Dominick Salvatore
 

Managerial Economics in a Global Economy
4th edition, ISBN 0-03-031158-6



Contents in Brief

Case Studies

Preface

           PART ONE: INTRODUCTION

                                     CHAPTER 1    The Nature and Scope of Managerial Economics

           APPENDIX: The Basics of Demand, Supply, and Equilibrium

                                     CHAPTER 2    Optimization Techniques and New Management Tools

           INTEGRATING CASE STUDY ONE:

           Michael Dell Turns the PC World Inside Out

           PART TWO: DEMAND ANALYSIS

                                     CHAPTER 3    Demand Theory

           APPENDIX: Behind the Market Demand Curve—The Theory of Consumer Choice

                                     CHAPTER 4    Demand Estimation

                                     CHAPTER 5    Demand Forecasting

           APPENDIX: Input-Output Forecasting

           INTEGRATING CASE STUDY TWO:

           Estimating and Forecasting the U.S. Demand for Electricity

           PART THREE: PRODUCTION AND COST ANALYSIS

                                     CHAPTER 6    Production Theory and Estimation

           APPENDIX: Production Analysis with Calculus

                                     CHAPTER 7    Cost Theory and Estimation

           APPENDIX: Cost Analysis with Calculus

                                     CHAPTER 8    Linear Programming

           INTEGRATING CASE STUDY THREE:

           Production and Cost Functions in the Petroleum Industry, Duality and Linear Programming

           PART FOUR: MARKET STRUCTURE AND PRICING PRACTICES

                                     CHAPTER 9    Market Structure: Perfect Competition, Monopoly, and Monopolistic Competition

           APPENDIX: Profit Maximization with Calculus

                                     CHAPTER 10 Oligopoly and Strategic Behavior

           APPENDIX: Oligopoly Theory with Calculus

                                     CHAPTER 11 Pricing Practices

           APPENDIX: Third-Degree Price Discrimination with Calculus

           INTEGRATING CASE STUDY FOUR:

           The Art of Devising Air Fares

           PART FIVE: REGULATION, RISK ANALYSIS, AND CAPITAL BUDGETING

                                     CHAPTER 12 Regulation and Antitrust: The Role of Government in the Economy

                                     CHAPTER 13 Risk Analysis

                                     CHAPTER 14 Long-Run Investment Decisions: Capital Budgeting

           INTEGRATING CASE STUDY FIVE:

           Regulation, Risk, Capital Budgeting, and the Price of International Telephone Calls

           APPENDIXES

                                     APPENDIX A:                Compounding, Discounting, and Present Value

                                     APPENDIX B:                Interest Factor Tables

                                     APPENDIX C:                Statistical Tables

                                     APPENDIX D:                Answers to Selected (Asterisked) Problems

           Glossary

           Indexes

Internet Site Addresses  

 

Detailed Table of Contents

Case Studies
Preface

 

 

PART ONE: INTRODUCTION

CHAPTER 1The Nature and Scope of Managerial Economics

  

1-1       The Scope of Managerial Economics

Definition of Managerial Economics
Relationship to Economic Theory
Relationship to the Decision Sciences
Relationship to the Functional Areas of Business Administration Studies

Case Study 1-1: Decision Making in Business and Military Strategy
Case Study 1-2: The Management Revolution

  

1-2       The Theory of the Firm

Reasons for the Existence of Firms and Their Functions
The Objective and Value of the Firm
Constraints on the Operation of the Firm
Limitations of the Theory of the Firm

Case Study 1-3: The Objective and Strategy of Firms in the Cigarette Industry
Case Study 1-4: The Virtual Corporation

  

1-3       The Nature and Function of Profits

Business Versus Economic Profit Theories of Profit
Function of Profit

Case Study 1-5: Profits in the Personal Computer Industry

  

1-4       Business Ethics

Case Study 1-6: Business Ethics at Boeing

  

1-5       The International Framework of Managerial Economics

Case Study 1-7: The Rise of the Global Corporation

Case Study 1-8: The Global Business Leader

Case Study 1-9: The World's Most Admired Companies

 

1-6       Managerial Economics and the Internet

Case Study 1-10: The Most Important Internet Site Addresses for Managerial Economics

Summary · Discussion Questions · Problems

 

APPENDIX:    The Basics of Demand, Supply, and Equilibrium

The Demand Side of the Market

The Supply Side of the Market

The Equilibrium Price

Shift in the Demand Curve and Equilibrium

Shift in the Supply Curve and Equilibrium

Case Study 1-11: Changes in Demand and Supply ad the Price of PCs

 

 Supplementary Readings · Internet Site Addresses

  

CHAPTER 2Optimization Techniques and New Management Tools

 

2-1       Methods of Expressing Economic Relationships

  

2-2       Total, Average, and Marginal Relationships

Total, Average, and Marginal Cost
Geometric Derivation of the Average- and Marginal-Cost Curves

Case Study 2-1: Total, Average, and Marginal Cost in the U.S. Steel Industry

 

2-3       Optimization Analysis

Profit Maximization by the Total-Revenue and Total-Cost Approach
Optimization by Marginal Analysis

Case Study 2-2: Optimal Pollution Control

 

2-4       Differential Calculus: The Derivative and Rules of Differentiation

The Concept of the Derivatives

Rules of Differentiation

 

 2-5      Optimization with Calculus

Determining a Maximum or a Minimum by Calculus
Distinguishing Between a Maximum and a Minimum: The Second Derivative

 

2-6       Multivariate Optimization

Partial Derivatives
Maximizing a Multivariable Function

 

2-7       Constrained Optimization

Constrained Optimization by Substitution
Constrained Optimization by the Lagrangian Multiplier Method

