a song download. b) an increase in the demand for downloaded songs. c) an increase in the price of broadband plans. d)

A faulty gasket on a piece of machinery supplied by Firm Z caused a fluid leak that damaged equipment in Factory X. Determine the range of out-of-court settlements when the expected value of litigation for the two firms is $65,000 in favor of Factory X. The court costs for Firm Z

Which of the following statements is true regarding the efficiency of using pollution fees versus quantity standards to regulate pollution? a) Quantity standards are more efficient fees because they can be used even in the presence of incomplete information. b) Pollution fees are more efficient because they ensure that all firms pay

George Stigler, a Nobel laureate in economics, suggested that one reason why oligopolies have prices higher than competitive industries is that tacit coordination concerning output and price is much easier when there are only a few competing firms. In addition, it is easier to detect cheating on some agreed-upon price

One of the major steps in decision-making is to explore the alternatives. Do most managerial decisions have a few, limited number of options? Explain. Illustrate your answer with an appropriate example. Answer: Most decisions have several (often many) competing options. Even when the choices are limited, there are often more alternatives

The use of intuitive prediction in forecasting: a) puts the wrong weights on different kinds of information. b) provides approximately correct decisions most of the time. c) is objective and reliable. d) likely to produce inaccurate and biased results. e) is consistent with probabilistic prediction. Answer: d Answer: d Answer: d In an infinitely repeated prisoner's dilemma (such as

Suppose that demand for and supply of a commodity in a market are shown on a graph with price on the vertical axis and quantity on the horizontal axis. The y-intercept of the demand curve is equal to $30. The equilibrium price and quantity are $20 and 300 units respectively. What

The following figure shows the demand curve ES, the average cost curve AC, the marginal cost curve MC, and the marginal revenue curve MR for a firm. Figure 8-1 Refer to Figure 8-1. If the firm operates as a monopoly in an unregulated market, its profit-maximizing price and output would be _____, respectively. a)

The production of a good with positive externalities will increase when: a) the government provides a subsidy for the good. b) the marginal internal cost of the good is higher than the marginal total cost. c) there is a price ceiling of zero in the market. d) the producer sells the good for a

What does the law of diminishing marginal returns state? a) When all inputs to production are increased in equal proportions, output will eventually decrease. b) When one input is increased, with all other inputs unchanged, the marginal product of the input will eventually decline. c) When one input is held constant, and all

The following payoff table depicts a zero-sum game: Table 10-4 Refer to Table 10-4. The equilibrium of the zero-sum game is: a) R1 versus C1. b) R1 versus C2. c) R2 versus C2. d) R3 versus C3. e) R2 versus C3. Answer: d Answer: d Answer: d The Juice Shop sells iced soft drinks. Management has found that demand is

Refer to Figure 11-1. The external cost associated with producing the good is: a) $5. b) $7. c) $8. d) $12. e) $2. Answer: e Answer: e Answer: e In each case below, find the profit-maximizing level of output. Verify that each output level is a maximum by checking the second derivative. (a) = '50 + 200Q ' 10Q2 (b)