Managerial Economics And Strategy - Pearson Education
Managerial Economicsand StrategyTH IRD E DITIONA01 PERL3786 03 SE FM.indd 118/12/2018 18:15
A01 PERL3786 03 SE FM.indd 218/12/2018 18:15
Managerial Economicsand StrategyT H IR D E DIT IONJeffrey M. PerloffUniversity of California, BerkeleyJames A. BranderSauder School of Business,University of British ColumbiaA01 PERL3786 03 SE FM.indd 318/12/2018 18:15
FOR JACKIE, LISA, BARBARA, AND CATHYVice President, Business, Economics, and UK Courseware:Donna BattistaDirector of Portfolio Management: Adrienne D’AmbrosioSpecialist Portfolio Manager: Chris DeJohnEditorial Assistant: Aly GrindallVice President, Product Marketing: Roxanne McCarleySenior Product Marketer: Carlie MarvelProduct Marketing Assistant: Marianela SilvestriManager of Field Marketing, Business Publishing:Adam GoldsteinField Marketing Manager: Ashley BryanVice President, Production and Digital Studio, Arts and Business:Etain O’DeaDirector, Production and Digital Studio, Business and Economics:Ashley SantoraManaging Producer, Business: Alison KalilContent Producer: Carolyn PhilipsOperations Specialist: Carol MelvilleDesign Lead: Kathryn FootManager, Learning Tools: Brian SuretteSenior Learning Tools Strategist: Emily BibergerManaging Producer, Digital Studio and GLP: James BatemanManaging Producer, Digital Studio: Diane LombardoDigital Studio Producer: Melissa HonigDigital Studio Producer: Alana ColesDigital Content Team Lead: Noel LotzDigital Content Project Lead: Courtney KamaoufFull Service Project Management: Pearson CSC, Nicole Suddethand Kathy SmithInterior Design: Pearson CSCCover Design: Pearson CSCCover Art: Arsgera/ShutterstockPrinter/Binder: LSC Communications, Inc./WillardCover Printer: Phoenix Color/HagerstownMicrosoft and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published as part of the services for any purpose. All such documents and related graphics are provided“as is” without warranty of any kind. Microsoft and/or its respective suppliers hereby disclaim all warranties and conditions withregard to this information, including all warranties and conditions of merchantability, whether express, implied or statutory, fitnessfor a particular purpose, title and non-infringement. In no event shall Microsoft and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an actionof contract, negligence or other tortious action, arising out of or in connection with the use or performance of information availablefrom the services.The documents and related graphics contained herein could include technical inaccuracies or typographical errors. Changes areperiodically added to the information herein. Microsoft and/or its respective suppliers may make improvements and/or changesin the product(s) and/or the program(s) described herein at any time. Partial screen shots may be viewed in full within the softwareversion specified.Microsoft and Windows are registered trademarks of the Microsoft Corporation in the U.S.A. and other countries. This book isnot sponsored or endorsed by or affiliated with the Microsoft Corporation.Copyright 2020, 2017, 2014 by Pearson Education, Inc. 221 River Street, Hoboken, NJ 07030. All rights reserved. Manufacturedin the United States of America. This publication is protected by copyright, and permission should be obtained from the publisherprior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise. For information regarding permissions, request forms, and the appropriate contactswithin the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/.Acknowledgments of third-party content appear on page xxii, which constitutes an extension of this copyright page.PEARSON, ALWAYS LEARNING, and MYLAB are exclusive trademarks owned by Pearson Education, Inc. or its affiliates in theU.S. and/or other countries.Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of theirrespective owners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only. Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates,authors, licensees, or distributors.Cataloging-in-Publication Data is available on file at the Library of Congress119ISBN 10: 0-13-518378-2ISBN 13: 978-0-13-518378-6A01 PERL3786 03 SE FM.indd 418/12/2018 18:15
Brief ContentsPrefaceChapter 1Chapter 2Chapter 3Chapter 4Chapter 5Chapter 6Chapter 7Chapter 8Chapter 9Chapter 10Chapter 11Chapter 12Chapter 13Chapter 14Chapter 15Chapter 16Chapter 17xiiiIntroduction1Supply and Demand9Empirical Methods for Demand Analysis44Consumer Choice87Production124Costs153Firm Organization and Market Structure191Competitive Firms and Markets225Monopoly266Pricing with Market Power307Oligopoly and Monopolistic Competition350Game Theory and Business Strategy385Strategies Over Time424Decision Making Under Uncertainty462Asymmetric Information500Government and Business536Global Business579Answers to Selected QuestionsE-1DefinitionsE-14ReferencesE-19Sources for Managerial Problems, Mini-Cases, and Managerial ImplicationsE-27IndexE-38CreditsE-74vA01 PERL3786 03 SE FM.indd 518/12/2018 18:15
ContentsPrefacexiiiChapter 1 Introduction1.1 Managerial Decision MakingProfitTrade-OffsOther Decision MakersStrategy1.2 Economic ModelsMINI-CASE Using an Income ThresholdModel in ChinaSimplifying AssumptionsTesting TheoriesPositive and Normative StatementsNew Theories1.3 Using Economic Skills in Your CareerSummaryChapter 2 Supply and DemandMANAGERIAL PROBLEM Carbon Taxes2.1 DemandThe Demand CurveThe Demand FunctionUSING CALCULUS Deriving the Slopeof a Demand CurveSumming Demand CurvesMINI-CASE Summing Corn Demand Curves2.2 SupplyThe Supply CurveThe Supply FunctionSumming Supply Curves2.3 Market EquilibriumUsing a Graph to Determine the EquilibriumUsing Math to Determine the EquilibriumForces That Drive the Market to EquilibriumMINI-CASE Speed of Adjustmentto New Information2.4 Shocks to the EquilibriumEffects of a Shift in the Demand CurveQ&A 2.1Effects of a Shift in the Supply CurveMINI-CASE The Opioid EpidemicReduces Labor Market ParticipationQ&A 2.2MANAGERIAL IMPLICATION TakingAdvantage of Future 23232324252626272.5 Effects of Government InterventionsPolicies That Shift CurvesMINI-CASE Occupational LicensingPrice ControlsMINI-CASE Venezuelan Price Ceilingsand ShortagesSales TaxesQ&A 2.3MANAGERIAL IMPLICATION Cost Pass-Through2.6 When to Use the Supply-andDemand ModelMANAGERIAL SOLUTION Carbon TaxesSummary 39 Questions 3927272828303335363637Chapter 3 Empirical Methodsfor Demand AnalysisMANAGERIAL PROBLEM Estimating theEffect of an iTunes Price Change3.1 ElasticityThe Price Elasticity of DemandMANAGERIAL IMPLICATION ChangingPrices to Calculate an Arc ElasticityQ&A 3.1MINI-CASE Demand Elasticities forGoogle Play and Apple AppsUSING CALCULUS The Point Elasticity of DemandElasticity Along the Demand CurveQ&A 3.2Other Types of Demand ElasticitiesMINI-CASE Anti-Smoking Policies MayReduce Drunk DrivingDemand Elasticities over TimeOther ElasticitiesEstimating Demand Elasticities3.2 Regression AnalysisA Demand Function ExampleMINI-CASE The Portland Fish ExchangeMultivariate RegressionQ&A 3.3Goodness of Fit and the R2 StatisticMANAGERIAL IMPLICATION Focus Groups3.3 Properties and Statistical Significanceof Estimated CoefficientsRepeated SamplesDesirable Properties for Estimated CoefficientsA Focus Group ExampleConfidence IntervalsHypothesis Testing and Statistical 626364646465656767viA01 PERL3786 03 SE FM.indd 618/12/2018 18:15
