Managerial Economics: Foundations of Business Analysis and Strategy, Twelfth Edition
By Christopher R. Thomas and S. Charles Maurice
Contents:
CHAPTER 1 Managers, Profits, and Markets 1
1.1 The Economic Way of Thinking about Business Practices and Strategy 2
Economic Theory Simplifies Complexity 3
The Roles of Microeconomics and Industrial Organization 3
1.2 Measuring and Maximizing Economic Profit 7
Economic Cost of Using Resources 7
Economic Profit versus Accounting Profit 11
Maximizing the Value of the Firm 14
The Equivalence of Value Maximization and Profit Maximization 16
Some Common Mistakes Managers Make 16
1.3 Separation of Ownership and Control of the Firm 21
The Principal–Agent Problem 21
Corporate Control Mechanisms 24
1.4 Market Structure and Managerial Decision Making 25
What Is a Market? 26
Different Market Structures 27
Globalization of Markets 29
1.5 Summary 30
Key Terms 32
Technical Problems 32
Applied Problems 33
Mathematical Appendix: Review of Present Value Calculations 35
Mathematical Exercises 37
CHAPTER 2 Demand, Supply, and Market Equilibrium 38
2.1 Demand 39
The General Demand Function: Qd 5 f (P, M, PR, 7, PE, N ) 40
Direct Demand Functions: Qd 5 f (P) 44
Inverse Demand Functions: P 5 f (Qd ) 46
Movements along Demand 47
Shifts in Demand 48
2.2 Supply 52
The General Supply Function: Qs 5 f (P, PI , Pr , T, Pe , F ) 53
Direct Supply Functions: Qs 5 f (P ) 55
Inverse Supply Functions: P 5 f (Qs) 56
Shifts in Supply 57
2.3 Market Equilibrium 61
2.4 Measuring the Value of Market Exchange 64
Consumer Surplus 65
Producer Surplus 67
Social Surplus 67
2.5 Changes in Market Equilibrium 68
Changes in Demand (Supply Constant) 68
Changes in Supply (Demand Constant) 69
Simultaneous Shifts in Both Demand and Supply 70
Predicting the Direction of Change in Airfares: A
Qualitative Analysis 74
Advertising and the Price of Milk: A Quantitative Analysis 75
2.6 Ceiling and Floor Prices 76
2.7 Summary 78
Key Terms 79
Technical Problems 79
Applied Problems 84
CHAPTER 3 Marginal Analysis for
Optimal Decisions 88
3.1 Concepts and Terminology 89
3.2 Unconstrained Maximization 91
The Optimal Level of Activity (A*) 91
Marginal Benefit and Marginal Cost 95
Finding Optimal Activity Levels with Marginal Analysis 97
Maximization with Discrete Choice Variables 99
Sunk Costs, Fixed Costs, and Average Costs Are Irrelevant 101
3.3 Constrained Optimization 103
Marginal Benefit per Dollar Spent on an Activity 103
Constrained Maximization 104
Optimal Advertising Expenditures: An Example of
Constrained Maximization 106
Constrained Minimization 107
3.4 Summary 109
Key Terms 110
Technical Problems 110
Applied Problems 114
Mathematical Appendix: A Brief Presentation of
Optimization Theory 117
Mathematical Exercises 120
CHAPTER 4 Basic Estimation
Techniques 121
4.1 The Simple Linear Regression Model 122
A Hypothetical Regression Model 123
The Random Error Term 123
4.2 Fitting a Regression Line 125
4.3 Testing for Statistical Significance 129
The Relative Frequency Distribution for ˆ
b 130
The Concept of a t-Ratio 131
Performing a t-Test for Statistical Significance 132
Using p-Values to Determine Statistical
Significance 134
4.4 Evaluation of the Regression Equation 135
The Coefficient of Determination (R 2) 136
The F-Statistic 137
Controlling Product Quality at SLM: A Regression
Example 138
4.5 Multiple Regression 141
The Multiple Regression Model 141
4.6 Nonlinear Regression Analysis 141
Quadratic Regression Models 142
Log-Linear Regression Models 146
4.7 Summary 149
Key Terms 150
Technical Problems 150
Applied Problems 154
Statistical Appendix: Problems Encountered in
Regression Analysis 157
CHAPTER 5 Theory of Consumer
Behavior 159
5.1 Basic Assumptions of Consumer Theory 160
The Consumer’s Optimization Problem 160
Properties of Consumer Preferences 160
The Utility Function 162
5.2 Indifference Curves 163
Marginal Rate of Substitution 164
Indifference Maps 166
A Marginal Utility Interpretation of MRS 166
5.3 The Consumer’s Budget Constraint 169
Budget Lines 169
Shifting the Budget Line 172
