BRIEF CONTENTS

Preface

P A R T l

XI

Introduction

1 Introduction and Goals of the Firm2 Fundamental Economic Concepts

2A Differential Calculus Techniquesin Management

l

226

57

Demand and Forecasting 75

3 Demand Analysis 764 Estimating Demand 112

4A Problems in Applying the LinearRegression Model 145

5 Business and Economic Forecasting 1616 Managing Exports 202

P A R T I I I

Production and Cost 257

7 Production Economics 2587A Maximization of Production Output

Subject to a Cost Constraint 2978 Cost Analysis 299

8A Long-Run Costs with a Cobb-DouglasProduction Function 329

9 Applications of Cost Theory 3339A Mass Customization and the

Learning Curve 365

P A R T IV

Pricing and Output Decisions:Strategy and Tactics

10 Prices, Output, and Strategy: Pureand Monopolistic Competition

11 Price and Output Determination:Monopoly and Dominant Firms

371

372

423

12 Price and Output Determination: Oligopoly 45213 Best-Practice Tactics: Game Theory 485

13A Entry Deterrence and AccommodationGames 531

14 Pricing Techniques and Analysis 542

Organizational Architectureand Regulation

15 Contracting, Governance,and Organizational Form

15A Auction Design and InformationEconomics

16 Government Regulation17 Long-Term Investment Analysis

Appendices

A The Time Value of MoneyB TablesC Check Answers to Selected

End-of-Chapter Exercises

Index

Web Appendices

A Consumer Choice Using Indifference CurveAnalysis

B International Parity ConditionsC Production Decisions and Linear ProgrammingD Capacity Planning and Pricing against a Low-

Cost Competitor — A Case StudyE Pricing of Joint Products and Transfer PricingF Decisions Under Risk and Uncertainty

591

592

630660695

A- 1B-l

C- 1

I- 1

IV

CONVENI

Preface

PA RT l

XI

Introduction

CHAPTER 1

Chapter PreviewManagerial Challenge: Executive PerformanceBonus Plan: General ElectricWhat îs Managerial Economics?The Decision-Making ModelThe Role of ProfitsObjective of the FirmSeparation of Ownership and Control:The Principal- Agent ProblemWhat Went Right/What Went Wrong:Saturn CorporationImplications of Shareholder WealthMaximizationWhat Went Right/What Went Wrong:Eli Lilly Depressed by Loss of Prozac PatentSummaryExercisesCase Exercises: Designing a ManagerialIncentives ContractReducing Greenhouse Gases

CHAPTER 2EC

2455

12

15

15

16

23

2425

Chapter Preview 26Managerial Challenge: Revenue Managementat American Airlines 26Demand and Supply: A Quick ReviewMarginal AnalysisThe Net Present Value Concept 41Meaning and Measurement of Risk 44What Went Right/What Went Wrong:Long-Term Capital Management (LTCM) 49The Relationship Between Risk and Return 52Summary 54Exercises 55

APPENDIX2ADlFFERENTIAL CALCULUS TECHNIQUES

INjŞ4ANAGEM[ENT____^

Relationship Between Marginal Analysisand Differential Calculus 57Managerial Challenge: A Skeleton in theStealth Bomber's Closet 58Applications of Differential Calculusto Optimization Problems 65Parţial Differentiation and MultivariateOptimization 70SummaryExercises 72

P A R T II

Demand and Forecasting 75

CHAPTER 3DEMAND ANALYSIS 76

Chapter PreviewManagerial Challenge: Health Care Reformand Cigarette TaxesDemand RelationshipsThe Price Elasticity of DemandInternational Perspectives: Free Trade and thePrice Elasticity of Demand: Nestle YogurtThe Income Elasticity of DemandCross Price Elasticity of DemandOther Demand Elasticity MeasuresThe Combined Effect of Demand ElasticitiesSummaryExercisesCase Exercise: Polo Golf Shirt Pricing

CHAPTER 4

76

76

81

97

98

100

104

105

106

106

111

Chapter Preview 112Managerial Challenge: The Demand for PublicTransportation 112Estimating Demand Using MarketingResearch Techniques 114

