book

Managerial Economics and Strategy, 2/e

Name: Managerial Economics and Strategy, 2/e
ISBN: 9780134472553

by Jeffrey M. Perloff, James A. Brander

February 2016

Beginner to intermediate

500 pages

33h 40m

English

Pearson

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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 EditionMain InnovationsFeaturesAlternative OrganizationsSupplements
1 Introduction
1.1 Managerial Decision Making
ProfitTrade-OffsOther Decision MakersStrategy
1.2 Economic Models
Simplifying AssumptionsTesting TheoriesPositive and Normative Statements

Summary
2 Supply and Demand
Learning Objectives
2.1 Demand
The Demand CurveEffects of a Price Change on the Quantity Demanded.Effects of Other Factors on Demand.The Demand FunctionSumming Demand Curves
2.2 Supply
The Supply CurveEffects of Price on Supply.Effects of Other Variables on Supply.The Supply FunctionSumming Supply Curves
2.3 Market Equilibrium
Using a Graph to Determine the EquilibriumUsing Algebra to Determine the EquilibriumForces That Drive the Market to Equilibrium
2.4 Shocks to the Equilibrium
Effects of a Shift in the Demand CurveQ&A 2.1AnswerEffects of a Shift in the Supply CurveEffects of Shifts in both Supply and Demand CurvesQ&A 2.2Answer
2.5 Effects of Government Interventions
Policies That Shift CurvesPrice ControlsPrice Ceilings.Price Floors.Why Supply Need Not Equal Demand.Sales TaxesEquilibrium Effects of a Specific Tax.The Same Equilibrium No Matter Who Pays the Tax.Pass-Through.Q&A 2.3Answer
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 DemandArc Elasticity.Q&A 3.1AnswerPoint Elasticity.Elasticity Along the Demand CurveQ&A 3.2AnswerDownward-Sloping Linear Demand Curves.Horizontal Demand Curves.Vertical Demand Curves.Other Demand ElasticitiesDemand Elasticities over TimeOther ElasticitiesEstimating Demand Elasticities
3.2 Regression Analysis
A Demand Function ExampleThe Demand Function and the Inverse Demand Function.Random Errors.Regression Analysis Using Microsoft Excel.Ordinary Least Squares Regression.Multivariate RegressionQ&A 3.3AnswerGoodness 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 SamplesDesirable Properties for Estimated CoefficientsA Focus Group ExampleConfidence IntervalsHypothesis Testing and Statistical Significance
3.4 Regression Specification
Selecting Explanatory VariablesQ&A 3.4AnswerCorrelation and Causation.Omitted Variables.Functional Form
3.5 Forecasting
ExtrapolationTrends.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 PreferencesCompleteness.Transitivity.More Is Better.Preference MapsPreferences and Indifference Curves.Willingness to Substitute Between Goods.Curvature of Indifference Curves.
4.2 Utility
Utility FunctionsOrdinal and Cardinal UtilityMarginal UtilityMarginal Rates of Substitution
4.3 The Budget Constraint
Slope of the Budget LineEffects of a Change in Price on the Opportunity SetEffects of a Change in Income on the Opportunity SetQ&A 4.1AnswerQ&A 4.2Answer
4.4 Constrained Consumer Choice
The Consumer’s Optimal BundleInterior Solutions.Q&A 4.3AnswerCorner Solutions.Q&A 4.4AnswerPromotionsBuy One, Get One Free Promotion.BOGOF Versus a Half-Price Promotion.
4.5 Deriving Demand Curves
4.6 Behavioral Economics
Tests of TransitivityEndowment EffectsSalience
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 FunctionThe Marginal Product of LaborQ&A 5.1AnswerThe Average Product of LaborGraphing the Product CurvesThe Effect of Extra Labor.Relationships Among Product Curves.The Law of Diminishing Marginal Returns
5.3 Long-Run Production
