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Index
Practice, Engage, and Assess
Managerial Economics and Strategy
The Pearson Series in Economics
Managerial Economics and Strategy
Brief Contents
Contents
Preface
What’s New in the Second Edition
Main Innovations
Features
Alternative Organizations
Supplements
1 Introduction
1.1 Managerial Decision Making
Profit
Trade-Offs
Other Decision Makers
Strategy
1.2 Economic Models
Simplifying Assumptions
Testing Theories
Positive and Normative Statements
Summary
2 Supply and Demand
Learning Objectives
2.1 Demand
The Demand Curve
Effects of a Price Change on the Quantity Demanded.
Effects of Other Factors on Demand.
The Demand Function
Summing Demand Curves
2.2 Supply
The Supply Curve
Effects of Price on Supply.
Effects of Other Variables on Supply.
The Supply Function
Summing Supply Curves
2.3 Market Equilibrium
Using a Graph to Determine the Equilibrium
Using Algebra to Determine the Equilibrium
Forces That Drive the Market to Equilibrium
2.4 Shocks to the Equilibrium
Effects of a Shift in the Demand Curve
Q&A 2.1
Answer
Effects of a Shift in the Supply Curve
Effects of Shifts in both Supply and Demand Curves
Q&A 2.2
Answer
2.5 Effects of Government Interventions
Policies That Shift Curves
Price Controls
Price Ceilings.
Price Floors.
Why Supply Need Not Equal Demand.
Sales Taxes
Equilibrium Effects of a Specific Tax.
The Same Equilibrium No Matter Who Pays the Tax.
Pass-Through.
Q&A 2.3
Answer
2.6 When to Use the Supply-and-Demand Model
Summary
Questions
1. Demand
2. Supply
3. Market Equilibrium
4. Shocks to the Equilibrium
5. Effects of Government Interventions
6. When to Use the Supply-and-Demand Model
7. Managerial Problem
8. MyEconLab Spreadsheet Exercises 17
3 Empirical Methods for Demand Analysis
Learning Objectives
3.1 Elasticity
The Price Elasticity of Demand
Arc Elasticity.
Q&A 3.1
Answer
Point Elasticity.
Elasticity Along the Demand Curve
Q&A 3.2
Answer
Downward-Sloping Linear Demand Curves.
Horizontal Demand Curves.
Vertical Demand Curves.
Other Demand Elasticities
Demand Elasticities over Time
Other Elasticities
Estimating Demand Elasticities
3.2 Regression Analysis
A Demand Function Example
The Demand Function and the Inverse Demand Function.
Random Errors.
Regression Analysis Using Microsoft Excel.
Ordinary Least Squares Regression.
Multivariate Regression
Q&A 3.3
Answer
Goodness of Fit and the R 2 [&~centgothbldmath~~COLOR~[H3 RUST]R^{~centgothbld~2}~norm~~COLOR~[Black]&] Statistic
3.3 Properties and Statistical Significance of Estimated Coefficients
Repeated Samples
Desirable Properties for Estimated Coefficients
A Focus Group Example
Confidence Intervals
Hypothesis Testing and Statistical Significance
3.4 Regression Specification
Selecting Explanatory Variables
Q&A 3.4
Answer
Correlation and Causation.
Omitted Variables.
Functional Form
3.5 Forecasting
Extrapolation
Trends.
Seasonal Variation.
Nonlinear Trends.
Theory-Based Econometric Forecasting
Summary
Questions
1. Elasticity
2. Regression Analysis
3. Properties and Statistical Significance of Estimated Coefficients
4. Regression Specification
5. Forecasting
6. Managerial Problem
7. MyEconLab Spreadsheet Exercises23
4 Consumer Choice
Learning Objectives
4.1 Consumer Preferences
Properties of Consumer Preferences
Completeness.
Transitivity.
More Is Better.
Preference Maps
Preferences and Indifference Curves.
Willingness to Substitute Between Goods.
Curvature of Indifference Curves.