Contents3.4 Regression SpecificationSelecting Explanatory VariablesMINI-CASE Determinants of CEO CompensationQ&A 3.4Functional FormMANAGERIAL IMPLICATION Experiments3.5 ForecastingExtrapolationTheory-Based Econometric ForecastingMANAGERIAL SOLUTION Estimatingthe Effect of an iTunes Price ChangeSummary 81 Questions 82Chapter 4 Consumer ChoiceMANAGERIAL PROBLEM Paying Employeesto Relocate4.1 Consumer PreferencesProperties of Consumer PreferencesMINI-CASE You Can’t Have Too Much MoneyPreference Maps4.2 UtilityUtility FunctionsOrdinal and Cardinal UtilityMarginal UtilityUSING CALCULUS Marginal UtilityMarginal Rates of Substitution4.3 The Budget ConstraintSlope of the Budget LineUSING CALCULUS The Marginal Rateof TransformationEffects of a Change in Price onthe Opportunity SetEffects of a Change in Income onthe Opportunity SetQ&A 4.1MINI-CASE RationingQ&A 4.24.4 Constrained Consumer ChoiceThe Consumer’s Optimal BundleQ&A 4.3MINI-CASE Why Americans Buy MoreE-Books Than Do GermansQ&A 4.4PromotionsMANAGERIAL IMPLICATION DesigningPromotions4.5 Deriving Demand Curves4.6 Behavioral EconomicsTests of TransitivityEndowment EffectsMINI-CASE How You Ask theQuestion MattersSalienceMANAGERIAL IMPLICATION SimplifyingConsumer ChoicesA01 PERL3786 03 SE FM.indd 114115115116MANAGERIAL SOLUTION PayingEmployees to RelocateSummary 118 Questions 119Appendix 4A The Marginal Rate of SubstitutionAppendix 4B The Consumer OptimumChapter 5 ProductionMANAGERIAL PROBLEM Labor ProductivityDuring Recessions5.1 Production Functions5.2 Short-Run ProductionThe Total Product FunctionThe Marginal Product of LaborUSING CALCULUS Calculating the MarginalProduct of LaborQ&A 5.1The Average Product of LaborGraphing the Product CurvesThe Law of Diminishing Marginal ReturnsMINI-CASE Malthus and the Green Revolution5.3 Long-Run ProductionIsoquantsMINI-CASE Self-Driving TrucksSubstituting InputsQ&A 5.2USING CALCULUS Cobb-DouglasMarginal Products5.4 Returns to ScaleConstant, Increasing, and DecreasingReturns to ScaleQ&A 5.3MINI-CASE Returns to Scale for CrocsVarying Returns to ScaleMANAGERIAL IMPLICATION Small Is Beautiful5.5 InnovationProcess InnovationMINI-CASE Robots and the Food You EatOrganizational InnovationMINI-CASE A Good Boss Raises ProductivityMANAGERIAL IMPLICATION TechnicalProgress and Competitive AdvantageMANAGERIAL SOLUTION LaborProductivity During RecessionsSummary 149 Questions 149Chapter 6 CostsMANAGERIAL PROBLEM TechnologyChoice at Home Versus Abroad6.1 The Nature of CostsOpportunity CostsMINI-CASE The Opportunity Cost of an MBAQ&A 6.1Costs of Durable 4714814814815315315415415515615618/12/2018 18:15
