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Eric Bentzen
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15e
Managerial Economics
Mark Hirschey
University of Kansas
Eric Bentzen
Copenhagen Business School
Carsten Scheibye
Copenhagen Business School
Australia Brazil Mexico Singapore United Kingdom United States

● ● ● ● ●
Managerial Economics, Fifteenth © 2019, Cengage Learning EMEA
Edition WCN: 02-300
Mark Hirschey, Eric Bentzen
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Print Number: 01 Print Year: 2019
Dedication
To Christine
(Mark Hirschey)
To Birgitte
(Eric Bentzen)
To Susanne
(Carsten Scheibye)
Brief Contents
Preface xii
Part 1: Overview of Managerial Economics 1
1. Nature and Scope of Managerial Economics 3
2. Economic Optimization 25
3. Demand and Supply 81
Part 2: Demand Analysis and Estimation 111

4. Demand Analysis 113
5. Demand Estimation 161
6. Forecasting 197
Part 3: Production and Competitive Markets 239

7. Production Analysis 241
8. Cost Analysis and Estimation 289
9. Linear Programming 329
10. Competitive Markets 369
11. Performance and Strategy in Competitive Markets 403
Part 4: Imperfect Competition 445

12. Monopoly and Monopsony 447
13. Monopolistic Competition and Oligopoly 487
14. Game Theory and Competitive Strategy 529
15. Pricing Practices 565
Part 5: Long-Term Investment Decisions 609

16. Risk Analysis 611
17. Capital Budgeting 649
18. Organization Structure and Corporate Governance 685
19. Government in the Market Economy 719
Appendix A: Compounding and the Time Value of Money 757
Appendix B: Interest Factor Tables 773
Appendix C: Statistical Tables 781
Index 787
iv
Contents
Part 1: Overview of Managerial Economics 1

Chapter 1: Nature and Scope of Managerial Summary 45
Economics 3 Questions 46
How is Managerial Economics Useful? 3
Self-Test Problems and Solutions 47
Managerial Application 1.1 Business Ethics 5
Problems 52
Theory of the Firm 7
Case Study: Spreadsheet Analysis of the
Profit Measurement 11 EOQ at the Neighborhood Pharmacy, Inc. 56
Managerial Application 1.2 The World is Selected References 57
Turning to Capitalism and Democracy 13
Appendix 2A: Maths Analysis for Managers 58
Why do Profits Vary Among Firms? 14
Properties of Real Numbers 58
Managerial Application 1.3 Google on Social
Responsibility 15 Equations 60
Role of Business in Society 16 Concept of a Marginal 63
Managerial Application 1.4 The IKEA way 18 Rules for Differentiating a Function 65
Structure of this Text 18 Appendix 2B: Multivariate Optimization
and the Lagrangian Technique 72
Summary 20
Partial Derivative Concept 72
Questions 20
Maximizing Multivariate Functions 73
Case Study: Is Coca-Cola the ‘Perfect’ Business? 21
Constrained Optimization 74
Selected References 24
Problem 80
Chapter 2: Economic Optimization 25
Chapter 3: Demand and Supply 81
Economic Optimization Process 25
Basis for Demand 81
Revenue Relations 27
Managerial Application 3.1 Energy
Managerial Application 2.1 Ethical Aspects Consumption in the World 83
of Corporate Governance 28
Market Demand Function 83
Managerial Application 2.2 Do Firms
Really Optimize? 33 Demand Curve 85
Cost Relations 34 Basis for Supply 88
Profit Relations 38 Market Supply Function 89
Incremental Concept in Economic Analysis 42 Supply Curve 91
Managerial Application 2.3 Behavioural Market Equilibrium 94

Economics 43 Summary 100
v
vi Contents
Questions 101 Case Study: Spreadsheet Analysis of Demand

Self-Test Problems and Solutions 101 and Supply for Sunbest Orange Juice 108
Problems 104 Selected References 110
Part 2: Demand Analysis and Estimation 111
Chapter 4: Demand Analysis 113 Managerial Application 5.2 Market Experiments

Consumer Decision-Making 113 on the Web 172
Measures of Regression Model Significance 177
Managerial Application 4.1 Odd-Number
Pricing Riddle 119 Judging Variable Significance 182
Indifference Curves 119 Summary 184

Questions 185
Budget Constraints 121
Individual Demand 125
Problems 190
Optimal Consumption 131
Managerial Application 4.2 Relationship Case Study: Demand Estimation
Marketing 132 for Mrs. Smyth’s Pies 194
Demand Sensitivity Analysis: Elasticity 135 Selected Reference 196

Price Elasticity of Demand 136 Chapter 6: Forecasting 197
Price Elasticity and Marginal Revenue 140 Forecasting Applications 197
Managerial Application 4.3 Haggling Managerial Application 6.1 Economic
in the Car Business 144 Forecasting: The Art and the Science 199
Price Elasticity and Optimal Pricing Policy 144 Qualitative Analysis 200
Cross-Price Elasticity of Demand 146 Trend Analysis and Projection 201
Income Elasticity of Demand 147 Managerial Application 6.2 Crypto Predictions 206
Managerial Application 4.4 What’s in a Name? 149 Business Cycle 206
Summary 149 Managerial Application 6.3 The Stock Market
Questions 150 and the Business Cycle 213
Self-Test Problems and Solutions 151 Exponential Smoothing 214
Problems 156 Econometric Forecasting 217
Case Study: Optimal Level of Advertising 159 Managerial Application 6.4 How Good is Your
Forecasting Ability? 218
Judging Forecast Reliability 221
Chapter 5: Demand Estimation 161 Choosing the Best Forecast Technique 223
Interview and Experimental Methods 161 Summary 225
Simple Demand Curve Estimation 162 Questions 226
Managerial Application 5.1 Sampling Self-Test Problems and Solutions 227
Technology for TV Advertising 163
Problems 231
Simple Market Demand Curve Estimation 165
Case Study: Forecasting Global Performance
Identification Problem 168 for a Mickey Mouse Organization 235
Regression Analysis 172 Selected Reference 238
Contents vii
Part 3: Production and Competitive Markets 239
Chapter 7: Production Analysis 241 Managerial Application 8.2 GAAP and IRFS 296
Factors of Production 241 Managerial Application 8.3 Cost Stickiness 300
The Short Run 242 Minimum Efficient Scale 301
The Long Run 242 Firm Size and Plant Size 302
Production Functions 242 Learning Curves 308
Input–Output Analysis 242 Managerial Application 8.4 Bigger Isn’t
Total, Marginal, and Average Product 244 Always Better 308
Law of Marginal Returns to a Factor 251 Economies of Scope 311
Law of Diminishing Returns to a Factor 251 Cost–Volume–Profit Analysis 312
Managerial Application 7.1 Efficiency Wages 252 Summary 317
Input Combination Choice 255 Questions 318
Marginal Revenue Product and Optimal Self-Test Problems and Solutions 318
Employment 259 Problems 321
Managerial Application 7.2 National Minimum Case Study: Estimating Hospitalization Costs
Wages in the EU 260 for Regional Hospitals 324
Optimal Combination of Multiple Inputs 262 Selected References 327
Optimal Levels of Multiple Inputs 266
Chapter 9: Linear Programming 329
Returns to Scale 267
Basic Assumptions 329
Productivity Measurement 269
Managerial Application 9.1 Karmarkar’s
Managerial Application 7.3 Labour Productivity
LP Breakthrough 330
Growth in Selected Countries 2009–2016 270
Managerial Application 9.2 LP: More than
Summary 271
a Visual Approach 331
Questions 272
Production Planning for Multiple Products 331
Graphic Specification and Solution 333
Problems 276
Algebraic Specification and Solution 338
Case Study: Worker Productivity Among Giant
US Corporations 280 Managerial Application 9.3 LP on the PC! 342
Selected References 283 Dual in Linear Programming 342
Appendix 7A: A Constrained Optimization Dual Specification 343

Approach to Developing the Optimal Input Solving the Dual Problem 345
Combination Relationships 284 Summary 348
Constrained Production Maximization 284 Questions 349
Constrained Cost Minimization 286
Problem 287
Problems 357
Chapter 8: Cost Analysis and Estimation 289 Case Study: An LP Pension Funding Model 362
Economic and Accounting Costs 289 Appendix 9A: Rules for Forming the Dual Linear
Role of Time in Cost Analysis 291 Programming Problem 365
Managerial Application 8.1 GE’s ‘20-70-10’ Plan 292 Primal Problem 365
Short-Run Cost Curves 293 Dual Problem 366
Long-Run Cost Curves 296 Selected References 367
viii Contents
Chapter 10: Competitive Markets 369 Competitive Market Efficiency 403

Competitive Environment 369 Managerial Application 11.1 The Walmart
Factors that Shape the Competitive Phenomenon 407
Environment 370 Market Failure 408
Managerial Application 10.1 International Trade Role for Government 410
Benefits the Rich More Than the Poor 371 Subsidy and Tax Policy 411
Competitive Market Characteristics 373 Managerial Application 11.2 Corn Growers
Managerial Application 10.2 Is the Stock Market Discover Oil! 411
Perfectly Competitive? 374 Tax Incidence and Burden 414
Profit Maximization in Competitive Markets 375 Managerial Application 11.3 Measuring
Marginal Cost and Firm Supply 379 Economic Profits 418
Competitive Market Supply Curve 382 Price Controls 418
Managerial Application 10.3 Dot.com 383 Business Profit Rates 421
Competitive Market Equilibrium 386 Market Structure and Profit Rates 424
Summary 388 Competitive Market Strategy 426
Questions 389 Long-Run Firm Performance 427
Self-Test Problems and Solutions 390 Summary 427
Problems 395 Questions 429
Case Study: Profitability Effects of Firm Size Self-Test Problems and Solutions 430
for DJIA Companies 399 Problems 436
Selected References 401 Case Study: The Most Profitable S&P 500
Companies 441
Chapter 11: Performance and Strategy
in Competitive Markets 403 Selected References 444
Part 4: Imperfect Competition 445

