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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
Self-Test Problems and Solutions 185
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
Selected References 160
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
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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
Selected References 755
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
Prefacexiii
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.
xivPreface
● 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
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BE UNSTOPPABLE
Overview of Managerial
Economics 1
P A R T
CHAPTER 1
Nature and Scope of
Managerial Economics
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.
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 Economics5
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.
6 Part 1: Overview of Managerial Economics
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,
Chapter 1: Nature and Scope of Managerial Economics7
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.
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CONSTANCE
CONWAY.
FROM MRS. ROMILLY TO MISS CONWAY.
May 7.
MY DEAREST CONSTANCE,—I have persuaded

my watchful Nellie, with great difficulty, to let
me send a few words in answer to yours. I
cannot get out of my head a haunting fear that
somehow you do not quite appreciate my
precious Maggie. It would grieve sue intensely if
things were so.
Maggie is like me, reserved as to her deepest

feelings: and it may be that you have scarcely
read as yet her true nature. She is capable of
giving such devoted love. Dear Constance, have
you won it yet? Forgive me for asking the
question. Forgive a mother's anxieties. I can
scarcely judge from Maggie's letters, but I have
had doubts, and your letter has awakened real
fear. Your mention of her is so slight, compared
with all that you say of my other dear girls.
Does that—can it—betoken indifference?
I know well how terribly my sweet Maggie is

suffering at my absence, though she will bear
up courageously for the sake of others. And I
want you to see below the surface with her. I
want you to know my child's real worth and
depth. She is so humble, so tender-spirited,—I
could not bear, dear Constance, to think that
you and she should not fully understand one
another.
It rejoices me to hear that darling Elfie is

really trying to be brave. She is, as you say, a
sensitive little puss—not with the acute
sensibilities and intense feeling of dear Maggie,
so seldom allowed to appear,—but excitable,
nervous, fanciful, and soon overwrought. Miss
Jackson had not quite the right method of
managing Elfie. I was compelled at one time to
make a strong stand, and to insist on no
spoiling. I trust to you for more firmness.
Nona's powers will develop. I am not at all

afraid for that dear girl. She is capable of
anything: but sixteen is very young, and the
high spirits which seem to you such a
disadvantage, I should call quite a blessing. I
wish I could look forward as hopefully for
Thyrza as for Nona. I do find there a strange
hardness, which exists in no other of my
children. If you are able to influence her for
good, so much the better. But, dear friend, do
think over what I have said about my precious
Maggie. I have so depended on your loving
companionship for her, now in her time of trial
and loneliness. If you knew how that dear girl
has always clung to me and depended upon
Nellie, you would realise a little of what she
must now be suffering. Try to win her heart,
dear Constance,—for my sake! I can assure you
my Maggie's love is worth having.
I must not write more. I shall suffer severely
for this.—Believe me, your warmly-attached
friend—
GERTRUDE
ROMILLY.
CHAPTER XIV.
SUBLIMITY AND MAGGIE.
CONSTANCE CONWAY'S JOURNAL.
May 12. Tuesday.
IF ever anybody managed to write a harmless and non-

exciting letter, I should have said that mine to Mrs. Romilly
came under that description. Her answer fell upon me like a
small thunder-clap.
Of course I showed Mrs. Romilly's letter to nobody:

though, equally of course, I was expected to pass the sheet
round the breakfast-table. That very bad habit prevails in
this house to an unfortunate extent. Mr. Romilly labours
under a ludicrous belief that anything written by any near
relative of his own must be intended for his eyes: and
nobody is supposed ever to receive a letter or note which
cannot be regarded as common property. Hence arises an
occasional necessity for objectionable little private slips and
secret postscripts, as the only possible mode of saying what
must be said, and avoiding betrayed confidences.
All eyes were on me as I read, and when I put the letter

into my pocket glances of meaning were exchanged. Mr.
Romilly, who had just appeared, sighed in an audible and
appealing fashion, while Maggie remarked that "Mother
could write so seldom and only to one at once, and tell all
the news."
"Mrs. Romilly tells me really no news," I said.
"And no messages to any of us!" exclaimed Nona,—