Case Study 2-3: Pursuing Multiple Objectives Under Constraints by Global Corporations

  

2-8       New Management Tools for Optimization

Benchmarking

Case Study 2-5: Benchmarking at Xerox, Ford, and Mobil

Total Quality Management

Case Study 2-6: Total Quality Management at Johnson & Johnson, Motorola, and GE

Reengineering

Case Study 2-7: Reengineering at GE

The Learning Organization

Case Study 2-8: Applying Learning-Organization Principles at Ford

Other Management Tools
New Management Tools and Functional Specialization in Managerial Economics

  

Summary · Discussion Questions · Problems · Supplementary Readings Internet Site Addresses

 

INTEGRATING CASE STUDY ONE:
Michael Dell Turns the PC World Inside Out

  

PART TWO: DEMAND ANALYSIS

CHAPTER 3Demand Theory

  

3-1       The Demand for a Commodity

An Individual's Demand for a Commodity
From Individual to Market Demand
The Demand Faced by a Firm

Case Study 3-1: The Demand for Big Macs

Case Study 3-2: The Demand for Sweet Potatoes in the United States

 

                        3-2       Price Elasticity of Demand

Point Price Elasticity of Demand

Arc Price Elasticity of Demand

Price Elasticity, Total Revenue, and Marginal Revenue

Factors Affecting the Price Elasticity of Demand

Case Study 3-3: Price Elasticities of Demand in the Real World

 

                        3-3       Income Elasticity of Demand

Case Study 3-4: Income Elasticities of Demand in the Real World

 

                        3-4       Cross-Price Elasticity of Demand

Case Study 3-5: Cross-Price Elasticities of Demand in the Real World
Case Study 3-6: Substitution Between Domestic and Foreign Goods

 

                        3-5       Using Elasticities in Managerial Decision Making

                       

3-6       International Convergence of Tastes

Case Study 3-7: Gillette Introduces the Sensor and Mach3 Razors -- Truly Global Products
Case Study 3-8: Ford's World Car(s)

 

3-7       Electronic Commerce

Case Study 3-9: E-Commerce at Amazon.com

 

Summary · Discussion Questions · Problems

 

APPENDIX:    Behind the Market Demand Curve-The Theory of Consumer Choice

The Consumer's Tastes: Indifference Curves
The Consumer's Constraints: The Budget Line

The Consumer's Equilibrium

Derivation of the Consumer's Demand Curve

Income and Substitution Effects of a Price Change

The Theory of Consumer Choice Mathematically

 

 Supplementary Readings · Internet Site Addresses

 

CHAPTER 4Demand Estimation

  

4-1       The Identification Problem

 

4-2       Marketing Research Approaches to Demand Estimation

Consumer Surveys and Observational Research
Case Study 4-1: Micromarketing: Marketers Zero In on Their Customers

Consumer Clinics

Market Experiments
Case Study 4-2: Estimation of the Demand for Oranges by Market Experiment
Case Study 4-3: Virtual Shopping and Virtual Management as New Managerial Tools

  

4-3       Introduction to Regression Analysis

  

4-4       Simple Regression Analysis

The Ordinary Least-Squares Method

Tests of Significance of Parameter Estimates
Other Aspects of Significance Tests and Confidence Intervals

Test of Goodness of Fit and Correlation

 

4-5       Multiple Regression Analysis

The Multiple Regression Model

The Coefficient of Determination and Adjusted R2
Analysis of Variance
Point and Interval Estimates

 

4-6       Problems in Regression Analysis

Multicollinearity
Heteroscedasticity
Autocorrelation

 

4-7       Demand Estimation by Regression Analysis

Model Specification
Collecting Data on the Variables
Specifying the Form of the Demand Equation
Testing the Econometric Results

Case Study 4-4: Estimation of the Demand for Air Travel over the North Atlantic

  

4-8       Estimating the Demand for U.S. Imports and Exports

Case Study 4-5: The Major Commodity Exports and Imports of the United States
Case Study 4-6: The Major Trade Partners of the United States
Case Study 4-7: The Top U.S. Exporters

 

Summary · Discussion Questions · Problems · Supplementary Readings · Internet Site Addresses

 

CHAPTER 5Demand Forecasting

 

5-1       Qualitative Forecasts

Survey Techniques

Opinion Polls
Soliciting a Foreign Perspective

Case Study 5-1: Forecasting the Number of McDonald's Restaurants Worldwide

 

5-2       Time-Series Analysis

Reasons for Fluctuations in Time-Series Data
Trend Projection
Seasonal Variation

Case Study 5-2: Forecasting New-Housing Starts with Time-Series Analysis

 

5-3       Smoothing Techniques

Moving Averages
Exponential Smoothing

Case Study 5-3: Forecasting Lumber Sales with Smoothing Techniques

 

5-4       Barometric Methods

Case Study 5-4: Forecasting the Level of Economic Activity with Composite and
Diffusion Indexes

  

5-5 Econometric Models

Single-Equation Models

Case Study 5-5: Forecasting the Demand for Air Travel over the North Atlantic
Multiple-Equation Models

Case Study 5-6: Economic Forecasts with Large Econometric Models

Case Study 5-7: Risks in Demand Forecasting

 

                                    Summary · Discussion Questions · Problems

 

APPENDIX:    Input-Output Forecasting

Input-Output Tables
Direct Requirements Matrix
Total Requirements Matrix
Forecasting with Input-Output Tables
Uses and Shortcomings of Input-Output Forecasting

Case Study 5-8: Using the Total Requirements Matrix for Forecasting in the United States


INTEGRATING CASE STUDY TWO:
Estimating and Forecasting the U.S. Demand for Electricity

 