viiiContentsSunk Costs157MANAGERIAL IMPLICATION Ignoring Sunk Costs 1586.2 Short-Run CostsMINI-CASE Costs of Building a GuitarCommon Measures of CostUSING CALCULUS Calculating Marginal CostCost CurvesQ&A 6.2Production Functions and the Shapesof Cost CurvesShort-Run Cost Summary6.3 Long-Run CostsMINI-CASE Short Run Versus Long Runin the Sharing EconomyInput ChoiceMANAGERIAL IMPLICATION Cost Minimizationby Trial and ErrorMINI-CASE The Internet and OutsourcingQ&A 6.3The Shapes of Long-Run Cost CurvesMINI-CASE Economies of Scale at GoogleQ&A 6.46.4 The Learning CurveMINI-CASE Solar Power Learning Curves6.5 The Costs of Producing Multiple GoodsMINI-CASE Medical Economies of ScopeMANAGERIAL SOLUTION TechnologyChoice at Home Versus AbroadSummary 184 Questions 184Appendix 6A Calculating Cost CurvesAppendix 6B Long-Run Cost 5176176178179179180181182182189190Chapter 7 Firm Organization andMarket StructureMANAGERIAL PROBLEM Amazon’sDelivery Services7.1 Ownership and Governance of FirmsPrivate, Public, and Nonprofit FirmsMINI-CASE Chinese State-Owned EnterprisesOwnership of For-Profit FirmsFirm Governance7.2 Profit MaximizationProfitTwo Steps to Maximizing ProfitUSING CALCULUS Maximizing ProfitQ&A 7.1MANAGERIAL IMPLICATION MarginalDecision MakingSocial ResponsibilityMINI-CASE Trends in Social ResponsibilityForcing Firms to Maximize Profit:The Survivor Principle and Competitionfor Corporate Control7.3 Profits Over TimeInterest RatesA01 PERL3786 03 SE FM.indd 06206Investing and Profit Maximizing Over TimeQ&A 7.2MANAGERIAL IMPLICATION Stock PricesVersus Profit7.4 The Make or Buy DecisionStages of ProductionVertical IntegrationProfitability and the Supply Chain DecisionMINI-CASE NetflixMINI-CASE The Gig EconomyMarket Size and the Life Cycle of a Firm7.5 Market StructureThe Four Main Market StructuresComparison of Market StructuresDisruptive Innovations and the Evolutionof Market StructureRoad Map to the Rest of the BookMANAGERIAL SOLUTION Amazon’sDelivery ServicesSummary 221 Questions 1Chapter 8 Competitive Firmsand MarketsMANAGERIAL PROBLEM The Rising Costof Keeping On Truckin’8.1 Perfect CompetitionCharacteristics of a PerfectlyCompetitive MarketDeviations from Perfect Competition8.2 Competition in the Short RunHow Much to ProduceQ&A 8.1USING CALCULUS Profit Maximizationwith a Specific TaxWhether to ProduceMINI-CASE Fracking and ShutdownsQ&A 8.2MANAGERIAL IMPLICATION Sunk Costsand the Shutdown DecisionThe Short-Run Firm Supply CurveThe Short-Run Market Supply CurveShort-Run Competitive Equilibrium8.3 Competition in the Long RunLong-Run Competitive ProfitMaximizationThe Long-Run Firm Supply CurveMINI-CASE The Size of EthanolProcessing PlantsThe Long-Run Market Supply CurveMINI-CASE Industries with High Entry andExit RatesMINI-CASE An Upward-Sloping Long-RunSupply Curve for CottonLong-Run Competitive EquilibriumQ&A 8.3Zero Long-Run Profit with Free 24024124124224224224324624624724718/12/2018 18:15
Contents8.4 Competition Maximizes EconomicWell-BeingConsumer SurplusMANAGERIAL IMPLICATION Willingness toPay on eBayMINI-CASE Digital SurplusProducer SurplusQ&A 8.4Q&A 8.5Competition Maximizes Total SurplusMINI-CASE The Deadweight Loss ofHoliday GiftsEffects of Government InterventionQ&A 8.6MANAGERIAL SOLUTION The Rising Costof Keeping On Truckin’Summary 261 Questions250251252254254255257258258260262Chapter 9 MonopolyMANAGERIAL PROBLEM Brand-Nameand Generic Drugs9.1 Monopoly Profit MaximizationMarginal RevenueUSING CALCULUS Deriving a Monopoly’sMarginal Revenue FunctionQ&A 9.1Choosing Price or QuantityTwo Steps to Maximizing ProfitUSING CALCULUS Solving for theProfit-Maximizing OutputMINI-CASE Apple’s iPadQ&A 9.2Effects of a Shift of the Demand CurveQ&A 9.3MINI-CASE Taylor Swift Concert PricingQ&A 9.49.2 Market PowerMarket Power and the Shape of theDemand CurveMANAGERIAL IMPLICATION CheckingWhether the Firm Is Maximizing ProfitThe Lerner IndexQ&A 9.5Sources of Market Power9.3 Market Failure Due to Monopoly PricingQ&A 9.69.4 Causes of MonopolyCost-Based MonopolyQ&A 9.7Government