pertly, I thought.
"None," I replied. "Perhaps she was tired with writing,

for she ends abruptly."
"Jackie always showed her letters from mother!" These

words in a subdued whisper reached my ears. Of course I
paid no regard to the sound.
Mr. Romilly sighed afresh, and observed that his dear

wife was really not in a state to write at all—er, just before
a journey—er. He hoped, however, that she must be feeling
a little stronger—er, as she ventured on the exertion—er.
"I am afraid it was not very prudent of Mrs. Romilly," I

said.
Then the Prayer-bell rang, and the subject had to be

dropped.
My thoughts have dwelt a good deal on that letter to-

day, as is perhaps natural. Mrs. Romilly has never before
said or done anything to make me really uncomfortable,
and to be made uncomfortable by friend is a trial. One must
allow for the weakened fancies of illness. But what could
induce her to suppose that I objected to Nona's high spirits?
I would not, if I could, lower them by a single half-inch.
Certainly I should be glad to find something in Nona besides
the love of fun.
I am wondering, too, what more I can do with respect

to Maggie. True it is, no doubt, that I have not yet
succeeded in winning her love. Is this my fault? Everybody
cannot suit everybody else: and the winning of another's
affection must surely depend in some degree on natural
compatibility of temper and of tastes. I hope in time to
possess Maggie's trust and esteem. But suppose I never
succeeded in gaining her love,—should I be necessarily to
blame? Surely I need not count myself so lovable a person,
that all with whom I come in contact must needs care for
me!
Again, what about Mrs. Romilly's estimate of Maggie?

Are there really such hidden depths beneath that childish
manner? It might, of course, be so: yet somehow I cannot
help thinking with a smile of the famous Chicken's soliloquy,
as he views the empty egg-shell whence his little body has
just emerged—
"And my deep heart's sublime imaginings

In there!!"
One might almost as soon credit a newly-hatched

chicken with "sublime imaginings" as Maggie Romilly with
hidden depths of profound affection and acute suffering.
Maggie grieving terribly over the parting! Maggie hiding
intense sorrow under an appearance of cheerfulness! I
could laugh as I write the words, remembering the high
glee with which two or three hours ago she and Nona were
racing round the schoolroom, trying to catch the little ones.
Quite right too. I am only glad to see them so happy. But
certainly I detect no symptoms in Maggie of severe self-
control, of concealed depression, of overmastering anxiety.
And with one so quick to betray each passing mood, pain
and sorrow could scarcely be held under continuously.
It seems to me that Maggie is rather gratified than

otherwise with her present position in the house; and is
very much preoccupied with out-of-door engagements,
especially tennis. She likes an unbroken course of such
amusements as Glynde can afford, and is rather apt at
present to let duty wait upon pleasure. Care has not fed yet
upon her damask cheek. She looks well, is plump and rosy,
and at times she strikes me as quite pretty. Indeed, I
should say that she and all the girls, except Elfie, are
unconsciously rejoicing under the sudden cessation of the
strain which always comes upon a household with long
illness.
Now and then I see Maggie to be greatly put out with

me, when I have to take some decisive step in opposition to
Miss Millington.
One odd phase of affairs is Maggie's devotion to Miss

Millington. It is odd, because in some respects Maggie is
proud. She will not brook a hint or suggestion from any one
as to the management of things and she has an extremely
good notion, transparently shown, of her own reflected
honours as the daughter of Mr. Romilly, owner of a big
house in the south and a fine estate in the north. But pride
does not come between her and "Millie."
Certainly I will allow that Miss Millington is quite
ladylike, as well as almost pretty. Still, it is a little droll and
out of place to see Maggie, the eldest daughter at home and
present head of the establishment, running perpetually after
the little nursery governess, fondling her, making much of
her, holding long consultations with her late at night,
behaving, in short, as if Miss Millington were her most
intimate personal friend and most trusted adviser. I am
wrong to say that Maggie will take hints from nobody; for
she will receive any number from Miss Millington.
The most singular part of this devotion is its novelty. I