PART THREE: PRODUCTION AND COST ANALYSIS

CHAPTER 6Production Theory and Estimation

  

6-1       The Organization of Production and the Production Function

The Organization of Production
The Production Function

  

6-2       The Production Function with One Variable Input

Total, Average, and Marginal Product
The Law of Diminishing Returns and Stages of Production

 

6-3       Optimal Use of the Variable Input

  

6-4       The Production Function with Two Variable Inputs

Production Isoquants
Economic Region of Production
Marginal Rate of Technical Substitution
Perfect Substitutes and Complementary Inputs

  

6-5       Optimal Combination of Inputs

Isocost Lines
Optimal Input Combination for Minimizing Costs or Maximizing Output
Profit Maximization
Effect of Change in Input Prices

Case Study 6-1: Substitutability Between Gasoline Consumption and Driving Time

 

                        6-6       Returns to Scale

Case Study 6-2: Returns to Scale in U.S. Manufacturing Industries
Case Study 6-3: General Motors Decides Smaller Is Better

 

                        6-7       Empirical Production Functions

                        Case Study 6-4: Output Elasticities in U.S. Manufacturing Industries

  

6-8       Innovations and Global Competitiveness

                                    Meaning and Importance of Innovations

Case Study 6-5: How Do Firms Get New Technology?
Innovations and the International Competitiveness of U.S. Firms

Case Study 6-6: How Xerox Lost and Regained International Competitiveness and Became a Leader in Information Technology

The New Computer-Aided Production Revolution and U.S. International Competitiveness
Case Study 6-7: The New U.S. Digital Factory
Case Study 6-8: The Euro and the International Competitiveness of European Firms

 

                                    Summary · Discussion Questions · Problems

  

APPENDIX:    Production Analysis with Calculus

Constrained Output Maximization
Constrained Cost Minimization
Profit Maximization

                                   

Supplementary Readings · Internet Site Addresses

 

            CHAPTER 7Cost Theory and Estimation

 

                        7-1       The Nature of Costs

  

7-2       Short-Run Cost Functions

Short-Run Total and Per-Unit Cost Functions
Short-Run Total and Per-Unit Cost Curves

Case Study 7-1: Per-Unit Cost Curves in the Cultivation of Corn

  

7-3       Long-Run Cost Curves

Long-Run Total Cost Curves
Long-Run Average and Marginal Cost Curves

Case Study 7-2: The Long-Run Average Cost Curve in Electricity Generation

 

                        7-4       Plant Size and Economies of Scale

Case Study 7-3: The Shape of the Long-Run Average Cost Curve in Various U.S. Industries

 

7-5       Learning Curves

                        Case Study 7-4: To Reduce Costs, Firms Often Look Far Afield

 

                        7-6       Minimizing Costs Internationally-The New Economies of Scale

International Trade in Inputs

Case Study 7-5: Even the IBM PC and the Boeing 777 Are Not All American!
The New International Economies of Scale
Immigration of Skilled Labor

 

                        7-7       The Architecture of the Ideal Firm

                        Case Study 7-6: Firm Architecture and Organizational Competitiveness

  

7-8       Cost-Volume-Profit Analysis and Operating Leverage

Cost-Volume-Profit Analysis
Operating Leverage

Case Study 7-7: Breakeven Analysis for LockheedÆs Tri-Star Airbus and EuropeÆs Airbus Industrie

 

                        7-9       Empirical Estimation of Cost Functions

Data and Measurement Problems in Estimating Short-Run Cost Functions
The Functional Form of Short-Run Cost Functions
Estimating Long-Run Cost Functions with Cross-Sectional Regression Analysis
Estimating Long-Run Cost Functions with Engineering and Survival Techniques

Case Study 7-8: Estimates of Short-Run and Long-Run Cost Functions

  

Summary · Discussion Questions · Problems

 

APPENDIX:    Cost Analysis with Calculus

Supplementary Readings · Internet Site Addresses

 

CHAPTER 8 – Linear Programming

                       

8-1       Meaning, Assumptions, and Applications of Linear Programming

The Meaning and Assumptions of Linear Programming
Applications of Linear Programming

 

8-2       Some Basic Linear Programming Concepts

Production Processes and Isoquants in Linear Programming
The Optimal Mix of Production Processes

  

8-3       Procedure Used in Formulating and Solving Linear Programming Problems

           

8-4       Linear Programming: Profit Maximization

Formulation of the Profit Maximization Linear Programming Problem
Graphic Solution of the Profit Maximization Problem
Extreme Points and the Simplex Method
Algebraic Solution of the Profit Maximization Problem

Case Study 8-1: Maximizing Profits in Blending Aviation Gasoline and Military Logistics by Linear Programming

Case Study 8-2: Linear Programming as a Tool of Portfolio Management

 

                        8-5       Linear Programming: Cost Minimization

Formulation of the Cost Minimization Linear Programming Problem
Graphic Solution of the Cost Minimization Problem
Algebraic Solution of the Cost Minimization Problem

Case Study 8-3: Cost Minimization Model for Warehouse Distribution Systems and Supply Chain Management

 

                        8-6       The Dual Problem and Shadow Prices

The Meaning of Dual and Shadow Prices
The Dual of Profit Maximization
The Dual of Cost Minimization

Case Study 8-4: Shadow Prices in Closing an Airfield in a Forest Pest Control Program

 

                        8-7       Linear Programming and Logistics in the Global Economy

Case Study 8-5: Measuring the Pure Efficiency of Operating Units
Case Study 8-6: Logistics at National Semiconductor, Saturn, and Compaq

 

8-8 Actual Solution of Linear Programming Problems on Personal Computers

Summary · Discussion Questions · Problems · Supplementary Readings · Internet Site Addresses