Statistical Estimation of The Demand FunctionA Simple Linear Regression Model

Multiple Linear Regression Model

Summary

Exercises

Case Exercise: Soft Drink Demand Estimation

APPENDIX4APROBLEMS IN APPLYING THE LINEAR

Introduction

Nonlinear Regression Models

Summary

Exercises

CHAPTER 5

Chapter Preview

Managerial Challenge: Export MarketPricing at Toyota

115

119

132

137

138

143

145

156

158

158

Chapter Preview 161

Managerial Challenge: Excess Fiber OpticCapacity at Global Crossing Inc. 161

The Significance of Forecasting 1 63

Selecting a Forecasting Technique 163

Alternative Forecasting Techniques 165

Deterministic Time-Series Analysis 165

Smoothing Techniques 173

Barometric Techniques 179

Survey and Opinion-Polling Techniques 1 84

Econometric Models 185

Stochastic Time-Series Analysis 189

Forecasting with Input-Output Tables 192

International Perspectives: Long-Term SalesForecasting by General Motors in OverseasMarkets 193

Summary 193

Exercises 194

Case Exercises: South Pole Ice Cream Company 199

Cruise Ship Arrivals in Alaska 199

Lumber Price Forecast 200

CHAPTER 6MANAGING EXPORTS 202

202

202

215

Introduction 203

Import-Export Sales and Exchange Rates 204

International Perspectives: The Collapse of Exportand Domestic Sales at Cummins Engine 206

Outsourcing 207

China Trade Blossoms 209

The Market for U.S. Dollars as Foreign Exchange 210

Foreign Exchange Risk Management 214

International Perspectives: Toyota and HondaBuy U.S. Assembly CapacityThe Determinants of Long-Run Trendsin Exchange Rates 216

Purchasing Power Parity 221

What Went Right/What Went Wrong:Ford Motor Co. and Exide Batteries:Are Country Managers Here to Stay? 222

International Trade: A Managerial Perspective 231

Free Trade Areas: The European Unionand NAFTA 241

Perspectives on the U.S. Trade Deficit 250

Summary 251

Exercises 253

Case Exercises: Predicting the Long-Term Trendsin Value of the U.S. Dollar, DM, and Euro 254

U.S. Energy Policy, Oii Imports, and the Priceof Gasoline 255

Production and Cost

CHAPTER 7PRODUCTION ECONOMICS

257

258

Chapter Preview 258

Managerial Challenge: What Went Wrongin California's Deregulation of Electricity? 258

The Production Function 260

Production Functions with One Variable Input 263

What Went Right/What Went Wrong: FactoryBottlenecks at a Boeing Assembly Plant 265

Determining the Optimal Use of theVariable Input 270

Production Functions with MultipleVariable Inputs 272

Determining the Optimal Combinationof Inputs 277

VI

CONTENTS

A Fixed Proportions Optimal Production Process 281Returns to Scale 286Summary 291Exercises 292Case Exercise: The Production Functionfor Wilson Company 295

Break-Even Analysis Versus Contribution Analysis 348Linear Break-Even Analysis 349Summary 359Exercises 359Case Exercises: Cost Functions 361Charter Airline Operating Decisions 363

APPENDIX 7 AMAXIMIZATION OF PRODUCTION OUTPUTSUBJECT TO A COST CONSTRAINT 297

APPENDIX 9AMASS CUSTOMIZATION AND THELEARNING CURVE 365

Exercise

CHAPTER 8COST ANALYSIS

298

299

Learning Curve RelationshipThe Percentage of LearningExercise

365368369

Chapter Preview 299Managerial Challenge: US AirwaysCost Structure 299The Meaning and Measurement of Cost 300Short-Run Cost Functions 305Long-Run Cost Functions 312Economies and Diseconomies of Scale 316International Perspectives: How JapaneseCompanies Deal with the Problems of Size 320Summary 323Exercises 323Case Exercise: Cost Analysis 327