4.2 Utility
Utility Functions
Ordinal and Cardinal Utility
Marginal Utility
Marginal Rates of Substitution
4.3 The Budget Constraint
Slope of the Budget Line
Effects of a Change in Price on the Opportunity Set
Effects of a Change in Income on the Opportunity Set
Q&A 4.1
Answer
Q&A 4.2
Answer
4.4 Constrained Consumer Choice
The Consumer’s Optimal Bundle
Interior Solutions.
Q&A 4.3
Answer
Corner Solutions.
Q&A 4.4
Answer
Promotions
Buy One, Get One Free Promotion.
BOGOF Versus a Half-Price Promotion.
4.5 Deriving Demand Curves
4.6 Behavioral Economics
Tests of Transitivity
Endowment Effects
Salience
Summary
Questions
1. Consumer Preferences
2. Utility
3. The Budget Constraint
4.Constrained Consumer Choice
5. Deriving Demand Curves
6. Behavioral Economics
7. Managerial Problem
8. MyEconLab Spreadsheet Exercises 11
Appendix 4A The Marginal Rate of Substitution
Appendix 4B The Consumer Optimum
5 Production
Learning Objectives
5.1 Production Functions
5.2 Short-Run Production
The Total Product Function
The Marginal Product of Labor
Q&A 5.1
Answer
The Average Product of Labor
Graphing the Product Curves
The Effect of Extra Labor.
Relationships Among Product Curves.
The Law of Diminishing Marginal Returns
5.3 Long-Run Production
Isoquants
Properties of Isoquants.
Shapes of Isoquants.
Substituting Inputs
Substitutability of Inputs Varies Along an Isoquant.
Q&A 5.2
Answer
Substitutability of Inputs and Marginal Products.
Cobb-Douglas Production Functions.
5.4 Returns to Scale
Constant, Increasing, and Decreasing Returns to Scale
Q&A 5.3
Answer
Varying Returns to Scale
5.5 Innovation
Process Innovation
Organizational Innovation
Summary
Questions
1. Production Functions
2. Short-Run Production
3. Long-Run Production
4. Returns to Scale
5. Innovation
6. Managerial Problem
7. MyEconLab Spreadsheet Exercises 9
6 Costs
Learning Objectives
6.1 The Nature of Costs
Opportunity Costs
Q&A 6.1
Answer
Costs of Durable Inputs
Sunk Costs
6.2 Short-Run Costs
Common Measures of Cost
Fixed Cost, Variable Cost, and Total Cost.
Average Cost.
Marginal Cost.
Cost Curves
Production Functions and the Shapes of Cost Curves
The Variable Cost Curve.
The Marginal Cost Curve.
The Average Cost Curves.
Short-Run Cost Summary
6.3 Long-Run Costs
Input Choice
The Isocost Line.
Combining Cost and Production Information.
Factor Price Changes.
Q&A 6.2
Answer
The Shapes of Long-Run Cost Curves
Q&A 6.3
Answer
Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves
6.4 The Learning Curve
6.5 The Costs of Producing Multiple Goods
Summary
Questions
1. The Nature of Costs
2. Short-Run Costs
3. Long-Run Costs
4. The Learning Curve
5. The Costs of Producing Multiple Goods
6. Managerial Problem
7. MyEconLab Spreadsheet Exercises 7
Appendix 6A Long-Run Cost Minimization
7 Firm Organization and Market Structure
Learning Objectives
7.1 Ownership and Governance of Firms
Private, Public, and Nonprofit Firms
Ownership of For-Profit Firms
Publicly Traded and Closely Held Corporations.
Liability.
Firm Size.
Firm Governance
7.2 Profit Maximization
Profit
Two Steps to Maximizing Profit
Output Rules.
Q&A 7.1
Answer
Shutdown Rules.
Profit over Time
7.3 Owners’ Versus Managers’ Objectives
Consistent Objectives
Contingent Rewards.
Profit Sharing.
Q&A 7.2
Answer
Conflicting Objectives
Revenue Objectives.