INTEGRATING CASE STUDY THREE:
Production and Cost Functions in the Petroleum Industry, Duality, and Linear Programming

 

 

 

CHAPTER 9 – Market Structure: Perfect Competition, Monopoly, and Monopolistic Competition

 

                        9-1       Market Structure and Degree of Competition

  

9-2       Perfect Competition

Meaning and Importance of Perfect Competition

Case Study 9-1: Competition in the Stock Market

Price Determination under Perfect Competition
Short-Run Analysis of a Perfectly Competitive Firm
Short-Run Supply Curve of the Competitive Firm and Market
Long-Run Analysis of a Perfectly Competitive Firm

Case Study 9-2: Long-Run Adjustment in the U.S. Cotton Textile Industry

 

9-3       Competition in the Global Economy

Domestic Demand and Supply, Imports, and Prices
The Dollar Exchange Rate and U.S. International Competitiveness

Case Study 9-3: Foreign Exchange Quotations
Case Study 9-4: The Depreciation of the Dollar and the Profitability of U.S. Firms

 

                        9-4       Monopoly

Sources of Monopoly

Case Study 9-5: Government Franchise, Monopoly Power, and Competition in the Telecommunications Industry

Short-Run Price and Output Determination under Monopoly
Long-Run Price and Output Determination under Monopoly

Case Study 9-6: The Market Value of Monopoly Profits in the New York City Taxi Industry

Comparison of Monopoly and Perfect Competition

 

                        9-5       Monopolistic Competition

Meaning and Importance of Monopolistic Competition
Case Study 9-7: The Monopolistically Competitive Restaurant Market

Short-Run Price and Output Determination under Monopolistic Competition

Long-Run Price and Output Determination under Monopolistic Competition

Product Variation and Selling Expenses under Monopolistic Competition
Case Study 9-8: Advertisers Are Taking on Competitors by Name

 

                                    Summary · Discussion Questions · Problems

APPENDIX:    Profit Maximization with Calculus

Supplementary Readings · Internet Site Addresses

 

 

CHAPTER 10 – Oligopoly and Strategic Behavior

 

10-1     Oligopoly and Market Concentration

Oligopoly: Meaning and Sources

Case Study 10-1: Brands: Thrive or Die

Concentration Ratios, the Herfindahl Index, and Contestable Markets

Case Study 10-2: Industrial Concentration in the United States

           

10-2     Oligopoly Models

The Kinked Demand Curve Model
Cartel Arrangements

Case Study 10-3: The Organization of Petroleum Exporting Countries (OPEC) Cartel

Price Leadership

Efficiency Implications of Oligopoly
Case Study 10-4: Firm Size and Profitability

 

                        10-3     The Sales Maximization Model

 

10-4     The March of Global Oligopolists

Case Study 10-5: The Rising Competition in Global Banking
Case Study 10-6: The Globalization of the Pharmaceutical Industry
Case Study 10-7: Strategic Alliances and Relationship Enterprises

 

                        10-5     Strategic Behavior and Game Theory

Strategic Behavior and Game Theory: Meaning and Importance
Payoff Matrix for an Advertising Game
Nash Equilibrium

Case Study 10-8: Dell Computers and Nash Equilibrium

  

10-6     The Prisoners' Dilemma, Price and Nonprice Competition, and Cartel Cheating

The Prisoner's Dilemma
Price Competition and the Prisoners' Dilemma
Nonprice Competition, Cartel Cheating, and the Prisoners' Dilemma

Case Study 10-9: Telephone's and Airlines' Price Wars, and the Prisoners' Dilemma

                       

10-7     Extensions of Game Theory

Repeated Games and Tit-for-tat
Threats, Commitments, and Credibility
Entry Deterrence

Case Study 10-10: Wal-Mart's Preemptive Expansion Marketing Strategy

 

10-8     Strategic Behavior and International Competitiveness

Summary · Discussion Questions · Problems

APPENDIX:    Oligopoly Theory with Calculus

The Kinked Demand Curve Model
The Centralized Cartel Model

The Market-Sharing Cartel
The Sales Maximization Model

 

Summary · Discussion Questions · Problems

 

APPENDIX:    Profit Maximization with Calculus

Supplementary Readings · Internet Site Addresses

 

 

 

CHAPTER 11 – Pricing Practices

 

11-1     Pricing of Multiple Products

Pricing of Products with Interrelated Demands
Plant Capacity Utilization and Optimal Product Pricing
Optimal Pricing of Joint Products Produced in Fixed Proportions
Optimal Pricing and Output of Joint Products Produced in Variable Proportions

Case Study 11-1: Optimal Pricing and Output by Gillette

 

                        11-2     Price Discrimination

Meaning of and Conditions for Price Discrimination
First- and Second-Degree Price Discrimination
Third-Degree Price Discrimination Graphically
Third-Degree Price Discrimination Algebraically

Case Study 11-2: Price Discrimination in the Pricing of Electricity by Con Edison

 

                        11-3     International Price Discrimination and Dumping

                        Case Study 11-3: Kodak Antidumping Victory over Fuji

  

11-4     Transfer Pricing

Meaning and Nature of Transfer Pricing
Transfer Pricing with No External Market for the Intermediate Product
Transfer Pricing with a Perfectly Competitive Market for the Intermediate Product
Transfer Pricing with an Imperfectly Competitive Market for the Intermediate Product

Case Study 11-4: Transfer Pricing by Multinational Corporations

 

                        11-5     Pricing in Practice

Cost-Plus Pricing
Evaluation of Cost-Plus Pricing
Incremental Analysis in Pricing

Case Study 11-5: Incremental Pricing at Continental Airlines
Case Study 11-6: Peak-Load Pricing by Con Edison