APPENDIX 8ALONG-RUN COSTS WITH A COBB-DOUGLASPRODUCTION FUNCTION 329Exercises

CHAPTER 9APPLICATIONS OF COST THEORY

332

333

Chapter Preview 333Managerial Challenge: How Exactly HaveComputerization and Information TechnologyLowered Costs at Chevron, Timken,and Merck? 333Types of Cost Functions 334Estimating Short-Run Cost Functions 335What Went Right/What Went Wrong: Boeing:The Rising Marginal Cost of 747s 338Long-Run Cost-Output Relationships 340

PA RT IV

Pricing and Output Decisions:Strategy and Tactics

CHAPTER 10PRICES, OUTPUT, AND STRATEGY: PUREAND MONOPOLISTIC COMPETITION

371

372Chapter Preview 372Managerial Challenge: Resurrecting Apple 372Introduction 374Competitive Strategy 375What Went Right/What Went Wrong: Xerox 376Porter's Five Forces Strategic Framework 380A Continuum of Market Structures 391Price-Output Determination Under PureCompetition 394Price-Output Determination UnderMonopolistic Competition 400What Went Right/What Went Wrong:The Dynamics of Competition at Amazon.com 402Selling and Promotional Expenses 405Competitive Markets Under AsymmetricInformation [Opţional Advanced Section] 408Solutions to the Adverse Selection Problem 413Summary 418Exercises 419Case Exercises: HP and Dell PersonalComputers 422Saving Sony Music 422

vii

CONTENTS

CHAPTER11PRICE AND OUTPUT DETERMINATION:MONOPOLY AND DOMINANT FlRMS

CHAPTER 13BEST-PRACTICE TACTICS: GAME THEORY 485

423

Chapter Preview 423Managerial Challenge: Dominant MicroprocessorCompany Intel Adapts to Next Trend 423Monopoly Defined 424The Sources of Market Power for a Monopolist 425What Went Right/What Went Wrong:Pilot Error at Palm 429Price and Output Determination fora Monopolist 430The Optimal Markup, Contribution Margin,and Contribution Margin Percentage 433Regulated Monopolies 439What Went Right/What Went Wrong:The Public Service Company of New Mexico 440The Economic Raţionale for Regulation 441Summary 445Exercises 445Case Exercise: Differential Pricingof Pharmaceuticals: The HIV/ AIDS Crisis

CHAPTER 12PRICE AND OUTPUT DETERMINATION:

450

Chapter Preview 452Managerial Challenge: Are Nokia's Marginson Cell Phones Collapsing?Oligopolistic Market StructuresInterdependencies in Oligopolistic IndustriesIgnoring InterdependenciesCartels and Other Forms of CollusionInternational Perspectives: The Organizationof Petroleum Exporting Countries(OPEC) Cartel 467Price Leadership 471The Kinked Demand Curve Model 475Avoiding Price Wars 476What Went Right/What Went Wrong:Good-Better-Best Product Strategy at Kodak 478Summary 481Exercises 482Case Exercise: Cell Phones DisplaceMobile Phone Satellite Networks 484

Chapter PreviewManagerial Challenge: Large-Scale EntryDeterrence of Low-Cost Discounters:Southwest, People Express, Value Jet, Kiwi,and JetBlueOligopolistic Rivalry and Game TheoryAnalyzing Simultaneous GamesThe Escape from Prisoner's DilemmaAnalyzing Sequential GamesBusiness Rivalry as a Self-EnforcingSequential GameCredible Threats and CommitmentsReplacement GuaranteesSummaryExercisesCase Exercise: International Perspectives:The Superjumbo Dilemma

APPENDIX13AENTRY DETERRENCE AND ACCOMMODATION

485

485487492496507

511515518524525

529

531

Excess Capacity as a Credible Threat 531Precommitments Using Non-RedeployableAssets 533Summary 540Exercises 541