Chapter 12: Monopoly and Monopsony 447 Questions 471
Monopoly Market Characteristics 447 Self-Test Problems and Solutions 471
Managerial Application 12.1 Commission Fines Problems 478
Eight Producers of Capacitors €254 Million for Case Study: Effect of R&D on Tobin’s q 483
Participating in Cartel 449 Selected References 485
Profit Maximization Under Monopoly 450
Chapter 13: Monopolistic Competition
Social Costs of Monopoly 453 and Oligopoly 487
Social Benefits of Monopoly 457 Contrast Between Monopolistic Competition
Monopoly Regulation 459 and Oligopoly 487
Managerial Application 12.2 Is Ticketmaster Monopolistic Competition 489
a Monopoly? 461 Managerial Application 13.1 Dell’s Price
Monopsony 464 War with Dell 490
Antitrust Policy 468 Monopolistic Competition Process 493
Managerial Application 12.3 Is This Why Managerial Application 13.2 Intel: Running
They Call it ‘Hardball’? 468 Fast to Stay in Place 493
Competitive Strategy in Monopoly Markets 469 Oligopoly 497
Summary 470 Cartels and Collusion 498
Contents ix
Oligopoly Output-Setting Models 499 Self-Test Problems and Solutions 554

Oligopoly Price-Setting Models 504 Problems 557
Census Measures of Market Concentration 511 Case Study: Time Warner, Inc. is Playing Games
Managerial Application 13.3 Horizontal Merger with Stockholders 561
Guidelines 513 Selected References 563
Summary 514
Chapter 15: Pricing Practices 565
Questions 515
Pricing Rules and Analysis 566
Problem 520 Mark-Up Pricing and Profit Maximization 567
Case Study: Market Structure Analysis Managerial Application 15.1 Mark-Up Pricing
at Columbia Drugstores, Inc. 525 Technology 568
Selected References 527 Price Discrimination 571

Price Discrimination Example 573
Chapter 14: Game Theory and
Competitive Strategy 529 Managerial Application 15.2 Do Colleges
Price Discriminate? 573
Game Theory Basics 529
Two-Part Pricing 577
Managerial Application 14.1 Asymmetric
Multiple-Product Pricing 580
Information 531
Joint Products 582
Prisoner’s Dilemma 532
Joint Product Pricing Example 584
Nash Equilibrium 535
Managerial Application 15.3 10 cents
Infinitely Repeated Games 537 for a Gallon of Gas in Dayton, Ohio 585
Managerial Application 14.2 The Market Managerial Application 15.4 Why Some
for Lemons 538 Price Wars Never End 589
Finitely Repeated Games 539 Summary 589
Game Theory and Auction Strategy 541 Questions and Answers 590
Managerial Application 14.3 Wrigley’s Success Self-Test Problems and Solutions 591
Formula 542 Problems 593
Competitive Strategy 543 Case Study: Pricing Practices in the Denver,
Pricing Strategies 545 Colorado, Newspaper Market 597
Managerial Application 14.4 Network Selected References 599
Switching Costs 547 Appendix 15A: Transfer Pricing 600
Nonprice Competition 548 Transfer Pricing Problem 600
Summary 552 Global Transfer Pricing Example 602
Questions 553 Problem 606
Part 5: Long-Term Investment Decisions 609

Chapter 16: Risk Analysis 611 Managerial Application 16.2 Why are
Lotteries Popular? 621
Concepts of Risk and Uncertainty 611
Adjusting the Valuation Model for Risk 623
Probability Concepts 613
Managerial Application 16.3 Stock Option
Managerial Application 16.1 Behavioural Finance 613 Backdating Scandal 624
Standard Normal Concept 619 Decision Trees and Computer Simulation 628
Utility Theory and Risk Analysis 621 Managerial Application 16.4 Internet Fraud 633
x Contents
Summary 634 Managerial Application 18.3 Institutional

Questions 635 Investors are Corporate Activists 703
Self-Test Problems and Solutions 636 Agreements and Alliances Among Firms 703
Problems 639 Legal and Ethical Environment 705
Case Study: Stock-Price Beta Estimation for Managerial Application 18.4 Sarbanes–Oxley 706
Google, Inc. 644 Summary 707
Selected References 647 Questions 709
Chapter 17: Capital Budgeting 649
Problems 711
Capital Budgeting Process 649
Case Study: Do Boards of Directors Make
Steps in Capital Budgeting 650 Good Corporate Watchdogs? 714
Managerial Application 17.1 Market-Based Selected References 717
Capital Budgeting 652
Cash Flow Estimation Example 652 Chapter 19: Government in the Market
Capital Budgeting Decision Rules 655 Economy 719
Project Selection 660 Externalities 719
Managerial Application 17.2 Is the Sun Managerial Application 19.1 ‘Tobacco’ Ethics 722
Setting on Japan’s Vaunted MOF? 661 Solving Externalities 722
Cost of Capital 665 Public Goods 724
Managerial Application 17.3 Federal Government
Managerial Application 19.2 Political Corruption 727
Support for R&D 666
Optimal Allocation of Social Resources 727
Managerial Application 17.4 Capital Allocation
at Berkshire Hathaway, Inc. 670 Benefit–Cost Methodology 730
Optimal Capital Budget 671 Benefit–Cost Criteria 732
Summary 673 Additional Methods of Improving Public
Questions 674 Management 736
Self-Test Problems and Solutions 675 Regulatory Reform in the New Millennium 738
Problems 678 Health Care Reform 740
Selected References 683 Managerial Application 19.3 Price Controls
for Pharmaceutical Drugs 741
Chapter 18: Organization Structure Summary 743
and Corporate Governance 685
Questions 744
Organization Structure 685
Transaction Cost Theory of the Firm 687
Problems 751
The Firm’s Agency Problem 688
Managerial Application 18.1 Organization
Design at GE 689
Appendix A: Compounding and the
Organization Design 692 Time Value of Money 757
Decision Management and Control 694
Corporate Governance 696 Appendix B: Interest Factor Tables 773
Managerial Application 18.2 Company
Information on the Internet 698 Appendix C: Statistical Tables 781
Ownership Structure as a Corporate
Governance Mechanism 699 Index 787
Contents
About the Authors
Eric Bentzen (Copenhagen Business School) is Associate Professor at Copenhagen Business

School, where he teaches undergraduate and graduate courses in Managerial Economics and
Business Analytics. He is a member of several professional organizations. He has published
in Applied Financial Economics, European Journal of Finance, Management Decision, Financial
Markets and Portfolio Management, and other leading academic journals.
Carsten Scheibye (Copenhagen Business School) is Assistant Professor at Copenhagen

Business School, where he teaches undergraduate courses in Managerial Economics.
He has significant experience in course coordination and management as well as within
didactical and pedagogical development of the learning environment surrounding the field
of Managerial Economics. In addition, he has received educational prizes for his teaching
abilities. Among these are the Education Prize from the Danish Society of Business and
Education.
The late Mark Hirschey (University of Wisconsin-Madison) was the Anderson W. Chandler
Professor of Business at the University of Kansas, where he was teaching undergraduate and
graduate courses in managerial economics and finance. Professor Hirschey was president of
the Association of Financial Economists and a member of several professional organizations.
He has published articles in the American Economic Review, Review of Economics and Statistics,
Journal of Business, Journal of Business and Economic Statistics, Journal of Finance, Journal of
Financial Economics, Journal of Industrial Economics, and other leading academic journals. He
was editor of Advances in Financial Economics, and past editor of Managerial and Decision
Economics.
xi
Preface
Economic concepts show how to apply common sense to understand business and solve
managerial problems. Economic intuition is really useful. It helps managers decide on which
products to produce, costs to consider, and prices to charge. It also helps them decide on the
best hiring policy and the most effective style of organization. Students and future managers
need to learn these things. The topics covered in managerial economics are powerful tools
that can be used to make managers more effective and their careers more satisfying. By
studying managerial economics, those seeking to further their business careers learn how to
more effectively collect, organize and analyze information.
A key feature of this book is its depiction of the firm as a cohesive organization. Effective
management involves an integration of the accounting, finance, marketing, personnel, and
production functions. This integrative approach demonstrates that important managerial
decisions are interdisciplinary in the truest sense of the word.
Although both microeconomic and macroeconomic relations have implications for
managerial decision-making, this book concentrates on microeconomic topics. Following
development of the economic model of the firm, the vital role of profits is examined. Because
economic decision-making often requires an elementary understanding of optimization
techniques and statistical relations, those basic concepts are described early in the text.
Because demand for a firm’s products plays a crucial role in determining its profitability and
ongoing success, demand analysis and estimation is an essential area of study. An important
part of this study is an investigation of the basic forces of demand and supply. This naturally
leads to discussion of economic forecasting and methods for assessing forecast reliability.
Production theory and cost analysis are then explored as means of understanding the
economics of resource allocation and employment.
Once the internal workings of a successful firm are understood, attention can turn
towards consideration of the firm’s external economic environment. Market structure analysis
provides the foundation for studying the external economic environment and for defining
an effective competitive strategy. The role of government in the market economy, including
the constraints it imposes on business, requires a careful examination of regulation and
antitrust law. Risk analysis and capital budgeting are also shown as methods for introducing
marginal analysis into the long-range strategic planning and control process. Finally, given
government’s increasing role in managing demand and supply for basic services, such as
education and healthcare, the use of economic principles to understand and improve public
management is also considered.
Managerial Economics, 15th Edition, takes a practical problem-solving approach. The focus
is on the economics—not the mathematics—of the managerial decision process. Quantitative
tools are sometimes employed, but the emphasis is on economic intuition.
xii
Preface xiii
THIS 15th EDITION