Two-Part Tariff, Tying, and Bundling
Case Study 11-7: Bundling in the Leasing of Movies

Other Pricing Practices
Case Study 11-8: No-Haggling Value Pricing in Car Buying
Case Study 11-9: Name Your Price at Priceline

 

Summary · Discussion Questions · Problems

APPENDIX:    Third-Degree Price Discrimination with Calculus

Supplementary Readings

 

INTEGRATING CASE STUDY FOUR:

The Art of Devising Air Fares

 

 

PART FIVE: REGULATION, RISK ANALYSIS, AND CAPITAL BUDGETING

CHAPTER 12Regulation and Antitrust: The Role of Government in the Economy

 

12-1     Government Regulation to Support Business and to Protect Consumers, Workers, and the Environment

Government Regulations That Restrict Competition

Case Study 12-1: Restrictions on Competition in the Pricing of Milk in New York City and the Nation

Government Regulations to Protect Consumers, Workers, and the Environment

Case Study 12-2: The FDA Steps Up Regulation of the Food and Drug Industry

Case Study 12-3: Regulation Greatly Reduced Air Pollution

 

12-2     Externalities and Regulation

The Meaning and Importance of Externalities
Policies to Deal with Externalities

Case Study 12-4: The Market for Dumping Rights

  

12-3     Public Utility Regulation

Public Utilities As Natural Monopolies
Difficulties in Public Utility Regulation

Case Study 12-5: Regulated Electricity Rate Increases for Con Edison - But Not for Long

 

12-4     Antitrust: Government Regulation of Market Structure and Conduct

Sherman Act (1890)
Clayton Act (1914)
Federal Trade Commission Act (1914)
Robinson-Patman Act (1936)
Wheeler-Lea Act (1938)
Celler-Kefauver Antimerger Act (1950)

 

                        12-5     Enforcement of Antitrust Laws and the Deregulation Movement

Enforcement of Antitrust Laws: Some General Observations
Enforcement of Antitrust Laws: Structure

Case Study 12-6: The IBM and AT&T Cases

Case Study 12-7: Antitrust and the New Merger Boom

Enforcement of Antitrust Laws: Conduct

Case Study 12-8: The Microsoft Antitrust Case

The Deregulation Movement
Case Study 12-9: Deregulation of the Airline Industry: An Assessment

 

                        12-6     Regulation of International Competition

                        Case Study 12-10: Voluntary Export Restraints on Japanese Automobiles to the United States

Case Study 12-11: Reductions of Trade Restrictions under the Uruguay Round

  

Summary · Discussion Questions · Problems · Supplementary Readings · Internet Site Addresses

 

CHAPTER 13Risk Analysis

  

13-1     Risk and Uncertainty in Managerial Decision Making

                        Case Study 13-1: The Risk Faced by Coca-Cola in Changing Its Secret Formula

Case Study 13-2: Why Companies Fail

  

13-2     Measuring Risk with Probability Distributions

Probability Distributions
An Absolute Measure of Risk: The Standard Deviation
Measuring Probabilities with the Normal Distribution
A Relative Measure of Risk: The Coefficient of Variation

Case Study 13-3: RiskMetrics: J.P. Morgan's Method of Measuring Risk

 

 

13-3     Utility Theory and Risk Aversion

                        Case Study 13-4: The Purchase of Insurance and Gambling by the Same Individual – A Seeming Contradiction

  

13-4     Adjusting the Valuation Model for Risk

Risk-Adjusted Discount Rates
Certainty-Equivalent Approach

Case Study 13-5: Adjusting the Valuation Model for Risk in the Real World

 

13-5     Other Techniques for Incorporating Risk into Decision Making

Decision Trees
Simulation

 

13-6     Decision Making under Uncertainty

The Maximum Criterion
The Minimax Regret Criterion
Other Methods of Dealing with Uncertainty

Case Study 13-6: Spreading Risks in the Choice of a Portfolio

  

13-7     Foreign-Exchange Risks and Hedging

                        Case Study 13-7: How Foreign Stocks Have Benefited a Domestic Portfolio

 

13-8     Information and Risk

Asymmetric Information and the Market for Lemons
The Insurance Market and Adverse Selection
The Problem of Moral Hazard

Case Study 13-8: Information, Risk and the Collapse of Long Term Capital Management

 

                                    Summary · Discussion Questions · Problems · Supplementary Readings · Internet Site Addresses

 

CHAPTER 14Long-Run Investment Decisions: Capital Budgeting

 

14-1     Capital Budgeting: An Overview

Meaning and Importance of Capital Budgeting
Overview of the Capital Budgeting Process

Case Study 14-1: Benefit-Cost Analysis and the SST
Case Study 14-2: The Eurotunnel: Another Bad French-British Investment?

 

                        14-2     The Capital Budgeting Process

Projecting Cash Flows
Net Present Value (NPV)
Internal Rate of Return (IRR)
Comparison of NPV and IRR

Case Study 14-3: Pennzoil's $3 Billion Capital Budgeting Challenge
Case Study 14-4: Capital Budgeting for Investments in Human Capital

  

14-3     Capital Rationing and the Profitability Index

  

14-4     The Cost of Capital

                                    The Cost of Debt

The Cost of Equity Capital: The Risk-Free Rate Plus Premium
The Cost of Equity Capital: The Dividend Valuation Model
The Cost of Equity Capital: The Capital Asset Pricing Model (CAPM)
The Weighted Cost of Capital

Case Study 14-5: The Choice Between Equity and Debt

  

14-5     Reviewing Investment Projects after Implementation

                        Case Study 14-6: Capital Budgeting Techniques of Major U.S. Firms

  