5.4 Utility Maximization 173
Maximizing Utility Subject to a Limited Income 173
Marginal Utility Interpretation of Consumer
Optimization 176
Finding the Optimal Bundle of Hot Dogs and
Cokes 179
5.5 Individual Demand and Market Demand Curves 180
An Individual Consumer’s Demand Curve 180
Market Demand and Marginal Benefit 181
5.6 Corner Solutions 184
5.7 Summary 185
Key Terms 186
Technical Problems 186
Applied Problems 193
Mathematical Appendix: A Brief Presentation of Consumer Theory 194
Mathematical Exercises 196
Online Appendix 1: Substitution and Income
Effects of a Price Change
CHAPTER 6 Elasticity and Demand 197
6.1 The Price Elasticity of Demand 199
Predicting the Percentage Change in Quantity
Demanded 200
Predicting the Percentage Change in Price 200
6.2 Price Elasticity and Total Revenue 201
Price Elasticity and Changes in Total Revenue 201
Changing Price at Borderline Video Emporium: A
Numerical Example 203
6.3 Factors Affecting Price Elasticity of Demand 205
Availability of Substitutes 205
Percentage of Consumer’s Budget 206
Time Period of Adjustment 206
6.4 Calculating Price Elasticity of Demand 207
Computation of Elasticity over an Interval 207
Computation of Elasticity at a Point 208
Elasticity (Generally) Varies along a Demand
Curve 212
6.5 Marginal Revenue, Demand, and Price
Elasticity 214
Marginal Revenue and Demand 214
Marginal Revenue and Price Elasticity 218
6.6 Other Demand Elasticities 219
Income Elasticity (EM) 220
Cross-Price Elasticity (EXR) 221
6.7 Summary 225
Key Terms 226
Technical Problems 226
Applied Problems 232
Mathematical Appendix: Demand Elasticity 233
Mathematical Exercises 235
CHAPTER 7 Demand Estimation and
Forecasting 236
7.1 Direct Methods of Demand Estimation 238
Consumer Interviews 238
Market Studies and Experiments 241
7.2 Specification of the Empirical Demand Function 242
A General Empirical Demand Specification 242
A Linear Empirical Demand Specification 243
A Nonlinear Empirical Demand Specification 244
Choosing a Demand Specification 244
7.3 Estimating Demand for a Price-Setting Firm 246
Estimating the Demand for a Pizza Firm: An
Example 247
7.4 Time-Series Forecasts of Sales and Price 251
Linear Trend Forecasting 252
A Sales Forecast for Terminator Pest Control 253
A Price Forecast for Georgia Lumber Products 254
7.5 Seasonal (or Cyclical) Variation 255
Correcting for Seasonal Variation by Using Dummy
Variables 256
The Dummy-Variable Technique: An Example 258
7.6 Some Final Warnings 265
7.7 Summary 266
Key Terms 267
Technical Problems 268
Applied Problems 271
Mathematical Appendix Empirical Elasticities 272
Data Appendix: Data for Checkers Pizza 273
Online Appendix 2: Estimating and Forecasting
Industry Demand for
Price-Taking Firms
CHAPTER 8 Production and Cost in the
Short Run 274
8.1 Some General Concepts in Production and Cost 275
Production Functions 276
Technical and Economic Efficiency 277
Inputs in Production 278
Short-Run and Long-Run Production Periods 279
Sunk Costs versus Avoidable Costs 280
8.2 Production in the Short Run 282
Total Product 282
Average and Marginal Products 284
Law of Diminishing Marginal Product 286
Changes in Fixed Inputs 287
8.3 Short-Run Costs of Production 291
Short-Run Total Costs 291
Average and Marginal Costs 294
General Short-Run Average and Marginal Cost
Curves 295
8.4 Relations Between Short-Run Costs and
Production 297
Total Costs and the Short-Run Production
Function 297
Average Variable Cost and Average Product 298
Marginal Cost and Marginal Product 299
The Graphical Relation between AVC, SMC, AP,
and MP 300
8.5 Summary 302
Key Terms 303
Technical Problems 303
Applied Problems 307
Mathematical Appendix: Short-Run Production and
Cost Relations 309
Mathematical Exercises 310
CHAPTER 9 Production and Cost in the
Long Run 311
9.1 Production Isoquants 313
Characteristics of Isoquants 313
Marginal Rate of Technical Substitution 314
Relation of MRTS to Marginal Products 315
9.2 Isocost Curves 316
Characteristics of Isocost Curves 316
Shifts in Isocost Curves 317
9.3 Finding the Optimal Combination of Inputs 318