Students and instructors will find that Managerial Economics, 15th Edition, provides an
efficient calculus-based introduction and guide to the optimization process. Chapter 2,
‘Economic Optimization’, illustrates how the concept of a derivative can be used as a
practical tool to understand and apply marginal analysis. ‘Multivariate Optimization and
the Lagrangian Technique’, Appendix 2B, examines the optimization process for equations
with three or more variables. Such techniques are especially helpful when managers
face constrained optimization problems, or decision situations with limited alternatives.
Throughout the text, a wide variety of problems describing real-world decisions can be solved
using such techniques.
Managerial Economics, 15th Edition provides an intuitive guide to model building,
analysis and basic economic relations. Although differential calculus is an obviously helpful
tool for understanding the process of economic optimization, it is important that students
not let mathematical manipulation get in the way of their basic grasp of economic concepts.
Although those using a non-calculus-based approach can safely skip parts of Chapter 2
and Appendix 2B, all other material is fully and completely assessable. With practice using
a wide variety of problems and examples throughout the text, all students are able to gain a
simple, practical understanding of how economics can be used to understand and improve
managerial decisions.
Learning Aids
● Each chapter incorporates a wide variety of simple numerical examples and detailed
practical illustrations of chapter concepts. These features portray the valuable use and
real-world implications of covered material.
● Each chapter includes short Managerial Applications boxes to show current examples of
how the concepts introduced in managerial economics apply to real-world situations.
New Managerial Applications based on articles from the Internet or Barron’s, Business
Week, Forbes, Fortune, and The Wall Street Journal are provided. This feature stimulates
student interest and offers a popular basis for classroom discussion.
● The book incorporates several new regression-based illustrations of chapter concepts
using actual company data, or hypothetical data adapted from real-world situations. Like
all aspects of the text, this material is self-contained and intuitive.
● Effective managers must be sensitive to the special challenges posed by an increasingly
global marketplace. To increase student awareness of such issues, a number of examples,
Managerial Applications, and case studies that relate to global business topics are
featured.
● Selected chapters are accompanied by a case study that provides in-depth treatment
of chapter concepts. To meet the needs of all instructors and their students, these case
studies are written to allow, but do not require, a computer-based approach. These case
studies are fully self-contained and especially helpful to instructors who wish to more
fully incorporate the use of basic spreadsheet and statistical software in their courses.
● New end-of-chapter questions and problems are provided, after having been subject
to necessary revision and class testing. Questions are designed to give students the
opportunity to grasp basic concepts on an intuitive level and express their understanding
in a nonquantitative fashion. Problems cover a wide variety of decision situations and
illustrate the role of economic analysis from within a simple numerical framework.
xiv Preface
● Each chapter includes self-test problems with detailed solutions to show students how
economic tools and techniques can be used to solve practical business problems. These
self-test problems are a proven study aid that greatly enhances the learning value of end-
of-chapter questions and problems.
Companion Website
Managerial Economics, 15th Edition is supported by a Companion Website to help make
teaching and learning the material both easy and enjoyable.
Acknowledgments
We are indebted to staff at Cengage Learning for making the 15th edition a reality.
A number of people have aided in the preparation of Managerial Economics. Helpful
suggestions and constructive comments have been received from a great number of
instructors and students who have used previous editions. Numerous reviewers have also
provided insights and assistance in clarifying difficult material. Among those who have been
especially helpful in the development of previous editions are: Barry Keating, University of
Notre Dame; Stephen Conroy, University of San Diego; Xu Wang, Texas A&M University;
Michael Brandl, University of Texas, Austin; Neil Garston, California State University, Los
Angeles; Albert Okunade, University of Memphis; David Carr, University of South Dakota;
Steven Rock, Western Illinois University; Mel Borland, Western Kentucky University; Tom
Staley, San Francisco State University.
Many thanks to the reviewers of this edition, Gu Guowei of London South Bank
University, UK and Dr Tendeukayi Mugadza of Monash University, South Africa.
Every effort has been made to minimize errors in the book. However, errors do
occasionally slip through despite diligent efforts to provide an error-free package of text
and ancillary materials. Readers are invited to correspond with me directly concerning any
corrections or other suggestions.
It is obvious that economic efficiency is an essential ingredient in the successful
management of both business and public-sector organizations. Like any dynamic area of
study, the field of managerial economics continues to undergo profound change in response
to the challenges imposed by a rapidly evolving environment. It is exciting to participate
in these developments. I sincerely hope that Managerial Economics contributes to a better
understanding of the usefulness of economic theory.
C engage’s peer reviewed content for higher and
further education courses is accompanied by a range
of digital teaching and learning support resources. The
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the instructor, student and the course. Examples of the
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for example, a testbank, PowerPoint slides and
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example, useful weblinks and glossary terms.
Lecturers: to discover the dedicated lecturer digital

support resources accompanying this textbook please
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BE UNSTOPPABLE
Overview of Managerial
Economics 1
P A R T
CHAPTER 1
Nature and Scope of
CHAPTER 2
Economic Optimization
CHAPTER 3
Demand and Supply
CHAPTER
1
Nature and Scope of
Bill Gates, founder of Microsoft Corporation, launched Microsoft together with Paul Allen
back in 1975. Microsoft became the largest PC company in the world. From 1995 to 2017
Gates held the Forbes title as one of the richest persons in the world, with an estimated net
worth of $91.7 billion as of February 2018.
Bill Gates’ success is powerful testimony to the practical usefulness of managerial
economics. Managerial economics answers fundamental questions. When is the market for
a product so attractive that entry or expansion becomes appealing? When is exit preferable
to continued operation? Why do some professions pay well, while others offer only m eagre
pay? Successful managers make good decisions, and one of their most useful tools is
the methodology of managerial economics.
HOW IS MANAGERIAL ECONOMICS USEFUL?

Economic theory and methodology lay down rules for improving business and public
policy decisions.
Evaluating Choice Alternatives

managerial Managerial economics helps managers recognize how economic forces affect organizations
economics and describes the economic consequences of managerial behaviour. It also links economic
Applies economic
tools and concepts, data and quantitative methods to develop vital tools for managerial decision-
techniques to making. This process is illustrated in Figure 1.1.
business and Managerial economics identifies ways to achieve goals efficiently. For example, suppose
administrative
decision-making. a small business seeks rapid growth to reach a size that permits efficient use of national
media advertising; managerial economics can be used to identify pricing and production
strategies to help meet this short-run objective quickly and effectively. Similarly, managerial
economics provides production and marketing rules that permit the company to maximize
net profits once it has achieved growth or market-share objectives.
Managerial economics has applications in both profit and not-for-profit sectors. For
example, an administrator of a nonprofit hospital strives to provide the best medical care
possible given limited medical staff, equipment, and related resources. Using the tools and
concepts of managerial economics, the administrator can determine the optimal allocation
of these limited resources. In short, managerial economics helps managers arrive at a set
of operating rules that aid in the efficient use of scarce human and capital resources. By
following these rules, businesses, nonprofit organizations and government agencies are
able to meet objectives efficiently.
3
4 Part 1: Overview of Managerial Economics
Figure 1.1 Managerial Economics is a Tool for Improving Management Decision-Making
Managerial economics uses economic concepts and quantitative methods to solve m

anagerial
problems.
Management Decision Problems

Product selection, output and pricing
Internet strategy
Organization design
Product development and promotion
strategy
Worker hiring and training
Investment and financing
Economic Concepts Quantitative Methods

Marginal analysis Numerical analysis
Theory of consumer demand Statistical estimation
Theory of the firm Forecasting procedures
Industrial organization and firm Game-theory concepts
behaviour Optimization techniques
Public choice theory Information systems
Use of economic concepts and
quantitative methods to solve
management decision problems
Optimal solutions to management

decision problems
Managerial Decision-Making
Managerial decision-making problems very often have many impacts, some of them
immediate, and others more modest. In order to make decisions we need information.
Sometimes all the relevant information we need is readily available and we can effectively
use this information in the decision-making process. In other settings, information may be
available, but we cannot effectively use it because of limitations. Many decision problems
are complicated due to uncertainty. When we have a decision problem with uncertain
information we can use two different ways to reach a decision. One is to simulate different
combinations of the outcome. Another is to use mathematical and statistical methods to
calculate the expected value of the outcome. Even with maths and statistics there are many
decision problems that are highly complex. With scarce resources, the different outcomes must
be evaluated. When addressing a complex problem, there are typically no signs that indicate
which are the important relationships that must be maintained and which can be ignored.
Chapter 1: Nature and Scope of Managerial Economics 5
Therefore, model-building is a simplification or an abstract representation of an existing

problem and choosing what to include and what to exclude requires experience. But
there are a number of important steps in model-building that can be useful to managerial
decision-making. Managerial economics offers a comprehensive application of economic
theory and methodology to management decision-making.
Little (1970)1 argued that the problem with management models is that managers never
use them. But he also argued that the reason can be found in the difficulty of implementing
a managerial decision model, and the different language managers use compared with the
one used in mathematical models.
If we want a decision-maker to use a model, the decision-maker must perceive the
owner of the model.
A decision model should have the following structure:
a) It should be simple – because it promotes ease of understanding. The most important
‘drivers’ should be included in a model, and the unimportant should be left out.
b) It should be robust – solutions should include a range of expected values.
c) It should be easy to control – changes of the model should be easy to do.
d) It should be updated – a model should be easy to update as new information becomes
available.
e) It should be easy to communicate with – a decision model should easily give ‘what-if’
answers.
Managerial Application 1.1