suppose Maggie has been fond of Miss Millington before, but
by no means to the same extent. "Maggie always allowed
Millie to call her by her name," Thyrza observed a day or
two ago, "so of course she has done the same to me. I
know Nellie didn't think it a good plan. But they were very
little together. Maggie was always dangling after mother and
Nellie,—it didn't matter which: and she was the same to
Jackie as to Millie. But now Jackie is gone, and mother and
Nellie are away, there's only Millie; and Maggie always must
have somebody!"
Does the clue lie in those words,—that Maggie "always

must have somebody!" Woodbine must cling to something.
If one prop be removed, it will find a second.
What to write to Mrs. Romilly, I do not know. For I must

comfort her: and yet I cannot say what is not true.
Something vaguely kind and cheering will be best. I shall
tell her how pretty Maggie's eyes are, and how fond she
seems of her sisters—not mentioning poor Thyrza. Then I
might perhaps generalise a little—abstractedly—about the
deepest natures not being always the most quickly won. Not
that I believe in that theory, but it will do as well as
anything else just now for my poor friend: and it is safe
enough to assert that a thing is "not always" this or the
other. But I shall have to be very careful. She is so quick to
read "between the lines."
May 14. Thursday.—My letter to Mrs. Romilly has gone

off. I feel rather "quaky" as to results.
Maggie will scarcely speak to me to-day. She is looking

her prettiest, not sulky and disagreeable, like most people
when they are vexed, but pensively grave, with just a little
heightening of colour, and a shy serious droop in her grey
eyes which suits them to perfection. Nona, taking her cue
from Maggie, is blunt, almost pert: and Elfie looks pinched
and miserable.
Of course I know the reason. Yesterday afternoon I

refused permission for Popsie to practise in the schoolroom,
while I was giving a lesson on Grecian history to the twins
and Thyrza. Miss Millington had kept her upstairs during the
usual time for her scale-playing, and desired that she might
do it later instead. I sent a kind message, saying I was
sorry that it could not be. A small thunder-cloud has
brooded in the air ever since. "Millie" was doleful at tea, and
she and Maggie shared grievances till twelve o'clock at
night, in Miss Millington's room.
But for Miss Millington, I do think my difficulties here

would soon lessen. I do not wish to make too much of her
conduct. She is what some people wrongly call "sensitive;"
that is, she has a susceptible temper, and is always
imagining slights. I believe she had delicate health in
childhood, which too often means a more or less spoiling
preparation for after-life. Whether or no that is the chief
cause, I do find her a difficult little person to get on with
comfortably. The friction is incessant.
One cannot expect to go through life without some

rubs; and no doubt there are faults on both sides. Very
likely I am a trouble to her, as well as she to me. I do not
exactly see how I could follow any different line of conduct:
but perhaps nothing is harder than to weigh dispassionately
one's own conduct, above all one's own bearing, towards
another, in such a case as this. We are each in a somewhat
ticklish position: and then, is not compatibility of temper to
smooth matters down.
It often strikes me as remarkable how almost

everybody has to do with somebody else who is
incompatible, somebody more or less trying, vexing,
worrying; not, of course, always with only one. And I often
wonder whether this ought to be viewed at all as an
accidental circumstance; still less as a subject for regret
and complaint.
Trial must be trial, in whatever shape it comes; and I do

feel that one is always free to pray for its removal, if God so
wills. But this is our time of probation and battling. It is far
more essential for us to learn patience and forbearance
than to glide smoothly through life. And I cannot at all see
how, if there were nothing to try our tempers, we ever
could become patient or forbearing. Untried good-humour is
not patience: any more than the stillness of ocean on a
breezeless day is rigidity. And the very word "forbearance"
implies the existence of something which must be borne.
May it not be that our Father does deliberately so place

us one with another, side by side—those who are not suited,
not compatible—for this very reason, that we may have the
opportunity to conquer ourselves, to vanquish our hasty and
impatient tempers, as we never could if He allowed us to be
only among those who can become so intensely dear to us,
that yielding to them must become a pleasure, not a pain at
all?
I don't know whether this sentence would be quite clear