IsoquantsProperties of Isoquants.Shapes of Isoquants.Substituting InputsSubstitutability of Inputs Varies Along an Isoquant.Q&A 5.2AnswerSubstitutability of Inputs and Marginal Products.Cobb-Douglas Production Functions.
5.4 Returns to Scale
Constant, Increasing, and Decreasing Returns to ScaleQ&A 5.3AnswerVarying Returns to Scale
5.5 Innovation
Process InnovationOrganizational 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 CostsQ&A 6.1AnswerCosts of Durable InputsSunk Costs
6.2 Short-Run Costs
Common Measures of CostFixed Cost, Variable Cost, and Total Cost.Average Cost.Marginal Cost.Cost CurvesProduction Functions and the Shapes of Cost CurvesThe Variable Cost Curve.The Marginal Cost Curve.The Average Cost Curves.Short-Run Cost Summary
6.3 Long-Run Costs
Input ChoiceThe Isocost Line.Combining Cost and Production Information.Factor Price Changes.Q&A 6.2AnswerThe Shapes of Long-Run Cost CurvesQ&A 6.3AnswerLong-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 FirmsOwnership of For-Profit FirmsPublicly Traded and Closely Held Corporations.Liability.Firm Size.Firm Governance
7.2 Profit Maximization
ProfitTwo Steps to Maximizing ProfitOutput Rules.Q&A 7.1AnswerShutdown Rules.Profit over Time
7.3 Owners’ Versus Managers’ Objectives
Consistent ObjectivesContingent Rewards.Profit Sharing.Q&A 7.2AnswerConflicting ObjectivesRevenue Objectives.Q&A 7.3AnswerOther Objectives.Corporate Social ResponsibilityEthical Obligations of Managers.Strategic CSR.Monitoring and Controlling a Manager’s ActionsTakeovers and the Market for Corporate Control
7.4 The Make or Buy Decision
Stages of ProductionVertical IntegrationQuasi-Vertical Integration.Contracts Versus Spot Markets.Degrees of Vertical Integration.Profitability and the Supply Chain DecisionTransaction 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 StructuresPerfect Competition.Monopoly.Oligopoly.Monopolistic Competition.Comparison of Market StructuresRoad 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 MarketLarge 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 ProduceQ&A 8.1AnswerWhether to ProduceThe 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 CurveThe Short-Run Market Supply CurveShort-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 MaximizationThe Long-Run Firm Supply CurveThe Long-Run Market Supply CurveEntry 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 EquilibriumQ&A 8.2AnswerZero Long-Run Profit with Free Entry
8.4 Competition Maximizes Economic Well-Being
Consumer SurplusMeasuring Consumer Surplus Using a Demand Curve.Effects of a Price Change on Consumer Surplus.Producer SurplusMeasuring Producer Surplus Using a Supply Curve.Q&A 8.3AnswerUsing Producer Surplus.Q&A 8.4AnswerCompetition Maximizes Total SurplusEffects of Government InterventionQ&A 8.5Answer
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 RevenueMarginal Revenue and Price.The Marginal Revenue Curve.Q&A 9.1AnswerMarginal Revenue and Price Elasticity of Demand.Choosing Price or QuantityTwo Steps to Maximizing ProfitProfit-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 CurveThe Lerner IndexQ&A 9.2AnswerSources of Market Power
9.3 Market Failure Due to Monopoly Pricing
Q&A 9.3Answer
9.4 Causes of Monopoly
Cost-Based MonopolyCost Advantages.Natural Monopoly.Q&A 9.4AnswerGovernment Creation of MonopolyBarriers to Entry.Patents.
9.5 Advertising
Deciding Whether to AdvertiseHow Much to AdvertiseQ&A 9.5Answer
9.6 Networks, Dynamics, and Behavioral Economics