14-6         The Cost of Capital and International Competitiveness

 

Summary · Discussion Questions · Problems · Supplementary Readings

INTEGRATING CASE STUDY FIVE:
Regulation, Risk, Capital Budgeting, and the Price of International Telephone Calls

  

 

APPENDIXES

APPENDIX ACompounding, Discounting, and Present Value

A-1 Future Value and Compounding
A-2 Present Value and Discounting
A-3 Future Value of an Annuity
A-4 Present Value of an Annuity

A-5 Compounding and Discounting Periods
A-6 Determining the Interest Rate
A-7 Perpetuities

 

APPENDIX BInterest Factor Tables

Table B-1 Compound Value of $1
Table B-2 Present Value of $1
Table B-3 Future Value of an Annuity of $1 for n Periods

Table B-4 Present Value of an Annuity of $1 for n Periods

 

APPENDIX CStatistical Tables

Table C-1 Areas under the Standard Normal Distribution
Table C-2 Areas in the Tails of the t Distribution
Table C-3 F Distribution for 5 Percent Significance

Table C-3 F Distribution for 1 Percent Significance
Table C-4 Durbin-Watson Statistic for 5 Percent Significance Points of d and d
Table C-4 Durbin-Watson Statistic for 1 Percent Significance Points of d and d

 

APPENDIX DAnswers to Selected (Asterisked) Problems

 

Glossary
Name Index
Subject Index

 

Case Studies

 

1-1 Decision Making in Business and Military Strategy
1-2 The Management Revolution
1-3 The Objective and Strategy of Firms in the Cigarette Industry1
1-4 The Virtual Corporation1
1-5 Profits in the Personal Computer Industry1
1-6 Business Ethics at Boeing
1-7 The Rise of the Global Corporation
1-8 The Global Business Leader
1-9 The World's Most Admired Companies
1-10 The Most Important Internet Sites for Managerial Economics
1-11 Changes in Demand and Supply and the Price of PCs

2-1 Total, Average, and Marginal Cost in the U.S. Steel Industry
2-2 Optimal Pollution Control
2-3 Pursuing Multiple Objectives Under Constraints by Global Corporations
2-4 Benchmarking at Xerox, Ford, and Mobil
2-5 Total Quality Management at Johnson & Johnson, Motorola, and GE
2-6 Reengineering at GE
2-7 Applying Learning-Organization Principles at Ford

  

INTEGRATING CASE STUDY ONE: Michael Dell Turns the PC World Inside Out

 

3-1 The Demand for Big Macs
3-2 The Demand for Sweet Potatoes in the United States
3-3 Price Elasticities of Demand in the Real World
3-4 Income Elasticities of Demand in the Real World
3-5 Cross-Price Elasticities of Demand in the Real World
3-6 Substitution Between Domestic and Foreign Goods

3-7 Gillette Introduces the Sensor Razor - A Truly Global Product
3-8 Ford's World Car(s)
3-9 E-Commerce at Amazon.com

4-1 Micromarketing: Marketers Zero In on Their Customers
4-2 Estimation of the Demand for Oranges by Market Experiment
4-3 Virtual Shopping and Virtual Management as Managerial Tools
4-4 Estimation of the Demand for Air Travel over the North Atlantic
4-5 The Major Commodity Exports and Imports of the United States

4-6 The Major Trade Partners of the United States
4-7 The Top U.S. Exporters

5-1 Forecasting the Number of McDonald's Restaurants Worldwide
5-2 Forecasting New-Housing Starts with Time-Series Analysis
5-3 Forecasting Lumber Sales with Smoothing Techniques
5-4 Forecasting the Level of Economic Activity with Composite and Diffusion Indexes
5-5 Forecasting the Demand for Air Travel over the North Atlantic
5-6 Economic Forecasts with Large Econometric Models
5-7 Risks in Demand Forecasting
5-8 Using the Total Requirements Matrix for Forecasting in the United States

 

            INTEGRATING CASE STUDY TWO: Estimating and Forecasting the U.S. Demand for Electricity

             

6-1 Substitutability Between Gasoline Consumption and Driving Time
6-2 Returns to Scale in U.S. Manufacturing Industries
6-3 General Motors Decides Smaller Is Better
6-4 Output Elasticities in U.S. Manufacturing Industries
6-5 How Do Firms Get New Technology?
6-6 How Xerox Lost and Regained International Competitiveness and Became a Leader in Information Technology
6-7 The New U.S. Digital Firm
6-8 The Euro and the International Competitiveness of European Firms

7-1 Per-Unit Cost Curves in the Cultivation of Corn
7-2 The Long-Run Average Cost Curve in Electricity Generation
7-3 The Shape of the Long-Run Average Cost Curve in Various U.S. Industries
7-4 To Reduce Costs, Firms Often Look Far Afield
7-5 Even the IMB PC and Boeing 777 Are Not All American!
7-6 Firm Architecture and Organizational Competitiveness
7-7 Breakeven Analysis for Lockheed's Tri-Star Airbus and Europe's Airbus Industries
7-8 Estimates of Short-Run and Long-Run Cost Functions

8-1  Maximizing Profits in Blending Aviation Gasoline and Military Logistics by Linear Programming
8-2 Linear Programming as a Tool of Portfolio Management
8-3 Cost Minimization Model for Warehouse Distribution Systems and Supply Chain Management
8-4 Shadow Prices in Closing an Airfield in a Forest Pest Control Program
8-5 Measuring the Pure Efficiency of Operating Units
8-6 Logistics at National Semiconductor, Saturn, and Compaq

 

INTEGRATING CASE STUDY THREE: Production and Cost Functions in the Petroleum Industry, Duality, and Linear Programming

 