Business Ethics
In the Financial Times you sometimes find evidence of ●● Accept responsibility for your mistakes, and fix them. Be
unscrupulous business behaviour. However, unethical con- quick to share credit for success.
duct is inconsistent with value maximization and contrary ●● Leave something on the table. Profit with your customer,
to the enlightened self-interest of management and other not off your customer.
employees. If honesty didn’t pervade corporations, the ability ●● Stick by your principles. Principles are not for sale at any
to conduct business would collapse. Eventually, the truth price.
always comes out, and when it does the unscrupulous lose
out. For better or worse, we are known by the standards we Does the ‘high road’ lead to corporate success? Consider
adopt. To become successful in business, everyone must the experience of A.P. Moller–Maersk – a Scandinavian
adopt a set of principles. Ethical rules to keep in mind when company. The founder of A.P. Moller–Maersk used the phrase
conducting business include: ‘no loss should hit us, which by due diligence could be
averted’.
●● Above all else, keep your word. Say what you mean, and
mean what you say. See: www.maersk.com
●● Do the right thing. A handshake with an honourable
person is worth more than a ton of legal documents from
a corrupt individual.
1 Little, J.C. ‘Models and Managers: The concept of a decision calculus’. Management Science. 1970, Vol. 16,
No. 8, B466–B48.
The managerial decision-modelling process

There are a number of stages in the managerial decision-making process. The process
should be regarded as an iterative process between the stages.
We define the three stages as: 1) Formulation, 2) Solution, 3) Interpretation.
Each of the three stages has its own steps which should be considered. They are:
1) Formulation: Problem formulation, Model construction, Input data.
2) Solution: Determining a solution, Testing the solution.
3) Interpretation: Analyzing and interpretation of the solution, Sensitivity Analysis,
Implementation.
1) Formulation
Formulation of the problem is a process where the problem is translated from the
practical problem into a mathematical model. A poorly or insufficiently formulated
model will result in a bad solution and ultimate misinterpretation. Therefore, the
formulation stage can be regarded as a challenge and the most difficult part, and
at the same time it also shows the direction and extension of the problem. It is not
uncommon that failure of managerial decision-making models can be traced directly
back to the formulation of the original problem. The limits of the problem as well
as the degree to which it pervades other units of the organization must be included.
• Problem formulation
Start by developing a clear and short statement of the problem. Sometimes this
initial analysis results in conflicting viewpoints. Identify a specific measurable
objective that clearly states the real problem. This objective could very well be the
goals of the organization.
• Model construction
A managerial decision model is an abstract representation of an existing prob-
lem. The essential feature of a managerial decision model is that it involves a set
of mathematical relationships, e.g. equations, inequalities, logical dependencies,
which correspond to some more down-to-earth relationships in the real world, e.g.
technological relationships, marketing constraints, capital, and labour constraints.
Remember that no model can be an exact representation of reality. We are
bound to paint a stylized and somewhat distorted picture of the problem. In any
model, complex interactions are simplified, and detail is summarized or omitted.
Begin with a simple model that just explain a single main effect.
Start by stating the assumptions of the problem and define the variables. These
variables can be those that are controllable (i.e., our decision variables), and those
variables that are uncontrollable. To distinguish between these more precisely,
look at the factors that determine demand. If we identify the factors that affect
demand for a product we could distinguish between those that are c ontrollable
and those that are uncontrollable factors. Within a company controllable demand
factors are price, product, promotion and place. And uncontrollable demand fac-
tors are income, taste, competitive factors, government policy, demographic factors,
climatic factors, macroeconomic factors, prices of substitutes and c omplements, etc.
• Input data
After having developed a model, we have to find input data to be used in the
model. Obtaining data is very important because a well-specified model could
be misleading if it contains improper data. Ask yourself what data are relevant,
and how the relevant data can be found. It is a good idea to be sensitive to data,
and very useful to check the facts, particularly the numbers that everyone in the
organization believes to be true. Sometimes numbers may be myths – justifiers of
organizational practice – or they might once have been true.
2) Solution
For many years courses in managerial decision-making focused most of their atten-
tion on this step, because the step involved mathematical skills to solve complicated
and sometimes complex problems. Here we will move away from the detailed steps of
the solution process and instead we will use software packages to do the hard work.
• Determining a solution
Determining a solution is an iterative process where the model is used to arrive
at the optimal (or best) solution to the problem. Sometimes this may require a set
of mathematical equations and sometimes you can use trial-and-error methods
and pick the best solution. We will often use a software package to do the more
complex computations. These computations often use an algorithm which is a
series of steps and procedures that are repeated until a solution has been found.
• Testing the solution
Testing the solution is a process of examining whether model and input match.
Often test results will cause the model to change in accordance with defects or
omissions. If something is missing, you expand the model, and then again check the
model and data match. The iteration goes on until the decision-maker is satisfied.
3) Interpretation
Interpreting the results can be a difficult and often professional challenge. It may
provide a solution to the problem posed or point to the need to gather additional
information.
• Analyzing and interpretation of the solution
Analyzing and interpreting the solution will determine the implications and per-
haps the problems that a decision can cause. It could give rise to a change of mar-
ketplace, prices, costs, or the organization.
• Sensitivity analysis
A significant part of the interpretation will be to establish sensitivity analyzes for
the proposed solution.
A sensitivity analysis indicates how sensitive the result will be to changes in
model parameters and variations. Sensitivity analysis shows how the solution will
change with different parameters or input data. Further, the sensitivity analysis
can show the dynamics of the model.
• Implementation
Implementing the results can be even more challenging. Often it will involve more
employees in an organization that may not have understood the entire probability
setting, model or solution. It can be a long-standing process that can extend over
several years. Changing the IT platform in a company is an example of a change
that may extend over time. Another is the modelling and managing the perfor-
mance of airports.2
THEORY OF THE FIRM

Firms are useful for producing and distributing goods and services.
2 Zografos, K., Giovanni A, and Odoni, A. Modelling and managing airport performance, Wiley, 2013.
Expected Value Maximization

At its simplest level, a business enterprise represents a series of contractual relationships
that specify the rights and responsibilities of various parties (see Figure 1.2). People directly
involved include customers, stockholders, management, employees, and suppliers. Society
is also involved because businesses use scarce resources, pay taxes, provide employment
opportunities, and produce much of society’s material and services output. The model
theory of the of business is called the theory of the firm. In its simplest version, the firm is thought to
firm have profit maximization as its primary goal. The firm’s owner-manager is assumed to be
Basic model of
business. working to maximize the firm’s short-run profits. Today, the emphasis on profits has been
broadened to encompass uncertainty and the time value of money. In this more complete
expected value
maximization model, the primary goal of the firm is long-term expected value maximization.
Optimization of The value of the firm is the present value of the firm’s expected future net cash flows. If
profits in light of cash flows are equated to profits for simplicity, the value of the firm today, or its present value,
uncertainty and
the time value of
is the value of expected profits, discounted back to the present at an appropriate interest rate.3
money.
value of the
firm Figure 1.2 The Corporation is a Legal Device
Present value of
the firm’s expected
future net cash The firm can be viewed as a series of contractual relationships that connect suppliers, investors,
flows. workers and management in a joint effort to serve customers.
present value
Worth in current
money.
Society
Suppliers Investors
Firm
Management Employees
Customers
3 Discounting is required because profits obtained in the future are less valuable than profits earned
presently. One euro today is worth more than €1 to be received a year from now because €1 today can be
invested and, with interest, grow to a larger amount by the end of the year. One euro invested at 10 per cent
interest would grow to €1.10 in one year. Thus, €1 is defined as the present value of €1.10 due in one year
when the appropriate interest rate is 10 per cent.
This model can be expressed as follows:
Value of the Firm = Present Value of Expected Future Profits

π1 π2 πn
= + + +
(1 + i) (1 + i)
1 2
(1 + i)n
1.1
n
πt
=∑
t =1 (1 + i)t
Here, p 1 , p 2 , , p n represent expected profits in each year, t, and i is the appropriate i nterest,
or discount, rate. The final form for Equation (1.1) is simply a shorthand expression in
which sigma ( ∑ ) stands for ‘sum up’ or ‘add together’. The term
n
∑
t =1
means, ‘Add together as t goes from 1 to n the values of the term on the right’. For
Equation (1.1), the process is as follows: Let t = 1 and find the value of the term p 1 /(1 + i)1,
the present value of year 1 profit; then let t = 2 and calculate p 2 /(1 + i)2, the present value of
year 2 profit; continue until t = n, the last year included in the analysis; then add up these
present value equivalents of yearly profits to find the current or present value of the firm.
Because profits (p ) are equal to total revenues (TR) minus total costs (TC), Equation
(1.1) can be rewritten as:
n
TR − TCt
Value = ∑ t 1.2
t =1 (1 + i)t
This expanded equation can be used to examine how the expected value maximization
model relates to a firm’s various functional departments. The marketing department often
has primary responsibility for promotion and sales (TR); the production department has
primary responsibility for development costs (TC); and the finance department has primary
responsibility for acquiring capital and, hence, for the discount factor (i) in the denominator.
Important overlaps exist among these functional areas. The marketing department can help
reduce costs for a given level of output by influencing customer order size and timing. The
production department can stimulate sales by improving quality. Other departments, for
example, accounting, human resources, transportation and engineering, provide informa-
tion and services vital to sales growth and cost control. The determination of TR and TC is
a difficult and complex task. All managerial decisions should be analyzed in terms of their
effects on value, as expressed in Equations (1.1) and (1.2).
Constraints and the Theory of the Firm