Q&A 7.3
Answer
Other Objectives.
Corporate Social Responsibility
Ethical Obligations of Managers.
Strategic CSR.
Monitoring and Controlling a Manager’s Actions
Takeovers and the Market for Corporate Control
7.4 The Make or Buy Decision
Stages of Production
Vertical Integration
Quasi-Vertical Integration.
Contracts Versus Spot Markets.
Degrees of Vertical Integration.
Profitability and the Supply Chain Decision
Transaction Costs and Opportunistic Behavior.
Security and Flexibility of Supply.
Avoiding Government Intervention.
Market Size and the Life Cycle of a Firm
7.5 Market Structure
The Four Main Market Structures
Perfect Competition.
Monopoly.
Oligopoly.
Monopolistic Competition.
Comparison of Market Structures
Road Map to the Rest of the Book
Summary
Questions
1. Ownership and Governance of Firms
2. Profit Maximization
3. Owners’ Versus Managers’ Objectives
4. The Make or Buy Decision
5. Market Structure
6. Managerial Problem
7. MyEconLab Spreadsheet Exercises 26
Appendix 7A Interest Rates, Present Value, and Future Value
8 Competitive Firms and Markets
Learning Objectives
8.1 Perfect Competition
Characteristics of a Perfectly Competitive Market
Large Numbers of Buyers and Sellers.
Identical Products.
Full Information.
Negligible Transaction Costs.
Free Entry and Exit.
Perfect Competition in the Chicago Mercantile Exchange.
Deviations from Perfect Competition
8.2 Competition in the Short Run
How Much to Produce
Q&A 8.1
Answer
Whether to Produce
The Market Price Is Above Minimum AC.
The Market Price Is Between the Minimum AC and the Minimum AVC.
The Market Price Is Less than the Minimum AVC.
The Short-Run Firm Supply Curve
The Short-Run Market Supply Curve
Short-Run Market Supply with Identical Firms.
Short-Run Market Supply with Firms That Differ.
Short-Run Competitive Equilibrium
8.3 Competition in the Long Run
Long-Run Competitive Profit Maximization
The Long-Run Firm Supply Curve
The Long-Run Market Supply Curve
Entry and Exit.
Long-Run Market Supply with Identical Firms and Free Entry.
Long-Run Market Supply When Entry Is Limited.
Long-Run Market Supply When Firms Differ.
Long-Run Competitive Equilibrium
Q&A 8.2
Answer
Zero Long-Run Profit with Free Entry
8.4 Competition Maximizes Economic Well-Being
Consumer Surplus
Measuring Consumer Surplus Using a Demand Curve.
Effects of a Price Change on Consumer Surplus.
Producer Surplus
Measuring Producer Surplus Using a Supply Curve.
Q&A 8.3
Answer
Using Producer Surplus.
Q&A 8.4
Answer
Competition Maximizes Total Surplus
Effects of Government Intervention
Q&A 8.5
Answer
Summary
Questions
1. Perfect Competition
2. Competition in the Short Run
3. Competition in the Long Run
4. Competition Maximizes Economic Well-Being
5. Managerial Problem
6. MyEconLab Spreadsheet Exercises 22
9 Monopoly
Learning Objectives
9.1 Monopoly Profit Maximization
Marginal Revenue
Marginal Revenue and Price.
The Marginal Revenue Curve.
Q&A 9.1
Answer
Marginal Revenue and Price Elasticity of Demand.
Choosing Price or Quantity
Two Steps to Maximizing Profit
Profit-Maximizing Output.
The Shutdown Decision.
Effects of a Shift of the Demand Curve
9.2 Market Power
Market Power and the Shape of the Demand Curve
The Lerner Index
Q&A 9.2
Answer
Sources of Market Power
9.3 Market Failure Due to Monopoly Pricing
Q&A 9.3
Answer
9.4 Causes of Monopoly
Cost-Based Monopoly
Cost Advantages.
Natural Monopoly.
Q&A 9.4
Answer
Government Creation of Monopoly
Barriers to Entry.
