MANAGERIAL ECONOMICS SIXTH EDITION William F. Samuelson Boston University Stephen G. Marks Boston University WILEY JOHN WILEY & SONS, INC.
Contents CHAPTER 1 Introduction to Economic Decision Making 1 SEVEN EXAMPLES OF MANAGERIAL DECISIONS 2 SIX STEPS TO DECISION MAKING 6 Step 1: Define the Problem 6 Step 2: Determine the Objective 8 Step S: Explore the Alternatives 9 Step 4: Predict the Consequences 10 Step 5: Make a Choice 11 Step 6: Perform Sensitivity Analysis 12 PRIVATE AND PUBLIC DECISIONS: AN ECONOMIC VIEW 13 THINGS TO COME 16 The Aim of This Book 18 SECTION I: Decisions wjthin Firms 23 CHAPTER 2 Optimal Decisions Using Marginal Analysis 25 Siting a Shopping Mall.26 A SIMPLE MODEL OF THE FIRM 28 A Microchip Manufacturer 29 MARGINAL ANALYSIS 36 Marginal Analysis and Calculus 88 MARGINAL REVENUE AND MARGINAL COST 40 Marginal Revenue 42 Marginal Cost 43 Profit Maximization Revisited 43 SENSITIVITY ANALYSIS 46 Asking What if 46 APPENDK TO CHAPTER 2: CALCULUS AND OPTIMIZATION TECHNIQUES 59 SPECIAL APPENDIX TO CHAPTER 2i OPTIMIZATION USING SPREADSHEETS 70
xiv Contents CHAPTER 3 Demand Analysis and Optimal Pricing 74 DETERMINANTS OF DEMAND 75 The Demand Function 75 The Demand Curve and Shifting Demand 77 General Determinants of Demand 79 ELASTICITY OF DEMAND 80 Price Elasticity 80 Other Elasticities 85 Price Elasticity and Prediction 87 DEMAND ANALYSIS AND OPTIMAL PRICING 88 Price Elasticity, Revenue, and Marginal Revenue 88 Maximizing Revenue 91 Optimal Markup Pricing 93 Price Discrimination 96 Information Goods 101 APPENDIX TO CHAPTER 3: CONSUMER PREFERENCES AND DEMAND 115 CHAPTER 4 Estimating and Forecasting Demand 123 COLLECTING DATA 124 Consumer Surveys 124 \ Controlled Market Studies 126 Uncontrolled Market Data 127 REGRESSION ANALYSIS 128 Ordinary Least-Squares Regression 128 INTERPRETING REGRESSION STATISTICS 135 Potential Problems in Regression 140 FORECASTING 144 Time-Series Models 145 Fitting a Simple Trend 147 Barometric Models 153 Forecasting Performance 155 Final Thoughts 157 APPENDIX TO CHAPTER 4: REGRESSION USING SPREADSHEETS 171 SPECIAL APPENDIX TO CHAPTER 4: STATISTICAL TABLES 176 CHAPTER 5 Production 179 BASIC PRODUCTION CONCEPTS Production Technology 180 180
Contents xv PRODUCTION WITH ONE VARIABLE INPUT 181 Short-Run and Long-Run Production 181 Optimal Use of an Input 185 PRODUCTION IN THE LONG RUN 187 Returns to Scale 187 Least-Cost Production 189 MEASURING PRODUCTION FUNCTIONS 196 Linear Production 196 Production with Fixed Proportions 196 Polynomial Functions 197 The Cobb-Douglas Function 197 Estimating Production Functions 199 OTHER PRODUCTION DECISIONS 200 Multiple Plants 200 Multiple Products 202 Final Remarks 203 CHAPTER 6 Cost Analysis 212 RELEVANT COSTS 213 Opportunity Costs and Economic Profits 214 Fixed and Sunk Costs 217 Profit Maximization with Limited Capacity: Ordering a Best Seller 219 THE COST OF PRODUCTION 221 Short-Run Costs 222 Long-Run Costs 227 RETURNS TO SCALE AND SCOPE 231 Returns to Scale 231 Economies of Scope 235 COST ANALYSIS AND OPTIMAL DECISIONS 238 A Single Product 238 The Shut-Down Rule 240 Multiple Products 242 APPENDK TO CHAPTER 6: TRANSFER PRICING 255 SPECIAL APPENDIX TO CHAPTER 6: SHORT-RUN AND LONG-RUN COSTS 259 SECTION II: Competing within Markets 261 CHAPTER 7 Perfect Competition 263 THE BASICS OF SUPPLY AND DEMAND Shifts in Demand and Supply 267 265