Organizations frequently face limited availability of essential inputs, such as skilled
labour, raw materials, energy, specialized machinery and warehouse space. Manag-
ers often face limitations on the amount of investment funds available for a particular
project or activity. Decisions can also be constrained by contractual requirements. For
example, labour contracts limit flexibility in worker scheduling and job assignments.
Contracts sometimes require that a minimum level of output be produced to meet deliv-
ery requirements. In most instances, output must also meet quality requirements. Some
common examples of output quality constraints are nutritional requirements for feed
mixtures, audience exposure requirements for marketing promotions, reliability require-
ments for electronic products, and customer service requirements for minimum satis-
faction levels.
Legal restrictions, which affect both production and marketing activities, can also play
an important role in managerial decisions. Laws that define minimum wages, health and
safety standards, pollution emission standards, fuel efficiency requirements, and fair pric-
ing and marketing practices all limit managerial flexibility.
The role that constraints play in managerial decisions makes the topic of constrained
optimization a basic element of managerial economics. Later chapters consider important
economic implications of self-imposed and social constraints. This analysis is important
because value maximization and allocative efficiency in society depend on the efficient use
of scarce economic resources.
Limitations of the Theory of the Firm

optimize In practice, do managers try to optimize (seek the best result) or merely satisfice (seek sat-
Seek the best isfactory rather than optimal results)? Do managers seek the sharpest needle in a haystack
solution.
(optimize), or do they stop after finding one sharp enough for sewing (satisfice)? How
satisfice can one tell whether company support of the United Way, for example, leads to long-run
Seek satisfactory
rather than optimal
value maximization? Are generous salaries and stock options necessary to attract and retain
results. managers who can keep the firm ahead of the competition? When a risky venture is turned
down, is this inefficient risk avoidance? Or does it reflect an appropriate decision from the
standpoint of value maximization?
It is impossible to give definitive answers to questions like these, and this dilemma has
led to the development of alternative theories of firm behaviour. Some of the more promi-
nent alternatives are models in which size or growth maximization is the assumed primary
objective of management, models that argue that managers are most concerned with their
own personal utility or welfare maximization, and models that treat the firm as a collection
of individuals with widely divergent goals rather than as a single, identifiable unit. These
alternative theories, or models, of managerial behaviour have added to our understanding
of the firm. Still, none can supplant the basic value maximization concept as a foundation
for analyzing managerial decisions. Examining why provides additional insight into the
value of studying managerial economics.
Research shows that vigorous competition typically forces managers to seek value max-
imization in their operating decisions. Competition in the capital markets forces managers
to seek value maximization in their financing decisions as well. Stockholders are, of course,
interested in value maximization because it affects their rates of return on common stock
investments. Managers who pursue their own interests instead of stockholders’ interests
run the risk of losing their job. Unfriendly takeovers are especially hostile to inefficient
management that is replaced. Moreover, recent studies show a strong correlation between
firm profits and managerial compensation. Management has strong economic incentives
to pursue value maximization through their decisions.
It is sometimes overlooked that managers must consider all relevant costs and benefits
before they can make reasoned decisions. It is unwise to seek the best technical solution
to a problem if the costs of finding such a solution greatly exceed resulting benefits. As a
result, what often appears to be satisficing on the part of management can be interpreted
as value-maximizing behaviour once the costs of information gathering and analysis are
considered. Similarly, short-run growth maximization strategies are often consistent with
long-run value maximization when the production, distribution and promotional advan-
tages of large firm size are better understood.
Finally, the value maximization model also offers insight into a firm’s voluntary ‘socially
responsible’ behaviour. The criticism that the traditional theory of the firm emphasizes
profits and value maximization while ignoring the issue of social responsibility is import-
ant and will be discussed later in the chapter. For now, it will prove useful to examine the
concept of profits, which is central to the theory of the firm.
PROFIT MEASUREMENT
Free enterprise depends upon profits and the profit motive. Both play a role in the efficient
allocation of economic resources worldwide.
Business Versus Economic Profit

Profit is usually defined as the residual of sales revenue minus the explicit costs of doing
business. It is the amount available to fund equity capital after payment for all other
business profit resources used by the firm. This definition of profit is accounting profit, or business profit.
Residual of sales The economist also defines profit as the excess of revenues over costs. However,
revenue minus the
explicit accounting inputs provided by owners, including entrepreneurial effort and capital, are resources
costs of doing that must be compensated. The economist includes a normal rate of return on equity
business. capital plus an opportunity cost for the effort of the owner–entrepreneur as costs of
doing business, just as the interest paid on debt and the wages are costs in calculating
normal rate of
return
business profit. The risk-adjusted normal rate of return on capital is the minimum
Average profit return necessary to attract and retain investment. Similarly, the opportunity cost of
necessary to owner effort is determined by the value that could be received in alternative employ-
attract and retain
investment.
ment. In economic terms, profit is business profit minus the implicit (noncash) costs of
capital and other owner-provided inputs used by the firm. This profit concept is called
economic profit
Business profit
economic profit.
minus the implicit The concepts of business profit and economic profit can be used to explain the role
costs of capital of profits in a free-enterprise economy. A normal rate of return is necessary to induce
and any other
owner-provided
individuals to invest funds rather than spend them for current consumption. Normal
inputs. profit is simply a cost for capital; it is no different from the cost of other resources, such
as labour, materials, and energy. A similar price exists for the entrepreneurial effort of a
firm’s owner–manager and for other resources that owners bring to the firm. Opportunity
costs for owner-provided inputs are often a big part of business profits, especially among
small businesses.
Variability of Business Profits

In practice, reported profits fluctuate widely. Table 1.1 shows business profits for a sample
of 30 well-known industrial giants: companies that comprise the Dow Jones Industrial
profit margin Average. Business profit is often measured in dollar terms or as a percentage of sales rev-
Accounting net enue, called profit margin, as in Table 1.1. The economist’s concept of a normal rate of
income divided by profit is typically assessed in terms of the realized rate of return on stockholders’ equity
sales.
(ROE). Return on stockholders’ equity is defined as accounting net income divided by the
return on book value of the firm. As seen in Table 1.1, the average ROE for industrial giants found
stockholders’
equity in the Dow Jones Industrial Average falls in a broad range around 15 to 25 per cent per
Accounting net year. Although an average annual ROE of roughly 20 per cent can be regarded as a typical
income divided by or normal rate of return in the USA and Canada, this standard is routinely exceeded by
the book value of
total assets minus companies such as Boeing Company, which has consistently earned an ROE in excess of
total liabilities. 35 per cent per year.
12
Table 1.1 Profitability of Corporate Giants Included in the Dow Jones Industrial Average
Sales Net Return

evenue
R Income Profit on Equity
Symbol Name Company Information ($ million) ($ million) Margin (%) (ROE, %)
AAPL Apple Inc. Consumer electronics 182.80 39.51 29.26 47.95
AXP American Express Company Consumer finance 34.29 5.89 26.22 43.49
BA The Boeing Company Aerospace and defense 90.62 5.45 7.86 82.37
CAT Caterpillar Inc. Construction and mining equipment 55.18 3.70 9.21 30.35
CSCO Cisco Systems, Inc. Computer networking 47.14 7.85 20.61 17.15
CVX Chevron Corporation Oil and gas 199.94 19.24 15.61 20.13
DD E.I. du Pont de Nemours and Company Chemical industry 34.91 3.62 14.30 37.47
DIS Walt Disney Company Broadcasting and entertainment 48.13 7.50 25.09 27.24
GE General Electric Company Conglomerate 148.59 15.23 11.60 13.44
GS Goldman Sachs Group, Inc. Banking, Financial services 34.53 8.48 35.79 14.85
HD The Home Depot, Inc. Wholesale and retail trade 83.18 6.35 11.99 107.02
IBM International Business Machines Corporation Computers and technology 92.79 12.02 21.54 168.40
INTC Intel Corporation Semiconductors 55.87 11.70 28.28 21.06
JNJ Johnson & Johnson Pharmaceuticals 74.33 16.23 27.66 29.48
JPM JPMorgan Chase & Co Banking 94.21 21.76 31.63 12.84
KO The Coca-Cola Company Beverages 46.00 7.10 20.27 30.76
MCD McDonald’s Corporation Fast food 27.44 4.76 26.87 57.35
MMM 3M Company Conglomerate 31.82 4.96 22.08 53.60
MRK Merck & Co., Inc. Pharmaceuticals 42.24 11.92 40.92 35.53
MSFT Microsoft Corporation Software 86.83 22.07 32.04 30.99
NKE Nike, Inc. Apparel 27.80 2.69 12.75 32.74
PFE Pfizer, Inc. Pharmaceuticals 49.61 9.13 24.68 17.17
PG Procter & Gamble Company Consumer goods 83.06 11.39 17.92 21.51
TRV The Travelers Companies, Inc. Insurance 25.63 3.69 19.85 20.49
UNH UnitedHealth Group Managed healthcare 115.30 5.62 8.38 29.75
UTX United Technologies Corporation Conglomerate 65.10 6.22 13.65 28.47
V Visa, Inc. Consumer banking 12.70 5.44 60.81 28.18
VZ Verizon Communications Inc. Telecommunications 127.08 9.63 12.02 124.17
WMT Walmart, Inc. Retail 476.29 16.02 5.18 32.33
XOM Exxon Mobil Corporation Oil and gas 394.11 32.52 13.10 29.61
Data source: www.msn.com