Production of a Given Output at Minimum Cost 319
The Marginal Product Approach to Cost
Minimization 321
Production of Maximum Output with a Given Level
of Cost 322
9.4 Optimization and Cost 324
An Expansion Path 325
The Expansion Path and the Structure of Cost 326
9.5 Long-Run Costs 327
Derivation of Cost Schedules from a Production
Function 327
9.6 Forces Affecting Long-Run Costs 332
Economies and Diseconomies of Scale 332
Economies of Scope in Multiproduct Firms 338
Purchasing Economies of Scale 344
Learning or Experience Economies 345
9.7 Relations Between Short-Run and Long-Run Costs 347
Long-Run Average Cost as the Planning Horizon 347
Restructuring Short-Run Costs 349
9.8 Summary 351
Key Terms 352
Technical Problems 352
Applied Problems 357
Mathematical Appendix: Production and Cost
Relations with Two Variable Inputs 360
Mathematical Exercises 362
CHAPTER 10 Production and Cost
Estimation 364
10.1 Specification of the Short-Run Production
Function 365
10.2 Estimation of a Short-Run Production Function 367
10.3 Short-Run Cost Estimation: Some Problems with
Measuring Cost 371
Correcting Data for the Effects of Inflation 371
Problems Measuring Economic Cost 372
10.4 Estimation of a Short-Run Cost Function 373
Estimation of Typical Short-Run Costs 374
Estimation of Short-Run Costs at Rockford
Enterprises: An Example 376
10.5 Summary 379
Key Terms 380
Technical Problems 380
Applied Problems 381
Mathematical Appendix: Empirical Production and
Cost Relations 383
Mathematical Exercises 389
Online Appendix 3: Linear Programming
CHAPTER 11 Managerial Decisions in
Competitive Markets 390
11.1 Characteristics of Perfect Competition 392
11.2 Demand Facing a Price-Taking Firm 393
11.3 Profit Maximization in the Short Run 395
The Output Decision: Earning Positive Economic
Profit 396
The Output Decision: Operating at a Loss or Shutting
Down 401
The Irrelevance of Sunk Costs, Fixed Costs, and
Average Costs 405
Short-Run Supply for the Firm and Industry 407
Producer Surplus and Profit in Short-Run
Competitive Equilibrium 408
11.4 Profit Maximization in the Long Run 410
Profit-Maximizing Equilibrium for the Firm in the
Long Run 410
Long-Run Competitive Equilibrium for the
Industry 411
Long-Run Supply for a Perfectly Competitive
Industry 413
Economic Rent and Producer Surplus in Long-Run
Equilibrium 418
11.5 Profit-Maximizing Input Usage 421
Marginal Revenue Product and the Hiring
Decision 421
Average Revenue Product and the Shutdown
Decision 424
11.6 Implementing the Profit-Maximizing Output
Decision 425
General Rules for Implementation 425
Profit Maximization at Beau Apparel: An
Illustration 427
11.7 Summary 433
Key Terms 434
Technical Problems 434
Applied Problems 440
Mathematical Appendix: Profit Maximization for
Price-Taking Firms 444
CHAPTER 12 Managerial Decisions for Firms
with Market Power 446
12.1 Measurement of Market Power 448
Market Definition 449
Elasticity of Demand 450
The Lerner Index 450
Cross-Price Elasticity of Demand 451
12.2 Barriers to Entry 451
Barriers Created by Government 455
Economies of Scale 457
Essential Input Barriers 457
Brand Loyalties 458
Consumer Lock-In 458
Network Externalities (or Network Effects) 459
Sunk Costs as a General Barrier to Entry 460
12.3 Profit Maximization Under Monopoly:
Output and Pricing Decisions 462
Demand and Marginal Revenue for a Monopolist 463
Maximizing Profit at Southwest Leather Designs:
An Example 464
Short-Run Equilibrium: Profit Maximization or Loss
Minimization 466
Long-Run Equilibrium 471
12.4 Profit-Maximizing Input Usage 472
12.5 Monopolistic Competition 476
Short-Run Equilibrium 477
Long-Run Equilibrium 478
12.6 Implementing the Profit–Maximizing Output
and Pricing Decision 480
General Rules for Implementation 480
Maximizing Profit at Aztec Electronics: An
Example 484
12.7 Multiplant Firms 488
Multiplant Production at Mercantile Enterprises 490
12.8 Summary 493
Key Terms 494
Technical Problems 494
Applied Problems 502
Mathematical Appendix: Profit Maximization
for a Monopoly 506
CHAPTER 13 Strategic Decision Making in
Oligopoly Markets 509