Network ExternalitiesDirect Size Effects.Indirect Effects.Network Externalities and Behavioral EconomicsNetwork 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 PaysWhich Firms Can Price DiscriminateNot All Price Differences Are Price DiscriminationTypes of Price Discrimination
10.2 Perfect Price Discrimination
How a Firm Perfectly Price DiscriminatesPerfect Price Discrimination Is Efficient but Harms Some ConsumersQ&A 10.1AnswerIndividual Price Discrimination
10.3 Group Price Discrimination
Group Price Discrimination with Two GroupsA Graphical Approach.Prices and Elasticities.Q&A 10.2AnswerIdentifying GroupsEffects of Group Price Discrimination on Total SurplusGroup 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 ConsumersTwo-Part Pricing with Differing Consumers
10.6 Bundling
Pure BundlingMixed BundlingQ&A 10.3AnswerRequirement 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 FailWhy Cartels Form.Why Cartels Fail.Maintaining CartelsDetection and Enforcement.Government Support.Barriers to Entry.
11.2 Cournot Oligopoly
AirlinesA Graphical Approach.An Algebraic Approach.The Number of FirmsNonidentical FirmsUnequal Costs.Q&A 11.1AnswerDifferentiated Products.Q&A 11.2AnswerMergers
11.3 Bertrand Oligopoly
Identical ProductsBest-Response Curves.Bertrand Versus Cournot.Differentiated Products
11.4 Monopolistic Competition
EquilibriumQ&A 11.3AnswerProfitable 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 StrategiesBest ResponsesFailure to Maximize Joint ProfitsQ&A 12.1Answer
12.2 Types of Nash Equilibria
Multiple EquilibriaCheap Talk.The Pareto Criterion.Mixed-Strategy EquilibriaMixed-Strategy Only Nash Equilibria.Both Pure and Mixed-Strategy Equilibria.Q&A 12.2Answer
12.3 Information and Rationality
Incomplete InformationRationalityBounded Rationality.Maximin Strategies.
12.4 Bargaining
Bargaining GamesThe Nash Bargaining SolutionQ&A 12.3AnswerInefficiency in Bargaining
12.5 Auctions
Elements of AuctionsNumber of Units.Format of Bidding.Value.Bidding Strategies in Private-Value AuctionsSecond-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 GamesCooperation in a Repeated Prisoner’s Dilemma GameImplicit Versus Explicit CollusionFinitely Repeated Games
13.2 Sequential Games
Stackelberg OligopolyCredible ThreatsQ&A 13.1Answer
13.3 Deterring Entry
Exclusion ContractsLimit PricingQ&A 13.2AnswerEntry Deterrence in a Repeated Game
13.4 Cost and Innovation Strategies
Investing to Lower Marginal CostLearning by DoingRaising Rivals’ CostsQ&A 13.3Answer
13.5 Disadvantages of Moving First
The Holdup ProblemToo-Early Product Innovation
13.6 Behavioral Game Theory
Ultimatum GamesAn 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
ProbabilityFrequency.Subjective Probability.Probability Distributions.Expected ValueQ&A 14.1AnswerVariance and Standard Deviation
14.2 Attitudes Toward Risk
Expected UtilityRisk AversionUnwillingness to Take a Fair Bet.Q&A 14.2AnswerThe Risk Premium.Risk NeutralityRisk PreferenceRisk Attitudes of Managers
14.3 Reducing Risk
Obtaining InformationDiversificationCorrelation and Diversification.Diversification Through Mutual Funds.InsuranceDetermining the Amount of Insurance to Buy.Q&A 14.3AnswerFairness and Insurance.Insurance and Diversifiable Risks.
14.4 Investing Under Uncertainty
Risk-Neutral InvestingRisk-Averse InvestingQ&A 14.4Answer
14.5 Behavioral Economics and Uncertainty
Biased Assessment of ProbabilitiesThe Gambler’s Fallacy.Overconfidence.Violations of Expected Utility TheoryFraming.The Certainty Effect.Prospect TheoryComparing 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 MarketsProducts of Unknown QualitySymmetric Information Market Equilibrium.Asymmetric Information Market Equilibrium. Q&A 15.1AnswerVarying Quality Under Asymmetric Information.Q&A 15.2Answer