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not distant, and in a few moments they struck against the shore, and
were held fast by running between some small trees. The dog again
set up a howl, and the people before mentioned, now thinking
something was the matter, entered a boat and went to the island,
where they found you fast asleep in the basket, and dry as a biscuit!”
When Amy had reached this point of her story, Anna put her arms
around the dog’s neck, and with her eyes swimming in tears, kissed
him over and over again. She said nothing, however, for her heart
was too full. Her sister then went on to tell the rest of the story—but
as the reader will easily guess it all, I need not repeat it here. If any
of my young readers are curious to know all about it, I shall be at
their service, whenever they will give me a call.
Attachment to our Country.—When Gulliver was in Lilliput, he

lay down to sleep. In the morning he found himself fastened down to
the earth by a thousand little cords which the Lilliputians had thrown
over him. Every man is thus attached to some spot on earth by the
thousand small threads which habit and association are continually
throwing around him. Of these, perhaps, one of the strongest is that
which makes us love the place where our fathers are entombed.
When the Canadian Indians were once solicited to emigrate, “What!”
they replied, “shall we say to the bones of our fathers, ‘Arise, and go
with us into a foreign land?’”
The Fox and the Tortoise;
a fable, to show the advantages of honesty.
A fox that had been robbing some hen-roosts, and had therefore
excited the indignation of the people, was one day pursued by a
party of hunters, and sorely pressed by their hounds. At last he came
to a secluded spot, and having for the time eluded his enemies, he
sat down to take breath. Near by there chanced to be a tortoise, and
as birds and beasts always talk in fables, it was a matter of course
that the two animals on the present occasion should fall into
conversation.
“You seem,” said the tortoise, “to be very much out of breath: pray
let me ask you what is the matter?”
“Matter enough!” replied the fox. “I occasionally slip into the
farmers’ hen-roosts, and take away a few of their fowls, or now and
then I carry off a fat goose or a stray lamb; and behold, I am hunted
by all people with all their hounds, as if I was the greatest rascal on
the face of the earth! Whew! how hot I am. These villanous hounds
put me in a terrible tremor. One of them came so close as to snap at
my throat with his long ugly teeth, and I really thought my last hour
was come. What a terrible life it is I lead: I cannot stir abroad but
some hound is on my track, or some bullet whistles near my heart.
Even in my den of rocks I have no peace, for I am ever dreaming of
the sound of muskets or the baying of hounds.”
As the fox said this, the cry of the hunters and their hounds came
near, and to save his life, he was again obliged to take to flight. The
humble tortoise, observing all this, remarked very wisely, as follows:
“How much better it is to be honest and content with what we can
call our own, than to be forever running after forbidden pleasures,
thus drawing down upon ourselves the enmity of mankind, and all
the disquietude of a guilty conscience.”
The Insincerity of Flattery.—“What little, ugly-looking, red-

headed monster is that, playing among those children?” “That,
madam, is my eldest son!” “Indeed! you don’t say so; what a
beautiful little cherub it is!”
The Travels, Adventures and Experiences of
Thomas Trotter.
CHAPTER I.
My Birth and Parentage.—The reasons why I became a Traveller.—
My first Travels.—Advantage of having good legs.—My first
Voyage to the Mediterranean.—The Orange and Lemon
Trade.—The Gulf Stream.—Whales.—Portuguese Man-of-
War.
Ever since my earliest remembrance I have had a great passion

for travelling, seeing foreign countries, and studying foreign
manners. I believe this disposition runs in our family, for all the
Trotters, I am assured, have been great travellers. My great
grandfather, Absalom Trotter, was famous for having the longest legs
in the state of Massachusetts, and for making the best use of them.
He could beat a horse at a stretch of a month or so; but he died just
as the Providence railroad was completed. My great aunt, Peggy
Trotter, was also celebrated among her neighbors for an
unconquerable propensity to move about. There was not a story
circulating in the town, but she was the first to find it out, and the
most industrious in communicating it to all her acquaintance. If she
had lived till this day, I verily believe the newspaper editors would
have hired her to carry expresses; for when she once got hold of a
piece of intelligence, it is inconceivable how rapidly she made it fly
through all quarters of the town. When she died, people were afraid
that news would be scarce forever afterwards; but steamboats came
into fashion about that time, so that we have not been without a
supply of intelligence from various parts.
I was born in Fleet street, down at the north end, in Boston. My
father was a West-India captain, who used to sail in a little schooner
from Boston to Guadaloupe. He commonly carried out a load of
lumber, that is, pine boards, plank, timber, and shingles; and brought
back a cargo of molasses. Every time he returned from a voyage, he
brought us oranges, lemons, and pine-apples, fruits which do not
grow hereabouts. These rarities always excited my admiration; and I
was delighted to sit in the chimney-corner during the long winter
evenings, and listen to his description of the West-India islands,
where the summer and the fruits and the green fields last the whole
year round; and where no snow or ice chills the air, but fresh verdure
and bright flowers enliven the landscape from the beginning of the
year to the end of it.
The more of these stories I heard, the more I wanted to hear, for it
is notorious that there is no passion so insatiable as curiosity. And
when our curiosity is directed towards a useful object, the indulgence
of it becomes both proper and beneficial. The world is filled with
variety, and this variety is evidently designed by Providence to
stimulate our curiosity, so that we may be incited to action and the
pursuit of knowledge. In this way I became seized with an irresistible
inclination to travel and see the world. My neighbor Timothy Doolittle,
who had nobody to tell him stories when he was a boy, on the
contrary, never cared to move about, or know how the rest of the
world lived, or what was doing out of his own chimney-corner. I
believe he never in his life walked further than Roxbury Neck; and if
anybody should ask him how big the world was, he would say it
extended from Bunker Hill to Brookline! Such magnificent notions of
the universe will a man have who never stirs abroad.
I could give a long account of my early travels—how they began
in very infancy when I first ventured out the front door—how I next
rambled down the street, and was amazed to see how large the town
was—how I then grew more courageous, and journeyed as far as
Faneuil Hall Market; what surprising discoveries I made there; what
perilous adventures I met with on the way thither and back—how I
next made a still bolder excursion as far as Fort Hill, got overtaken
by night, and was brought back by the town crier—how, finally, after
a great many hair-breadth escapes and daring exploits, I became so
experienced in travelling that I ventured into the country to see what
sort of people lived there; and how in a single day I penetrated as far
as the Blue Hills, and found the inhabitants of Milton and Dorchester
an exceedingly civil, pleasant and good sort of people. I might give
the particulars of all these peregrinations at full length, if I had room
in these pages. But as it is very probable that most of my readers
have travelled the same route and seen pretty much the same
things, I have concluded to omit them for the present, and pass on to
the narrative of my travels and adventures in foreign countries, which
will probably offer more novelty and instruction.
My father died when I was ten years old; and as my mother had
been dead several years before, I was left to the care of my aunt
Katy Walker. I had little chance of gratifying my roving inclination
under her care, for she could not afford me any money, and
travelling is expensive. The most I could do was to take long walks
now and then, with a staff in my hand, and a pack over my back. In
this way I have travelled over nearly all the state of Massachusetts;
and can assure my readers, that they will learn more by travelling on
foot in a single day than they will in a week by being whirled along in
a railroad car. The main thing is to have good vigorous limbs; and a
man’s legs will always grow strong if he walks enough. After trudging
up and down for some years, a second cousin of mine, Captain
Scudder, who used to visit at our house, came one day to tell me
that he was about to make a voyage to the Mediterranean, to bring
home a cargo of oranges and lemons for the Boston market. He
offered to take me with him, and I gladly accepted the proposal. To
visit Europe was the great object of my wishes; and the
Mediterranean countries had the greatest of all possible attractions
for me. I was never tired of thinking of the interesting territories which
were situated upon that famous sea—their romantic shores—their
beautiful islands—their bright sky—their charming climate—their
magnificent cities—their picturesque inhabitants, and the multitude of
glorious and ever-memorable historical events connected with them.
All these thoughts threw me into a rapture, and my impatience to set
out upon the voyage was such, that I deemed every moment lost, till
I was on board, and the vessel was fairly under weigh.
We sailed in the brig Swift, bound to Malta. We carried a cargo of
logwood, coffee, sugar, beeswax, raw hides, tobacco, cotton, and
staves. These articles generally compose the cargo of vessels
bound to the Italian ports. The logwood, coffee, sugar, tobacco, and
cotton, are productions not raised in those countries. Hides and
staves are much cheaper, and more abundant, in our country than in
theirs. They have no great pastures and tracts of wild country filled
with droves of cattle, as you will find in many parts of America.
Forests of large trees are so scarce with them, that wood of every
kind bears a high price. Beeswax is an article which they use to a
great extent, as their custom is to burn enormously long wax candles
in their churches and religious processions.
It was about the middle of December when we set sail. This is
considered the best season for a voyage such as we were bound
upon. The oranges are ripe in January and February, so that when
the vessel arrives out, the fruit is all freshly gathered and ready for
shipping. A great deal of care is necessary in the importation of this
sort of fruit; for if the weather be too warm, or the oranges have been
too long taken from the trees, they will be spoiled on the passage. It
very often happens that a vessel arrives at Boston from Sicily in the
summer with a load of oranges and lemons, and having had a long
passage, the whole cargo is found to be spoiled, and must be thrown
away. This most commonly happens in the Italian vessels, which do
not sail so fast as the Americans’, and have not crews so expert in
navigation.
Well, I was now fairly on board. We hoisted sail; the wind blew
fresh from the northwest; we scudded by the castle, we were soon
outside of Boston lighthouse. The pilot jumped into his boat and
bade us good-by. I looked after him as his little wherry kept bobbing
up and down between the waves, till he was too far off to be seen
any longer. The steeples of Boston and the neighboring hills
gradually sunk in the horizon; night came on, and I could see no
more of my native land. We carried all sail through the night, in order
to get well off the coast while the wind was fair, as the weather is
very variable near the land, and it is highly dangerous to be near the
coast in winter. By-and-by we had furious squalls of wind, which tore
our sails, and put us in great danger. In a day or two more we
crossed the Gulf Stream, which is a long and wide current of water
running through the Atlantic, from the Gulf of Mexico nearly across
the ocean. I was astonished to find the water in this current blood-
warm, although it was the middle of winter; but Captain Scudder
informed me that this is always the case, as the water comes from a
warm climate. Dreadful thunder-storms also happen here, and a
great many ships have been struck and burnt up by lightning in the
Gulf Stream.
We were all very glad when we had crossed this remarkable
current, for we had nothing but squalls of wind and showers of rain
while we were in it. At length we got fairly out into blue water, the sky
grew clear, we had a bright sun and a fair wind, and although the sea
continued to roll and dash pretty turbulently, yet it was a pleasure to
stand on the deck and look at the glorious broad ocean, with its blue
waves, crested with white foam, sparkling in the sun. Two or three
ships had kept us company off the coast, and for some days we
could discern their white sails on the verge of the horizon; but they
presently sunk out of sight, and we found ourselves with nothing but
sea around and sky above us.
One day, as I was walking on the deck and looking out for a sail, I
was surprised to see a stream of water rise up out of the sea at
some distance. I pointed it out to the man who was steering at the
helm, and was told by him that it was a whale, spouting. I had never
seen a whale before, and was anxious to get a nearer view of so
wonderful a creature. My wish was soon gratified. Presently he
directed his course towards our vessel, and passed by us, spouting
up streams of water from his nose in a manner that excited my
astonishment. When I contemplated the monstrous bulk of this
creature, and the amazing swiftness with which he dashed through
the water, I could not repress a feeling of terror. Yet it is well known
that men are courageous enough to go out to sea in little boats for
the purpose of catching such enormous monsters. The description of
the whale fishery is one of the most interesting items in the history of
human courage and skill, and shows how the ingenuity of man can
triumph over the strength of the mightiest of all the brute creation.
The whale is attacked, pursued for miles across his own element,
and finally killed and taken by six or eight men in a boat, so small
that, if he had but the sense to open his mouth, he might swallow the
boat and its crew.
I had another amusement at sea in witnessing the gambols of the
shoals of porpoises which now and then came tumbling around us.
These fish generally move in single file through the water, and when
they meet a ship at sea, they shoot right before her bows, so as
almost to strike the vessel; but as they dart with great velocity, they
always manage to steer clear. At such times it is highly interesting to
watch their movements, as they glance through the water just below
the surface. When the sun shines, they glisten in the waves with all
the hues of the rainbow, and one would almost imagine they were
proud of showing their gaudy colors, for they dart along the ship’s
side, as if on purpose to be seen. This diversion is often fatal to
them, for the sailors contrive to catch them with harpoons. They are
very fat, and yield a large quantity of oil. Their flesh is black, and
tastes a good deal like pork; it is much relished by crews that have
been long deprived of fresh provisions.
In the course of our voyage, as I was looking over the vessel’s
side one bright, sunshiny day, I saw something sailing along on the
top of the waves that looked exactly like one of the chip boats which
the boys sail in the Frog Pond. The sailors told me it was a fish
called the Portuguese man-of-war. I looked upon it with admiration. It
was a most curious sort of shell-fish, with a thin white membrane or
wing spread in the air for a sail. By the help of this it steered before
the wind just like a ship, and kept company with us for two or three
miles. When I was looking at it with a spy-glass, it suddenly struck its
sail, dove under water, and was out of sight in an instant.
(To be continued.)
Story of Philip Brusque.
(Continued from page 21.)
CHAPTER II.
Brusque discovers that man wants something beside Liberty; he
wants Company—Society.
Such were the thoughts of Brusque, as he stood on a little hill in