Creation of MonopolyMINI-CASE The Canadian MedicalMarijuana MarketMINI-CASE Botox9.5 AdvertisingDeciding Whether to AdvertiseHow Much to AdvertiseA01 PERL3786 03 SE FM.indd 295USING CALCULUS Optimal AdvertisingQ&A 9.8MINI-CASE Super Bowl Commercials9.6 Internet Monopolies: Network Effectsand Scale EconomiesNetwork Externalitiesix295296296297297MANAGERIAL IMPLICATIONIntroductory PricesBehavioral Network ExternalitiesTwo-Sided MarketsNatural Monopoly on the InternetMINI-CASE Critical Mass and eBayDisruptive TechnologiesMANAGERIAL SOLUTION Brand-Nameand Generic DrugsSummary 302 Questions 302298298299299300300Chapter 10 Pricing with Market Power307MANAGERIAL PROBLEM Sale Prices10.1 Conditions for Price DiscriminationWhy Price Discrimination PaysMINI-CASE Disneyland PricingWhich Firms Can Price DiscriminateMANAGERIAL IMPLICATION Preventing ResaleMINI-CASE Preventing Resale of Designer BagsNot All Price Differences Are PriceDiscriminationTypes of Price Discrimination10.2 Perfect Price DiscriminationHow a Firm Perfectly Price DiscriminatesPerfect Price Discrimination IsEfficient but Harms Some ConsumersMINI-CASE Botox RevisitedQ&A 10.1Individual Price DiscriminationMINI-CASE Google Uses Bidding forAds to Price Discriminate10.3 Group Price DiscriminationGroup Price Discrimination withTwo GroupsUSING CALCULUS Maximizing Profit fora Group Discriminating MonopolyMINI-CASE Age DiscriminationQ&A 10.2Identifying GroupsMANAGERIAL IMPLICATION DiscountsEffects of Group Price Discriminationon Total Surplus10.4 Nonlinear Price Discrimination10.5 Two-Part PricingTwo-Part Pricing with Identical ConsumersTwo-Part Pricing with DifferingConsumersMINI-CASE Available for a Song10.6 BundlingPure 433418/12/2018 18:15
xContentsMixed BundlingQ&A 10.3Requirement Tie-In SalesMANAGERIAL IMPLICATION Ties That Bind10.7 Peak-Load PricingMINI-CASE Downhill PricingPeak-Load Pricing with a Capacity ConstraintDynamic PricingQ&A 10.4MANAGERIAL SOLUTION Sale PricesSummary344 Questions336337338339339340340341342343345Chapter 11 Oligopoly andMonopolistic CompetitionMANAGERIAL PROBLEM Gaining an Edgefrom Government Aircraft Subsidies11.1 CartelsWhy Cartels Succeed or FailMINI-CASE Employer “No-Poaching” CartelsMaintaining CartelsMINI-CASE Cheating on the MapleSyrup Cartel11.2 Cournot OligopolyAirlinesUSING CALCULUS Deriving the CournotEquilibriumThe Number of FirmsMINI-CASE Mobile Phone NumberPortabilityNonidentical FirmsQ&A 11.1Q&A 11.2MergersMINI-CASE Airline Mergers11.3 Bertrand OligopolyIdentical ProductsDifferentiated ProductsMANAGERIAL IMPLICATION Differentiatinga Product Through MarketingMINI-CASE Rising Market Power11.4 Monopolistic CompetitionMANAGERIAL IMPLICATION Managing inthe Monopolistically Competitive FoodTruck MarketEquilibriumQ&A 11.3Profitable MonopolisticallyCompetitive FirmsMINI-CASE Subsidizing the Entry Costof DentistsMANAGERIAL SOLUTION Gaining an Edgefrom Government Aircraft SubsidiesSummary 380 Questions 380Appendix 11A Nash-Bertrand EquilibriumA01 PERL3786 03 SE FM.indd 370370370372373374374Chapter 12 Game Theory andBusiness StrategyMANAGERIAL PROBLEM Dying to Work12.1 Oligopoly GamesDominant StrategiesBest ResponsesFailure to Maximize Joint ProfitsMINI-CASE Strategic AdvertisingQ&A 12.1Pricing Games in Two-Sided Markets12.2 Types of Nash EquilibriaMultiple EquilibriaMINI-CASE Cheap Talk in eBay’s BestOffer MarketMINI-CASE Timing Radio AdsMixed-Strategy EquilibriaMINI-CASE Competing E-Book FormatsQ&A 12.212.3 Information and RationalityIncomplete InformationMANAGERIAL