xvi Contents COMPETITIVE EQUILIBRIUM 269 Decisions of the Competitive Firm 269 Market Equilibrium 272 MARKET EFFICDZNCY 275 Private Markets: Benefits and Costs 276 INTERNATIONAL TRADE 286 Tariffs and Quotas 286 CHAPTER 8 Monopoly 298 PURE MONOPOLY 299 Barriers to Entry 301 PERFECT COMPETITION VERSUS PURE MONOPOLY 304 Cartels 307 Natural Monopolies 310 MONOPOLISTIC COMPETITION 314 CHAPTER 9 Oligopoly 326 OLIGOPOLY 328 Five-Forces Framework 328 Industry Concentration 330 Concentration and Prices 334 QUANTITY COMPETITION 337 A Dominant Firm 337 Competition among Symmetric Firms 339 PRICE COMPETITION 342 Price Rigidity and Kinked Demand 342 Price Wars and the Prisoner's Dilemma 344 OTHER DIMENSIONS OF COMPETITION 350 Advertising 350 Strategic Commitments 353 APPENDDi TO CHAPTER 9: BUNDLING AND TYING 365 CHAPTER 10 Game Theory and Competitive Strategy 370, SIZING UP COMPETITIVE SITUATIONS 371 ANALYZING PAYOFF TABLES 375 Equilibrium Strategies 378 COMPETITIVE STRATEGY 383 Market Entry 385 Bargaining 386 Sequential Competition 388 Repeated Competition 393 APPENDK TO CHAPTER 10: MIXED STRATEGIES 409
Contents xvii CHAPTER 11 Regulation, Public Goods, and Benefit-Cost Analysis 415 MARKET FAILURES AND REGULATION 416 MARKET FAILURE DUE TO MONOPOLY 417 Government Responses 418 MARKET FAILURE DUE TO EXTERNALITIES 424 Remedying Externalities 427 Promoting Positive Externalities 432 MARKET FAILURE DUE TO IMPERFECT INFORMATION 435 BENEFIT-COST ANALYSIS AND PUBUC GOODS PROVISION 438 PUBUC GOODS 439 Public Goods and Efficiency 439 THE BASICS OF BENEFIT-COST ANALYSIS 442 Applying the Net Benefit Rule 442 Dollar Values 443 Efficiency versus Equity 443 EVALUATING A PUBUC PROJECT 444 Public Investment in a Bridge 445 VALUING BENEFITS AND COSTS 448 Market Values 448 Nonmarketed Benefits and Costs 448 SECTION III: Decision-Making Applications 453 CHAPTER 12 Decision Making under Uncertainty 465 UNCERTAINTY, PROBABIUTY, AND EXPECTED VALUE 466 Expected Value 468 DECISION TREES 469 An Oil Drilling Problem 469 Features of the Expected-Value Criterion 472 SEQUENTIAL DECISIONS 477 RISK AVERSION 484 Expected Utility 487 Expected Utility and Risk Aversion 492 CHAPTER 13 The Value of Information 506 THE VALUE OF INFORMATION 507 The Oil Wildcatter Revisited 507 Imperfect Information 509
xviii Contents REVISING PROBABIUTIES 512 Bayes Theorem 513 OTHER APPLICATIONS 516 Predicting Credit Risks 517 Business Behavior and Decision Pitfalls 519 OPTIMAL SEARCH 523 Optimal Stopping 524 Optimal Sequential Decisions 526 THE VALUE OF ADDITIONAL ALTERNATIVES 527 Simultaneous Search 528 CHAPTER 14 Asymmetric Information and Organizational Design 544 ASYMETRIC INFORMATION 545 Adverse Selection 545 Signalling 548 Principals, Agents, and Moral Hazard 550 ORGANIZATIONAL DESIGN 554 The Nature of the Firm 554 The Breadth of the Firm 556 Assigning Decision-Making Responsibilities 557 Monitoring and Rewarding Performance 562 Separation of Ownership and Control in the Modern Corporation 569 APPENDIX TO CHAPTER 14: A PRINCIPAL-AGENT MODEL 585 CHAPTER 15 Bargaining and Negotiation 589 THE ECONOMIC SOURCES OF BENEFICIAL AGREEMENTS 591 Resolving Disputes 594 ^ Differences in Values 595 Contingent Contracts 598 MULTD7LE-ISSUE NEGOTIATIONS 599 Continuous Variables 601 NEGOTIATION STRATEGY 604 Perfect Information 605 Imperfect Information 605 CHAPTER 16 Auctions and Competitive Bidding 623 THE ADVANTAGES OF AUCTIONS 625 BIDDER STRATEGIES 629 English and Dutch Auctions 630
Contents xix Sealed-Bid Auctions 631 Common Values and the Winner's Curse 639 OPTIMAL AUCTIONS 641 Expected Auction Revenue 641 Competitive Procurement 647 CHAPTER 17 Linear Programming 660 UNEAR PROGRAMS 662 Graphing the LP Problem 664 A Minimization Problem 668 SENSITIVITY ANALYSIS AND SHADOW PRICES 671 Changes in the Objective Function 672 Shadow Prices 674 FORMULATION AND COMPUTER SOLUTION FOR LARGER LP PROBLEMS 679 Computer Solutions 683 ANSWERS TO ODD-NUMBERED QUESTIONS 699 INDEX 732