the centre of the island, and looked round upon what now seemed
entirely his own. Nor did anything happen to disturb his peace for a
long time. There was fruit enough for his support upon the trees, and
he found a cave in a rock, which served him for a house and a
home. The weather was almost constantly fine, and so mild was the
temperature, that he hardly needed a shelter, even at night.
So the time slid on very pleasantly with Philip for about a year. By
this time, he began to be a little tired of his own company; nor could
the chattering of the macaws and parrots, of which there were many
in the trees, entirely satisfy him. He caught some of the young birds,
and reared them, and taught them to speak, but still he felt lonely. At
last it came to be his custom every day to go upon the top of the
highest hill, and look far off upon the ocean, hoping to see a ship, for
he yearned in his heart to have some human being for a companion.
Then the tears would fill his eyes, and flow down his rough cheeks;
and then he would speak or think to himself as follows:
“Liberty is indeed a dear and beautiful thing, but still I want
something beside liberty. I want to hear a human voice. I want to
look into a human face. I want some one to speak to. I feel as if my
very heart would wither for the want of a friend. I feel a thirst within,
and I have no means of satisfying it. I feel within a voice speaking,
and there is no answer. This beautiful island is becoming a desert to
me, without even an echo. O! dear France! O! dear, dear home! How
gladly would I give up this hollow and useless liberty for the
pleasures of friendship and society. I would be willing to be
restrained by the thousand meshes of the law, if I might once more
enjoy the pleasure of living in the midst of my fellow-men.”
With these thoughts dwelling in his mind, Philip went to rest one
night, and though it was very stormy, he slept soundly. In the
morning the feelings of yesterday came back, and with a sad heart
he went again to the top of the hill; for the hope of seeing a ship, and
of once more being restored to human society, haunted him
perpetually. Long he stood upon the hill and looked out upon the
sea, now tossing from the tempest of the night, and throwing up a
thousand white-caps in every direction. Having gazed upon this
scene for more than an hour, he chanced to turn his eyes towards
the extremity of the island, where, at the distance of about a mile, he
distinctly saw a human being on the shore. He paused but a moment
to assure himself that he was not mistaken, and then set off like a
deer toward the stranger.
Brusque did not stop in his way, but ran with all his might. When
he came near the object of his attention, he saw that it was a man,
and without waiting to examine farther, ran toward him with open
arms. The man was alarmed, and stooping down, he picked up a
stone, and threatened to hurl it at Brusque. The latter now paused,
and the parties soon came to an understanding.
The stranger said that he was a fisherman from Mauritius, an
island in the Indian Ocean, belonging to the French nation. It is
inhabited chiefly by French people, and negroes, who are their
slaves. The whole population is about 20,000.
It seems that the fisherman had been driven out to sea by a
storm, and, the weather being cloudy and he having no compass, did
not know which way to steer for home. Thus he wandered about
several days, till, on the preceding night, in an attempt to land upon
the island where he now found himself, his little smack was dashed
in pieces, and he only saved himself by swimming.
No sooner had he told his story, than Philip put his arms around
him and kissed him over and over again. He was indeed delighted,
for now he had a companion, for which he had sighed so long. Now,
he had a human face to look upon; now, he could listen to a human
voice; now, he had some one into whose mind he could pour his own
thoughts and feelings. Now, in social intercourse, he could quench
that thirst which had parched his soul in solitude.
Full of these thoughts, Philip took the stranger, and led him to his
cave. He gathered for him some fresh pine-apples, and some
oranges, and placed them before him. When the fisherman began to
eat with a hearty appetite, Philip clapped his hands in joy. He then
ran to a little spring that was near, and brought some cool water in a
gourd shell, and gave it to the fisherman.
Now Philip Brusque was rather a proud man, and it was very
strange to see him waiting upon the rough fisherman, as if he were a
servant. But Philip was acting according to the dictates of his heart,
and so, though a seeming slave, he did not feel that his liberty was
violated. He was, in fact, acting according to his own pleasure, and
he was seeking happiness in his own way. If Philip had been
compelled to serve the fisherman, he would have hated and resisted
the task; but now, doing it freely, he found pleasure in it. So true it is
that we do things when we are free, with delight, which slavery would
turn into bitterness and sources of discontent.
Things went on very well for a few days. The fisherman took up
his abode in Philip’s cave, and there he lay a great part of the time.
Brusque brought him fruit and water, and all he wanted, and he did it
cheerfully for a time. But, by-and-by, the fisherman began to
command Brusque to wait upon him, to do this and that, and to bring
him this thing and that thing. This immediately changed the face of
affairs between the parties. Brusque became angry, and told the
fisherman to wait upon himself.
The fisherman made a rude reply, and high words followed.
Brusque ordered the fisherman to quit his cave. The fisherman told
Brusque to leave it himself. Their faces were full of red wrath. Anger
begets anger. The fisherman struck Brusque a blow. Brusque
retaliated, and being a powerful man, he instantly stretched the
fisherman on the ground. He was completely stunned, and lay
without motion, seeming actually to be dead.
Brusque’s anger was too high for the immediate return of reason.
He looked on the pale form with a feeling of delight, and spoke some
words of triumph between his firm-set teeth. But this feeling soon
passed away, and a better one returned. Believing that the fisherman
was dead, he now began to feel regret and remorse. Already was
that monitor within, called conscience, telling him that he had
violated a universal law, a law enacted by the Maker of man, and
whispered into every man’s bosom. Already Brusque felt that while a
fellow-being was on the island, he was not absolutely free; that this
fellow-being had rights as well as himself; that he had a right to his
life, and that in taking it away he had done a great wrong to justice,
to liberty, and himself.
While these thoughts were passing in his mind, the fisherman
moved, and showed signs of returning life. Brusque was again full of
joy, and fetching some water, sprinkled it over the man’s face. In a
short time he so far recovered as to sit upright, and soon after he
was able to walk about. Brusque led him to the cave, where, lying
down, the fisherman fell asleep.
Brusque now left him, and walked forth by himself. He was of a
reflecting turn, and from his training in the revolution, his reflections
often took a political cast. On this occasion, his thoughts ran thus:—
“What a strange creature I am! A few weeks since, I was mad with
joy at the arrival of this fisherman; soon he became the tyrant of my
life; I then wished him dead; and when I thought I had killed him, my
heart smote me, and I was more miserable than if death had stared
me in the face. He is now alive again, and I am relieved of a load;
and yet, in the midst of this happiness, which seems born of misery, I
still feel a strange sadness at my heart.
“When I was alone, I was perfectly free, but I soon found that
freedom, without society, was like the waters of the river, near which
Tantalus was so chained that he could not drink, thus dying of thirst
with a flood before his eyes.
“I therefore yearned for society, and then I had it by the arrival of
this fisherman. But he became a torment to me. What then is the
difficulty? I believe it is the want of some rules, by which we may
regulate our conduct. Though there are but two of us, still we find it
necessary to enter into a compact. We must form a government, we
must submit to laws, rules, and regulations. We must each submit to
the abridgment of some portion of our liberty, some portion of our
privileges, in order to secure the rest.”
Full of these thoughts, Brusque returned to the cave, and when
the fisherman awoke, he spoke to him on the subject of their quarrel,
and then set forth the necessity of laying down certain rules by which
the essential rights of each should be preserved, and a state of
harmony ensured. To this the fisherman agreed, and the following
code of laws being drawn up by Brusque, they were passed
unanimously:—
Be it ordained by Philip Brusque, late of France, and Jaques
Piquet, of Mauritius, to ensure harmony, establish justice, and
promote the good of all parties:
1. This island shall be called Fredonia.
2. Liberty, being a great good in itself, and the right of every
human being, it shall only be abridged so far as the good of society
may require. But as all laws restrain liberty, we, the people of
Fredonia, submit to the following:
3. The cave called the Castaway’s Home, lately occupied by
Philip Brusque, shall be alternately occupied for a day and night by
said Philip Brusque and Jaques Piquet; the former beginning this
day, and the latter taking it the next day, and so forth.
4. Each person shall have a right to build himself a house, and
shall have exclusive possession of the same.
5. If two persons wish the same fruit at the same time, they shall
draw lots for the first choice, if they cannot agree otherwise as to the
division.
6. If any difference arises between the two parties, Philip Brusque
and Jaques Piquet, they shall decide such questions by lot.
7. This code of laws shall be changed, or modified, or added to,
only by the consent of the parties, Philip Brusque and Jaques Piquet.
All which is done this 27th day of June, A. D. 18—.
This was neatly cut with a penknife on a board which had come
ashore from the wreck of Philip’s vessel, and it became the statute
law of the island of Fredonia.
(To be continued.)
Contentment.—A gentleman, it is said, had a board put on a