Patents.
9.5 Advertising
Deciding Whether to Advertise
How Much to Advertise
Q&A 9.5
Answer
9.6 Networks, Dynamics, and Behavioral Economics
Network Externalities
Direct Size Effects.
Indirect Effects.
Network Externalities and Behavioral Economics
Network Externalities as an Explanation for Monopolies
Summary
Questions
1. Monopoly Profit Maximization
2. Market Power
3. Market Failure Due to Monopoly Pricing
4. Causes of Monopoly
5. Advertising
6. Networks, Dynamics, and Behavioral Economics
7. Managerial Problem
8. MyEconLab Spreadsheet Exercises 25
10 Pricing with Market Power
Learning Objectives
10.1 Conditions for Price Discrimination
Why Price Discrimination Pays
Which Firms Can Price Discriminate
Not All Price Differences Are Price Discrimination
Types of Price Discrimination
10.2 Perfect Price Discrimination
How a Firm Perfectly Price Discriminates
Perfect Price Discrimination Is Efficient but Harms Some Consumers
Q&A 10.1
Answer
Individual Price Discrimination
10.3 Group Price Discrimination
Group Price Discrimination with Two Groups
A Graphical Approach.
Prices and Elasticities.
Q&A 10.2
Answer
Identifying Groups
Effects of Group Price Discrimination on Total Surplus
Group Price Discrimination Versus Competition.
Group Price Discrimination Versus Single-Price Monopoly.
10.4 Nonlinear Price Discrimination
10.5 Two-Part Pricing
Two-Part Pricing with Identical Consumers
Two-Part Pricing with Differing Consumers
10.6 Bundling
Pure Bundling
Mixed Bundling
Q&A 10.3
Answer
Requirement Tie-In Sales
10.7 Peak-Load Pricing
Summary
Questions
1. Conditions for Price Discrimination
2. Perfect Price Discrimination
3. Group Price Discrimination
4. Nonlinear Price Discrimination
5. Two-Part Pricing
6. Bundling
7. Peak-Load Pricing
8. Managerial Problem
9. MyEconLab Spreadsheet Exercises 23
11 Oligopoly and Monopolistic Competition
Learning Objectives
11.1 Cartels
Why Cartels Succeed or Fail
Why Cartels Form.
Why Cartels Fail.
Maintaining Cartels
Detection and Enforcement.
Government Support.
Barriers to Entry.
11.2 Cournot Oligopoly
Airlines
A Graphical Approach.
An Algebraic Approach.
The Number of Firms
Nonidentical Firms
Unequal Costs.
Q&A 11.1
Answer
Differentiated Products.
Q&A 11.2
Answer
Mergers
11.3 Bertrand Oligopoly
Identical Products
Best-Response Curves.
Bertrand Versus Cournot.
Differentiated Products
11.4 Monopolistic Competition
Equilibrium
Q&A 11.3
Answer
Profitable Monopolistically Competitive Firms
Summary
Questions
1. Cartels
2. Cournot Oligopoly
3. Bertrand Oligopoly
4. Monopolistic Competition
5. Managerial Problem
6. MyEconLab Spreadsheet Exercises 16
Appendix 11A Cournot Oligopoly with Many Firms
Appendix 11B Nash-Bertrand Equilibrium
12 Game Theory and Business Strategy
Learning Objectives
12.1 Oligopoly Games
Dominant Strategies
Best Responses
Failure to Maximize Joint Profits
Q&A 12.1
Answer
12.2 Types of Nash Equilibria
Multiple Equilibria
Cheap Talk.
The Pareto Criterion.
Mixed-Strategy Equilibria
Mixed-Strategy Only Nash Equilibria.
Both Pure and Mixed-Strategy Equilibria.
Q&A 12.2
Answer
12.3 Information and Rationality
Incomplete Information
Rationality
Bounded Rationality.
Maximin Strategies.