15.2 Reducing Adverse Selection
Restricting Opportunistic BehaviorUniversal Coverage.Laws to Prevent Opportunism.Equalizing InformationScreening.Signaling.Third-Party Information.
15.3 Moral Hazard
Moral Hazard in Insurance MarketsMoral Hazard in Principal-Agent RelationshipsReducing Moral Hazard Using Efficient Contracts.Symmetric Information.Asymmetric Information.
15.4 Using Contracts to Reduce Moral Hazard
Fixed-Fee ContractsContingent ContractsState-Contingent Contracts.Profit-Sharing Contracts.Bonuses and Options.Piece Rates and Commissions.Q&A 15.4Answer
15.5 Using Monitoring to Reduce Moral Hazard
HostagesBonding.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 PrincipleCost-Benefit Analysis
16.2 Regulation of Imperfectly Competitive Markets
Regulating to Correct a Market FailureOptimal Price Regulation.Non-Optimal Price Regulation Due to Poor Information.Q&A 16.1AnswerNon-Optimal Price Regulation Due to Inability to Subsidize.Regulatory CaptureApplying the Cost-Benefit Principle to Regulation
16.3 Antitrust Law and Competition Policy
MergersPredatory ActionsVertical RelationshipsResale Price Maintenance.Refusal to Deal.Exclusive Dealing.Price Discrimination.
16.4 Externalities
The Inefficiency of Competition with ExternalitiesReducing ExternalitiesEmissions Standards.Emission Fees.Q&A 16.2AnswerAssigning Property Rights.Environmental Corporate Social Responsibility.The Coase Theorem
16.5 Open-Access, Club, and Public Goods
Open-Access Common PropertyGovernment Regulation of Common Property.Assigning Property Rights.Club GoodsPublic GoodsFree Riding.Reducing Free Riding.
16.6 Intellectual Property
PatentsAdvantages and Disadvantages of Patents.Q&A 16.3AnswerAlternatives to Patents.Copyright Protection
Summary
Questions1.Market Failure and Government Policy2.Regulation of Imperfectly Competitive Markets3.Antitrust Law and Competition Policy4.Externalities5.Open-Access, Club, and Public Goods6. Intellectual Property7. Managerial Problem8. MyEconLab Spreadsheet Exercises19
17 Global Business
Learning Objectives
17.1 Reasons for International Trade
Comparative AdvantageGains from Trade Between Countries.Gains from Intra-Firm Trade.Q&A 17.1AnswerIncreasing Returns to ScaleCountry Size.Product Variety.
17.2 Exchange Rates
Determining the Exchange RateExchange Rates and the Pattern of TradeManaging Exchange Rate Risk
17.3 International Trade Policies
Quotas and Tariffs in Competitive MarketsFree Trade Versus a Ban on Imports.Free Trade Versus a Tariff.Free Trade Versus a Quota.Q&A 17.2AnswerRent SeekingNoncompetitive Reasons for Trade PolicyCreating Market Power.Strategic Trade Policy.11Contingent Protection.Trade Liberalization and the World Trading SystemTrade Liberalization Problems
17.4 Multinational Enterprises
Becoming a MultinationalInternational Transfer PricingProfit-Maximizing Transfer Pricing.Q&A 17.3AnswerTax 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

Content preview from Managerial Economics and Strategy, 2/e

6 Costs

An economist is a person who, when invited to give a talk at a banquet, tells the audience “There’s no such thing as a free lunch.”

Learning Objectives

Show how to make managerial decisions using the opportunity cost concept.
Draw marginal cost, average cost, and other cost curves.
Determine how to choose inputs to minimize the cost of producing a given quantity.
Predict how experience-based learning reduces costs.
Determine when it pays to produce two goods simultaneously.

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