IMPLICATION SolvingCoordination ProblemsRationalityMANAGERIAL IMPLICATION Using GameTheory to Make Business Decisions12.4 BargainingBargaining GamesThe Nash Bargaining SolutionQ&A 12.3USING CALCULUS Maximizing theNash ProductMINI-CASE Nash Bargaining over CoffeeInefficiency in Bargaining12.5 AuctionsElements of AuctionsBidding Strategies in Private-Value AuctionsMINI-CASE Experienced BiddersThe Winner’s CurseMANAGERIAL IMPLICATION Auction DesignMANAGERIAL SOLUTION Dying to WorkSummary 418 Questions 419Chapter 13 Strategies Over Time375376377377378378384MANAGERIAL PROBLEM Intel and AMD’sAdvertising Strategies13.1 Repeated GamesStrategies and Actions in Dynamic GamesCooperation in a RepeatedPrisoners’ Dilemma GameMINI-CASE Tit-for-Tat Strategies inTrench WarfareImplicit Versus Explicit CollusionMINI-CASE Signaling Drug Price IncreasesFinitely Repeated 5416417417424424
1.1 Managerial Decision Making 1 Profit 2 Trade-Offs 2 Other Decision Makers 2 Strategy 3 1.2 Economic Models 3 MINI-CASE Using an Income Threshold Model in China 4 Simplifying Assumptions 4 Testing Theories 5 Positive and Normative Statements 6 New Theori
Managerial Economics way, managerial economics may be considered as economics applied to “problems of choice’’ or alternatives and allocation of scarce resources by the firms. 1.2 MEANING OF MANAGERIAL ECONOMICS Managerial Economics is a discipline that combines e
Managerial Economics as a subject gained popularly in U.S.A after the publication of the book “Managerial Economics” by Joel Dean in 1951. Joel Dean observed that managerial Economics shows how economic analysis can be used in formulating policies. Managerial economics bridges the
ÿ Managerial economics differs from microeconomics in that microeco-nomics focuses on description and prediction while managerial eco-nomics is prescriptive. ÿ Managerial economics prescribes behavior, whereas microeconomics describes the environment. ÿ Managerial economics is an integrative course that brings the various
1. Essentials of Business Economics- D N Dwivedi, Vikas Publications. 2. Managerial Economics - Dom inick Sal watore . 3. Managerial Economics - Gupta and Mote 4. Economics - Samuel son & N or dhaus 5. Managerial Economics by Peterson and Lewis 6. Micro Economics – Dominick Salvatore 7. Macro Economics –
1. Managerial Economics – Analysis, Problems and Cases, P.L. Mehta, Sultan Chand Sons, New Delhi 2. Managerial Economics – Varshney and Maheshwari, Sultan Chand and Sons, New Delhi 3. Managerial Economics – D. Salvatore, McGraw Hill, New Delhi 4. Managerial Economics – Pearson and Lewis, Prentice Hall, New Delhi 5.
Managerial Economics, Suma Damodaran, Oxford. Macro Economics by MN Jhingan-Oxford Managerial Economics- Dr.DM.Mithani-Himalaya Publishers Managerial Economics-Dr.H.L Ahuja-S.Chand and Com pvt ltd, NewDelhi Manageria
Managerial Economics is ‘Normative’ Universal applicability The roots of Managerial Economics came from Micro Economics Relation of Managerial Economics to Economic Theory is much like that of Engineering to Physics or Medicine to Biology. It is the relation of applied field to basic fundamental disciplin
Managerial Economics Klein Mathematical Methods for Economics Krugman/Obstfeld/Melitz International Economics: Theory & Policy* Laidler The Demand for Money Lynn Economic Development: Theory and Practice for a Divided World Miller Economics Today* Miller/Benjamin The Economics of Macro Issues Miller/Benjamin/North The Economics of Public Issues .