9-1 Competition in the Stock Market
9-2 Long-Run Adjustment in the U.S. Cotton Textile Industry
9-3 Foreign Exchange Quotations
9-4 The Depreciation of the Dollar and the Profitability of U.S. Firms
9-5 Government Franchise, Monopoly Power, and Competition in the Telecommunications Industry
9-6 The Market Value of Monopoly Profits in the New York City Taxi Industry
9-7 The Monopolistically Competitive Restaurant Market
9-8 Advertisers Are Taking on Competitors by Name

10-1 Brands: Thrive or Die
10-2 Industrial Concentration in the United States
10-3 The Organization of Petroleum Exporting Countries (OPEC) Cartel
10-4 Firm Size and Profitability
10-5 The Rising Competition in Global Banking
10-6 The Globalization of the Pharmaceutical Industry
10-7 Strategic Alliances and Relationship Enterprises
10-8 Dell Computers and Nash Equilibrium
10-9 Telephone's and Airlines' Price Wars, and the Prisoners' Dilemma
10-10 Wal-Mart's Preemptive Expansion Marketing Strategy

11-1 Optimal Pricing and Output by Gillette
11-2 Price Discrimination in the Pricing of Electricity by Con Edison
11-3 Kodak Antidumping Victory over Fuji
11-4 Transfer Pricing by Multinational Corporations
11-5 Incremental Pricing by Continental Airlines
11-6 Peak-Load Pricing by Con Edison
11-7 Bundling in the Leasing of Movies
11-8 No-Haggling Value Pricing in Car Buying
11-9 Name Your Price at Priceline

  

INTEGRATING CASE STUDY FOUR: The Art of Devising Air Fares

  

12-1 Restrictions on Competition in the Pricing of Milk in New York City
12-2 The FDA Steps Up Regulation of the Food and Drug Industry
12-3 Regulation Greatly Reduced Air Pollution
12-4 The Market for Dumping Rights
12-5 Regulated Electricity Rate Increases for Con Edison
12-6 The IBM and AT&T Cases
12-7 Antitrust and the New Merger Boom
12-8 The Microsoft Antitrust Case
12-9 Deregulation of the Airline Industry: An Assessment
12-10 Deregulation of the Airline Industry: An Assessment
12-11 Reductions of Trade Restrictions under the Uruguay Round

13-1 The Risk Faced by Coca-Cola in Changing Its Secret Formula
13-2 Why Companies Fail
13-3 RiskMetrics: J.P. Morgan's Method of Measuring Risk
13-4 The Purchase of Insurance and Gambling by the Same Individual -- A Seeming Contradiction
13-5 Adjusting the Valuation Model for Risk in the Real World
13-6 Spreading Risks in the Choice of a Portfolio
13-7 Local-Currency and Dollar Stock Returns around the World
13-8 Information, Risk and the Collapse of Long Term Capital Management

14-1 Benefit-Cost Analysis and the SST
14-2 The Eurotunnel: Another Bad French-British Investment?
14-3 Pennzoil's $3 Billion Capital Budgeting Challenge
14-4 Capital Budgeting for Investments in Human Capital
14-5 The Choice Between Equity and Debt
14-6 Capital Budgeting Techniques of Major U.S. Firms

 

            INTEGRATING CASE STUDY FIVE: Regulation, Risk, Capital Budgeting, and the Price of International Telephone Calls

 

   Preface

 

This is a textbook for the traditional course in managerial economics offered in most business and economics programs. The organization of the text and the topics covered follow the traditional way the course is being taught, but they have been greatly extended in many new and exciting directions to reflect modern managerial tools and methods.

The primary aims of this text are:

• To provide a unifying theme of managerial decision making around the theory of the firm. This text shows how managerial economics is not the study of unrelated topics but the synthesis of economic theory, decision sciences, and the various fields of business administration studies, and it examines how they interact with one another as the firm attempts to reach optimal managerial decisions in the face of constraints.

• To introduce an international dimension into managerial economics to reflect the globalization of tastes, production, and distribution in today’s world. Other managerial economics texts include only few examples or an isolated chapter on the international aspects of managerial economics. This text, on the other hand, fully integrates and discusses, in each chapter and for each topic, the international ramifications of managerial economics in today’s global economy. This is essential because many of the commodities we consume are imported, and firms today purchase many inputs abroad and sell an increasing share of their outputs overseas. Even more important, domestic firms face more and more competition from foreign producers.

• To present many new topics and managerial tools not discussed at all or discussed only superficially in other managerial texts. These include firm architecture, strategic behavior, business ethics, electronic commerce, the economics of information, international risks, the new (international) economies of scale, and learning curves, as well as the virtual corporation, total quality management, reengineering, benchmarking, the learning organization,  the new digital factory, bundling, and the business use of the Internet.

• To show how managerial decisions are actually made in the real world. The text includes 117 real-world case studies (far more than  most other texts), as well as 5 longer integrating case studies at the end of each of the five parts of the text. Since managerial economics is by nature an applied field, this feature can hardly be overstated. The case studies in this text cover a broad range of topics:  benchmarking at Xerox, reengineering at General Electric, Gillette introducing the Sensor and Mach3 razors, Ford’s world car, virtual management, General Motors decides small is better, the new U.S. digital firm, logistics at Compaq, the Euro and the international competitiveness of European firms, the exchange rate of the dollar and the profitability of U.S. firms, Wal-Mart’s preemptive marketing strategy,  transfer pricing by multinational corporations, price discrimination by Con Edison, pricing at Priceline, the Microsoft antitrust case, risk-metrics, spreading risks in the choice of a portfolio, and the price of international telephone calls.