12.4 Bargaining
Bargaining Games
The Nash Bargaining Solution
Q&A 12.3
Answer
Inefficiency in Bargaining
12.5 Auctions
Elements of Auctions
Number of Units.
Format of Bidding.
Value.
Bidding Strategies in Private-Value Auctions
Second-Price Auction Strategies.
English Auction Strategy.
Equivalence of Auction Outcomes.
The Winner’s Curse
Summary
Questions
1. Oligopoly Games
2. Types of Nash Equilibria
3. Information and Rationality
4. Bargaining
5. Auctions
6. Managerial Problem
7. MyEconLab Spreadsheet Exercises 21
13 Strategies over Time
Learning Objectives
13.1 Repeated Games
Strategies and Actions in Dynamic Games
Cooperation in a Repeated Prisoner’s Dilemma Game
Implicit Versus Explicit Collusion
Finitely Repeated Games
13.2 Sequential Games
Stackelberg Oligopoly
Credible Threats
Q&A 13.1
Answer
13.3 Deterring Entry
Exclusion Contracts
Limit Pricing
Q&A 13.2
Answer
Entry Deterrence in a Repeated Game
13.4 Cost and Innovation Strategies
Investing to Lower Marginal Cost
Learning by Doing
Raising Rivals’ Costs
Q&A 13.3
Answer
13.5 Disadvantages of Moving First
The Holdup Problem
Too-Early Product Innovation
13.6 Behavioral Game Theory
Ultimatum Games
An Experiment.
Reciprocity.
Levels of Reasoning
Summary
Questions
1. Repeated Games
2. Sequential Games
3. Deterring Entry
4. Cost and Innovation Strategies
5. Disadvantages of Moving First
6. Behavioral Game Theory
7. Managerial Problem
8. MyEconLab Spreadsheet Exercises 16
Appendix 13A A Mathematical Approach to Stackelberg Oligopoly
14 Managerial Decision Making Under Uncertainty
Learning Objectives
14.1 Assessing Risk
Probability
Frequency.
Subjective Probability.
Probability Distributions.
Expected Value
Q&A 14.1
Answer
Variance and Standard Deviation
14.2 Attitudes Toward Risk
Expected Utility
Risk Aversion
Unwillingness to Take a Fair Bet.
Q&A 14.2
Answer
The Risk Premium.
Risk Neutrality
Risk Preference
Risk Attitudes of Managers
14.3 Reducing Risk
Obtaining Information
Diversification
Correlation and Diversification.
Diversification Through Mutual Funds.
Insurance
Determining the Amount of Insurance to Buy.
Q&A 14.3
Answer
Fairness and Insurance.
Insurance and Diversifiable Risks.
14.4 Investing Under Uncertainty
Risk-Neutral Investing
Risk-Averse Investing
Q&A 14.4
Answer
14.5 Behavioral Economics and Uncertainty
Biased Assessment of Probabilities
The Gambler’s Fallacy.
Overconfidence.
Violations of Expected Utility Theory
Framing.
The Certainty Effect.
Prospect Theory
Comparing Expected Utility and Prospect Theories.
Properties of Prospect Theory.
Summary
Questions
1. Assessing Risk
2. Attitudes Toward Risk
3. Reducing Risk
4. Investing Under Uncertainty
5. Behavioral Economics and Uncertainty
6. Managerial Problem
7. MyEconLab Spreadsheet Exercises 24
15 Asymmetric Information
Learning Objectives
15.1 Adverse Selection
Adverse Selection in Insurance Markets
Products of Unknown Quality
Symmetric Information Market Equilibrium.
Asymmetric Information Market Equilibrium.
Q&A 15.1
Answer
Varying Quality Under Asymmetric Information.
Q&A 15.2
Answer
15.2 Reducing Adverse Selection
Restricting Opportunistic Behavior
Universal Coverage.
Laws to Prevent Opportunism.
Equalizing Information
Screening.
Signaling.
Third-Party Information.
15.3 Moral Hazard
Moral Hazard in Insurance Markets
Moral Hazard in Principal-Agent Relationships
Reducing Moral Hazard Using Efficient Contracts.