452453458459460

CHAPTER 14PRICING TECHNIQUES AND ANALYSIS

Chapter Preview

542

542

Computers: Market Share VersusCurrent Profitability 542A Conceptual Framework for Proactive,Systematic-Analytical, Value-Based Pricing 543Optimal Differential Price Levels 546Differential Pricing in Target MarketSegments 555What Went Right/What Went Wrong: $19.95 for"Unlimited Access" at AOL Time Warner 561Pricing in Practice 567The Practice of Revenue Management,Advanced Material 573

viii

CON' j N' S

Summary 585Exercises 586Case Exercise: Congestion Pricing LibraryResearch 589

P A R T V

Organizational Architectureand Regulation

CHAPTER 15CONTRACTING, GOVERNANCE,AND ORGANIZATIONAL FORM

591

592

Chapter Preview 592Managerial Challenge: Controlling the Vertical:Ultimate TV 592Introduction 593The Role of Contracting in Cooperative Games 594Corporale Governance and the Problemof Moral Hazard 600What Went Right/What Went Wrong:Moral Hazard and Holdup at Enronand Worldcom 604The Principal-Agent Model 604What Went Right/What Went Wrong: Why HaveRestricted Stock Grants Replaced ExecutiveStock Options at Microsoft? 610Choosing the Efficient Organizational Forrn 612What Went Right/What Went Wrong:Cable Allies Refuse to Adopt Microsoft'sWebTV as an Industry Standard 616International Perspectives: Economies of Scaleand International Joint Venturesin Chip Making 617Vertical Integration 619What Went Right/What Went Wrong:Dell Replaces Vertical Integration withVirtual Integration 623Summary 625Exercises 626Case Exercises: Borders Books and Amazon.comDecide to Do Business Together 627Designmg a Managerial Incentive Contract 628The Division of Investment Banking Fees 629Library Exercise: Vertical Integrationat GM-Fisher Body 629

APPENDIX15AAUCTION DESIGN AND INFORMATIONECONOMICS 630Queue Service Rules 630Auctions 633Incentive-Compatible Revelation Mechanisms 648International Perspectives: Joint Venturein Memory Chips: IBM, Siemens, and Toshiba 653International Perspectives: Whirlpool's JointVenture in Appliances Improves Upon Maytag'sOutright Purchase of Hoover 655Summary 656Exercises 657Case Exercises: Spectrum Auction 658Debugging Computer Software: Intel 659

CHAPTER 16GOVERNMENT REGULATION 660

Chapter PreviewManagerial Challenge: Deregulationand the Coase TheoremThe Regulation of Market Structureand ConductAntitrust Regulation Statutes and theirEnforcementAntitrust Prohibition of SelectedBusiness Decisions

660

660

661

664

667Command and Control RegulatoryConstraints: An Economic Analysis 673The Regulation of Externalities 675Governmental Protection of Business 683The Optimal Deployment Decision:To License or Secure Captive Use 683What Went Right/What Went Wrong: Aventis 684What Went Right/What Went Wrong:Technology Licenses Cost Palm Its Lead in PDAs 686What Went Right/What Went Wrong:Motorola: What They Didn't Know Hurt Them 688Summary 690Exercises 691Case Exercises: Price Fixing of AuctionHouse CommissionsMicrosoft Tying ArrangementsMusic Recording Industry Blockedfrom Consolidating

693693

694

IX

CONTENTS

CHAPTER 17LONG-TERM INVESTMENT ANALYSIS 695

Chapter Preview 695Managerial Challenge: Multigenerational Effectsof Ozone Depletion and Greenhouse Gases 695The Nature of Capital Expenditure Decisions 696A Basic Framework for Capital Budgeting 697The Capital Budgeting Process 698Estimating the Firm's Cost of Capital 707Cost-Benefit Analysis 714Steps in Cost-Benefit Analysis 716Objectives and Constraints in Cost-BenefitAnalysis 718Analysis and Valuation of Benefits and Costs 719The Appropriate Rate of Discount 722Cost-Effectiveness Analysis 724Summary 726Exercises 727Case Exercises: Cost-Benefit Analysis 731Industrial Development Tax Reliefand Incentives 734

Appendices

A The Time Value of Money A-lB Tables B-lC Check Answers to Selected

End-of-Chapter Exercises C-l

Index 1-1

Web Appendices

A Consumer Choice Using Indifference CurveAnalysis

B International Parity ConditionsC Production Decisions and Linear ProgrammingD Capacity Planning and Pricing against a Low-

Cost Competitor—A Case StudyE Pricing of Joint Products and Transfer PricingF Decisions Under Risk and Uncertainty