OTHER UNIQUE FEATURES

The text has other unique features, among which are the following:

• It offers complete coverage of all the topics usually encountered in actual managerial decision making and covered in any managerial economics course. Thus, the text allows a great deal of flexibility in the choice of the topics that any instructor may wish to cover.

• The text can be used in courses with or without calculus. In-depth coverage of the full range of calculus and optimization techniques used in managerial decision making is presented in the optional sections of Chapter 2. In all subsequent chapters, calculus is used only in the mathematical appendixes at the end of most chapters and in footnotes.

• While applied in nature, this text rests on sound analytical foundations. This addresses the common criticism that texts in this field either are overly theoretical, or are applied in nature but resting on weak theoretical foundations.

 

 

NEW TO THE FOURTH EDITION

 

Many new sections were added to the fourth edition, among which: ethics in business (in Chapter 1), electronic commerce (in Chapter 3), the architecture of the ideal firm (in Chapter 7), transfer pricing by multinational corporation (in Chapter 11), antitrust and the new merger boom (in Chapter 12), and foreign exchange risk and hedging (in Chapter 13).

           The new edition also includes 28 new Cases Studies, among which: Business Ethics at Boeing (Chapter 1, Section 6); The World’s Most Admired Companies (1-9); E-Commerce at Amazon.com (3-9); Virtual Shopping and Virtual Management as New Managerial Tools (4-3); The Euro and the International Competitiveness of European Firms (6-8); Firm Architecture and Organizational Competitiveness (7-6); Strategic alliances and Relationship Enterprises (10-7); Telephone and Airline Price Wars, and the Prisoner’s Dilemma (10-9); Name Your Price at Priceline (11-9); The Microsoft Antitrust Case (12-8);  Information, Risk and the Collapse of Long Term Capital Management (13-8); and Regulation, Capital Budgeting and the Price of International Telephone Calls (14-7).

The present edition also contains a new section in each chapter with the most        important Internet Site Addresses for the topics presented in the chapter. Also new to

     the fourth edition is a Web Site that contains additional material (cases, theoretical

     points or applications) that is constantly updated for each chapter in the text.

PEDAGOGICAL FEATURES

In addition to the 117 real-world case studies presented in the text (seven to ten per chapter), there is a more extensive integrating real-world case study at the end of each of the 5 parts, which provides an overview of the type of managerial decision making examined in the particular part.

Important pedagogical features of the text are as follows:

• The sections of each chapter are numbered for easy reference, and longer sections are broken into two or more subsections.

• All of the graphs and diagrams are carefully explained in the text and then summarized briefly in the captions.

• Diagrams are generally drawn on numerical scales to allow the reading of the answers in actual numbers rather than simply as distances. Also, the judicious use of color and shading in the illustrations aids the student’s understanding.

• Important terms are presented in boldface in the chapters, and a glossary giving the definition of each important term, arranged alphabetically, is provided at the end of the book.

 

Each chapter also contains the following teaching aids:

 1. An Outline of each chapter, giving an overview of the material.

 2. A Summary, which reviews the main points covered in the text.

 3. Discussion Questions. The ability to answer these questions indicates that the student has fully absorbed the material covered in the chapter.

 4. Problems. These ask the student to actually apply and put to use what he or she has learned from the chapter. Answers to selected problems, marked by an asterisk (*), are provided at the end of the book for the type of quick feedback that is so essential to effective learning. The floppy disk symbol indicates the solutions that can be computer-generated.

 5. Supplementary Readings. These include the most important references on the various topics covered in each chapter. A separate name index is included at the end of the book.

 6. Internet Site Addresses  These provide the most important Internet site addresses for the topics presented in each chapter.

 7. Web Site   This presents additional material (cases, theoretical points or applications) for each chapter in the text and is constantly updated.

 

                                     

     FOR THE INSTRUCTOR

 

The following ancillaries are available to the instructor:

 1.   An Instructor’s Manual with transparency masters prepared by the author is available which provides the answers to all end-of-chapter questions and problems. The Manual was prepared with as much care as the text itself and is the most extensive of any text presently on the market.

 2.   A separate Computerized Test Bank, which contains a total of 1200 items (800 multiple-choice questions with answers, 150 true-and-false questions with answers, and 250 numerical problems fully worked out). This comprehensive Test Bank is more extensive than any competing text on the market.

 

3.    Managerial Economics in A Global Economy is packaged with a CD-ROM that contains a comprehensive software package designed to complement the text. Prepared by Dr. Robert F. Brooker of Gannon University, the package includes:

(1)     Analytical Business Calculator, an integrated set of computer programs that perform financial, market, mathematical, and statistical analysis,

(2)     Spreadsheet Tools for Managerial Economics, a collection of Microsoft Excel worksheets designed

       to demonstrate the use of spreadsheets for analytical modeling,

(3)     PowerPoint Notes, a set of  study notes that graphically summarize concepts covered in the text, and

(4)     files containing the data sets used in examples in the text and in the study guide. End-of-chapter

       problems that may be solved using the software are indicated by a [disk] symbol.

 

FOR THE STUDENT

The student will find the following supplements invaluable:

 1. A Study Guide, prepared by Professor Robert Brooker of Gannon University, is available from Harcourt to assist students in reviewing and applying the material covered in the text. A software package that runs on IBM-PC and IBM-PC compatible computers in a Microsoft Windows 3.1, Excel 5.1 environment is fully integrated with the text and study guide, and contains routines for regression analysis, forecasting, linear programming, capital budgeting, risk analysis, and all other important techniques of analysis presented in the text. The problems at the end of each chapter that can be solved using this software package are marked by a diskette symbol.

 2. A Web Site, prepared by the Author, presents additional material (cases, theoretical points or applications) for each chapter in the text and is constantly updated.

 

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