Symmetric Information.
Asymmetric Information.
15.4 Using Contracts to Reduce Moral Hazard
Fixed-Fee Contracts
Contingent Contracts
State-Contingent Contracts.
Profit-Sharing Contracts.
Bonuses and Options.
Piece Rates and Commissions.
Q&A 15.4
Answer
15.5 Using Monitoring to Reduce Moral Hazard
Hostages
Bonding.
Deferred Payments.
After-the-Fact Monitoring
Summary
Questions
1. Adverse Selection
2. Reducing Adverse Selection
3. Moral Hazard
4. Using Contracts to Reduce Moral Hazard
5. Using Monitoring to Reduce Moral Hazard
6. Managerial Problem
7. MyEconLab Spreadsheet Exercises 14
16 Government and Business
Learning Objectives
16.1 Market Failure and Government Policy
The Pareto Principle
Cost-Benefit Analysis
16.2 Regulation of Imperfectly Competitive Markets
Regulating to Correct a Market Failure
Optimal Price Regulation.
Non-Optimal Price Regulation Due to Poor Information.
Q&A 16.1
Answer
Non-Optimal Price Regulation Due to Inability to Subsidize.
Regulatory Capture
Applying the Cost-Benefit Principle to Regulation
16.3 Antitrust Law and Competition Policy
Mergers
Predatory Actions
Vertical Relationships
Resale Price Maintenance.
Refusal to Deal.
Exclusive Dealing.
Price Discrimination.
16.4 Externalities
The Inefficiency of Competition with Externalities
Reducing Externalities
Emissions Standards.
Emission Fees.
Q&A 16.2
Answer
Assigning Property Rights.
Environmental Corporate Social Responsibility.
The Coase Theorem
16.5 Open-Access, Club, and Public Goods
Open-Access Common Property
Government Regulation of Common Property.
Assigning Property Rights.
Club Goods
Public Goods
Free Riding.
Reducing Free Riding.
16.6 Intellectual Property
Patents
Advantages and Disadvantages of Patents.
Q&A 16.3
Answer
Alternatives to Patents.
Copyright Protection
Summary
Questions
1.Market Failure and Government Policy
2.Regulation of Imperfectly Competitive Markets
3.Antitrust Law and Competition Policy
4.Externalities
5.Open-Access, Club, and Public Goods
6. Intellectual Property
7. Managerial Problem
8. MyEconLab Spreadsheet Exercises19
17 Global Business
Learning Objectives
17.1 Reasons for International Trade
Comparative Advantage
Gains from Trade Between Countries.
Gains from Intra-Firm Trade.
Q&A 17.1
Answer
Increasing Returns to Scale
Country Size.
Product Variety.
17.2 Exchange Rates
Determining the Exchange Rate
Exchange Rates and the Pattern of Trade
Managing Exchange Rate Risk
17.3 International Trade Policies
Quotas and Tariffs in Competitive Markets
Free Trade Versus a Ban on Imports.
Free Trade Versus a Tariff.
Free Trade Versus a Quota.
Q&A 17.2
Answer
Rent Seeking
Noncompetitive Reasons for Trade Policy
Creating Market Power.
Strategic Trade Policy.11
Contingent Protection.
Trade Liberalization and the World Trading System
Trade Liberalization Problems
17.4 Multinational Enterprises
Becoming a Multinational
International Transfer Pricing
Profit-Maximizing Transfer Pricing.
Q&A 17.3
Answer
Tax Avoidance.
17.5 Outsourcing
Summary
Questions
1. Reasons for International Trade
2. Exchange Rates
3. International Trade Policies
4. Multinational Enterprises
5. Outsourcing
6. Managerial Problem
7. MyEconLab Spreadsheet Exercises 25
Answers to Selected Questions
Definitions
References
Sources for Managerial Problems, Mini-Cases, and Managerial Implications
Index
Number
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
Z
Credits
Featured Mini-Cases in This Book
Featured Managerial Implications in This Book
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