part of his land, on which was written, “I will give this field to any one
who is really contented;” and when an applicant came, he always
said, “Are you contented?” The general reply was, “I am.” “Then,”
rejoined the gentleman, “why do you want my field?”
Napoleon’s Last Obsequies.
In the first number of our Magazine we stated that the remains of

the late Emperor Napoleon had been conveyed from St. Helena to
France, for interment in the Hospital of the Invalides at Paris. This
event having caused the display of much splendid pageantry, and
public feeling among the French, we have thought it would be
interesting to our readers to see a minute and correct account of the
events and ceremonies that took place on this remarkable occasion.
The body of the Emperor was found in the earth at St. Helena,
where it had been deposited in a tomb of very strong and compact
masonry, so that although the workmen began at noon, it was ten
o’clock at night before they were able to reach the body. It was
enclosed in three coffins, two of mahogany and one of lead, all of
which were found in a perfect state, though nearly twenty years had
elapsed since they had been laid in the earth.
It is difficult to describe with what anxiety, with what emotions,
those who were present waited for the moment which was to expose
to them all that death had left of Napoleon. Notwithstanding the
singular state of preservation of the tomb and coffins, they could
scarcely hope to find anything but some misshapen remains of the
least perishable parts of the costume to evidence the identity. But
when, by the hand of Dr. Guillard, the satin sheet over the body was
raised, an indescribable feeling of surprise and affection was
expressed by the spectators, most of whom burst into tears. The
Emperor himself was before their eyes! The features of his face,
though changed, were perfectly recognised—the hands perfectly
beautiful—his well-known costume had suffered but little, and the
colors were easily distinguished—the epaulets, the decorations, and
the hat, seemed to be entirely preserved from decay—the attitude
itself was full of ease; and but for the fragments of the satin lining,
which covered as with a fine gauze several parts of the uniform, they
might have believed that they saw before them Napoleon still
extended on a bed of state. General Bertrand and M. Marchand, who
were present at the interment, quickly pointed out the different
articles which each had deposited in the coffin, and in the precise
position which they had previously described. It was even remarked
that the left hand which General Bertrand had taken to kiss for the
last time before the coffin was closed up, still remained slightly
raised.
The body was now placed in a new leaden coffin or sarcophagus,
sent out from France for the purpose, and conveyed with appropriate
ceremonies on board a French man-of-war, which immediately sailed
for Cherbourg. Great preparations were made in France for its
reception. On the arrival of the ship at Cherbourg, a steamboat was
ready to convey it up the Seine to Paris. A great number of
steamboats and vessels of all sorts were collected together, forming
a numerous fleet, under convoy of which the corpse was transported
up the river, stopping occasionally at the cities and towns on the way,
to allow the inhabitants the opportunity of gratifying their curiosity
and displaying their enthusiasm, by paying homage to the remains of
the great soldier and chieftain of the French empire. The crowds that
assembled all along the banks of the river were immense. The
military turned out by hundreds and thousands. All sorts of
pageantry, exhibition, and pompous show—consisting of triumphal
arches, pyramids, bridges, columns, and other fanciful and imposing
devices—contributed to give effect to the solemnities.
On the fourteenth of December, 1840, the procession reached St.
Germain, a place within a few miles of Paris. The crowd of
spectators which had thronged to the spot from Paris was so
immense, that it was impossible to proceed and land the body till the
middle of the next day. Two battalions of troops were stationed on
the banks of the river; and the stream was covered with vessels
decked with laurels and wreaths of immortelles, a bright, unfading,
yellow flower, very much in use among the French on funeral
occasions.
At the great bridge of Neuilly, three or four miles from Paris, an
immense rostral column had been prepared, surmounted by a ball or
globe, representing the world, and six feet in diameter. This was
crowned by a huge eagle; but owing to the intense cold of the

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Managerial economics Fifteenth Edition

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ISBN 13: 978-1-4737-5835-3

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Part 2: Demand Analysis and Estimation 111

Part 3: Production and Competitive Markets 239

Part 4: Imperfect Competition 445

Part 5: Long-Term Investment Decisions 609

Part 1: Overview of Managerial Economics 1

Role of Business in Society 16 Concept of a Marginal 63

Cost Relations 34 Basis for Supply 88

Profit Relations 38 Market Supply Function 89

Incremental Concept in Economic Analysis 42 Supply Curve 91

Managerial Application 2.3 Behavioural Market Equilibrium 94

Questions 101 Case Study: Spreadsheet Analysis of Demand

Problems 104 Selected References 110

Part 2: Demand Analysis and Estimation 111

Chapter 4: Demand Analysis 113 Managerial Application 5.2 Market Experiments

Indifference Curves 119 Summary 184

Demand Sensitivity Analysis: Elasticity 135 Selected Reference 196

Part 3: Production and Competitive Markets 239

Selected References 283 Dual in Linear Programming 342

Appendix 7A: A Constrained Optimization Dual Specification 343

Chapter 10: Competitive Markets 369 Competitive Market Efficiency 403

Part 4: Imperfect Competition 445

Oligopoly Output-Setting Models 499 Self-Test Problems and Solutions 554

Selected References 527 Price Discrimination 571

Part 5: Long-Term Investment Decisions 609

Summary 634 Managerial Application 18.3 Institutional

Problems 639 Legal and Ethical Environment 705

Eric Bentzen (Copenhagen Business School) is Associate Professor at Copenhagen Business

Carsten Scheibye (Copenhagen Business School) is Assistant Professor at Copenhagen

THIS 15th EDITION

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• An open-access area for students including, for

Lecturers: to discover the dedicated lecturer digital

Students: to discover the dedicated student digital

HOW IS MANAGERIAL ECONOMICS USEFUL?

Evaluating Choice Alternatives

Figure 1.1 Managerial Economics is a Tool for Improving Management Decision-Making

Managerial economics uses economic concepts and quantitative methods to solve m

Management Decision Problems

Economic Concepts Quantitative Methods

Optimal solutions to management

Therefore, model-building is a simplification or an abstract representation of an existing

Managerial Application 1.1

The managerial decision-modelling process

THEORY OF THE FIRM

Expected Value Maximization

This model can be expressed as follows:

Value of the Firm = Present Value of Expected Future Profits

Constraints and the Theory of the Firm

Limitations of the Theory of the Firm

Business Versus Economic Profit

Variability of Business Profits

Sales Net Return

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Attachment to our Country.—When Gulliver was in Lilliput, he

The Insincerity of Flattery.—“What little, ugly-looking, red-

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