13.1 Decision Making When Rivals Make Simultaneous
Decisions 511
The Prisoners’ Dilemma 514
Decisions with One Dominant Strategy 517
Successive Elimination of Dominated Strategies 518
Nash Equilibrium: Making Mutually Best
Decisions 520
Super Bowl Advertising: An Example of Nash
Equilibrium 523
Best-Response Curves and Continuous Decision
Choices 525
13.2 Strategy When Rivals Make Sequential Decisions 531
Making Sequential Decisions 532
First-Mover and Second-Mover Advantages 534
Strategic Moves: Commitments, Threats, and
Promises 537
13.3 Cooperation in Repeated Strategic Decisions 539
One-Time Prisoners’ Dilemma Decisions 540
Punishment for Cheating in Repeated
Decisions 542
Deciding to Cooperate 543
Trigger Strategies for Punishing Cheating 544
Pricing Practices That Facilitate Cooperation 545
Explicit Price-Fixing Agreements and Cartels 548
Tacit Collusion 553
13.4 Strategic Entry Deterrence 554
Limit Pricing 554
Capacity Expansion as a Barrier to Entry 558
13.5 Summary 560
Key Terms 561
Technical Problems 562
Applied Problems 566
Mathematical Appendix: Derivation of
Best-Response Curves for Continuous Simultaneous
Decisions 570
Mathematical Exercises 573
CHAPTER 14 Advanced Pricing
Techniques 575
14.1 Price Discrimination: Capturing Consumer
Surplus 576
The Trouble with Uniform Pricing 576
Types of Price Discrimination 578
Conditions for Profitable Price Discrimination 579
14.2 First-Degree (or Perfect) Price Discrimination 580
14.3 Second-Degree Price Discrimination Methods 583
Two-Part Pricing 584
Declining Block Pricing 593
14.4 Third-Degree Price Discrimination 594
Allocation of Sales in Two Markets to Maximize
Revenue 595
Profit Maximization with Third-Degree Price
Discrimination 598
14.5 Pricing Practices for Multiproduct Firms 603
Pricing Multiple Products Related in
Consumption 604
Bundling Multiple Products 607
14.6 Cost-Plus Pricing 610
Practical and Conceptual Shortcomings 611
14.7 Summary 615
Key Terms 616
Technical Problems 616
Applied Problems 619
Mathematical Appendix: Two-Part Pricing with two
Identical Groups of Buyers 623
Online Appendix 4: Pricing Multiple Products
Related in Production
CHAPTER 15 Decisions Under Risk and
Uncertainty 625
15.1 Distinctions Between Risk and Uncertainty 626
15.2 Measuring Risk with Probability
Distributions 627
Probability Distributions 627
Expected Value of a Probability Distribution 629
Dispersion of a Probability Distribution 629
15.3 Decisions Under Risk 632
Maximization of Expected Value 632
Mean–Variance Analysis 634
Coefficient of Variation Analysis 635
Which Rule Is Best? 635
15.4 Expected Utility: A Theory of Decision Making
Under Risk 637
A Manager’s Utility Function for Profit 638
Deriving a Utility Function for Profit 639
Maximization of Expected Utility 642
15.5 Decisions Under Uncertainty 645
The Maximax Criterion 645
The Maximin Criterion 647
The Minimax Regret Criterion 648
The Equal Probability Criterion 648
15.6 Summary 649
Key Terms 650
Technical Problems 651
Applied Problems 653
Mathematical Appendix: Decisions Under
Risk 655
CHAPTER 16 Government Regulation of
Business 656
16.1 Market Competition and Social Economic
Efficiency 658
Efficiency Conditions for Society 658
Social Economic Efficiency Under Perfect
Competition 659
16.2 Market Failure and the Case for Government
Intervention 662
16.3 Market Power and Public Policy 664
Market Power and Allocative Inefficiency 664
Market Power and Deadweight Loss 665
Promoting Competition through Antitrust
Policy 667
Natural Monopoly and Market Failure 668
Regulating Price Under Natural Monopoly 670
16.4 The Problem of Negative Externality 673
Pollution: Market Failure and Regulation 676
16.5 Nonexcludability 684
Common Property Resources 684
Public Goods 686
16.6 Information and Market Failure 688
Imperfect Information about Prices 688
Imperfect Information about Product Quality 689
Information as a Public Good 690
16.7 Summary 692
Key Terms 693
Technical Problems 694
Applied Problems 700
Web Chapter 1: The Investment Decision
APPENDIX: STATISTICAL TABLES 701
INDEX 705