to anybody else reading my journal: but it is very clear to
myself what I mean. There are such different kinds and
degrees of love. So often we love or try to love another,
merely because of circumstances, because we ought,
because we are thrown together, because we are related.
So seldom we love soother with pure and heart-whole
devotion, entirely because of what he or she is.
If things be thus, "Millie" is certainly my foremost

opportunity for patience in life just now, and very likely I
am hers.
Looking upon the matter in such a light ought, I think,

to make a great difference to one. For, instead of feeling
annoyed and worried at everything she says and does, I
shall understand that my Father is setting me a lesson in
patience and quietness of spirit, which has to be learnt.
Then, too, I must think how my Master, Christ, had the

same trial to endure, only to such an overwhelming extent.
For what is the utmost incompatibility of character and
temper between us and those around us, compared with
the infinite incompatibility between His pure and holy Spirit,
and the dull grovelling thoughts of His disciples? Only—His
love for them was so great! But for that, He never could
have borne it all those years. And I am sure a more loving
spirit is what I need. If I cannot love Miss Millington for
what she is in herself, or for what she is to me, cannot I
love her at least with a kind and pitying love—and because
she is dear to my Lord and Master?
It is not easy, I know. In the learning of this lesson, I
have to spell out the words letter by letter, looking up for
Heavenly teaching.
For I have to be patient with her, yet not weakly

yielding. I have to do my duty, often in direct opposition to
her wishes, yet not be angry when she shows unjust
resentment. No light programme to carry out. But "help
sufficient" is promised.
June 1. Monday.—No answer has arrived from Mrs.

Romilly, and no notice has been taken of my letter. I fear
she has been hardly so well lately; and evidently there is no
idea of her return to England for many months.
Much talk goes on about our projected journey north, in

July. I am looking forward as keenly as anyone to the
beautiful surroundings of Beckdale. Mountains will be a new
delight to me. But I have my doubts whether we shall get
away before the beginning of Denham's holidays. He would
be obliged to board with somebody in Glynde if we left
earlier. The same difficulty will not exist another year, for
after the summer holidays, he goes to Eton. Time he should
too; for of all spoilt boys—! Yet there is something winning
about the lad too.
Also we have much discussion at meal-times about the

future career of Eustace. Poor Mr. Romilly cannot keep any
worry to himself: and every day we wander with him round
and round the same hazy circles. I never realised before the
wearisomeness of a man who is unable to come to any
decision, without somebody to lead him by the hand. A
woman of that kind is bad enough, but a man is worse. He
talks and talks on, in his thin monotonous tones, reviewing
all the perplexities of a subject, pulling up first one side and
then the other, meekly opposing every suggestion,
mournfully refusing to accept any solution of the puzzle.
And if by dint of some happy hit, you really think he is at
last brought to some more hopeful point—suddenly he slips
out of your fingers, and starts the whole question again
from the very commencement.
It seems singular that Eustace Romilly should have

reached the age of twenty-two, and be still in uncertainty as
to his course in life.
He has not been home this half-year, except for three

nights at the time of my first arrival, and for one week at
Easter. Having finished his University career before
Christmas, he is now acting temporarily as tutor to the son
of an old friend. This gives umbrage to his father, and is
matter for never-ceasing complaint. It seems that Mr.
Romilly is bent upon seeing Eustace enter the Church, and
that Eustace is at present opposed to the step.
I do not know the ins and outs of the affair, nor am I

acquainted with Eustace's motives, but certainly I have a
very strong feeling against any man being pressed to take
so solemn a charge upon himself, unless distinctly called to
it.
All the girls except Thyrza unite in blaming their brother,

and Thyrza says nothing.
"So stupid of Eustace! Why can't he do what father

wishes?" Maggie said yesterday, and Thyrza's black eyes
flashed with silent indignation.
I am more and more convinced that Thyrza has a very

strong affection for her eldest brother, though she seldom
or never shows it in her manner when with him; and he is
uniformly the same to all his sisters.
CHAPTER XV.
THAT PUBLISHER!!
THE SAME.
June 16. Tuesday.
MAGGIE'S story has been returned, as any one might

have foretold. She has wondered much over the delay,
devising all sorts of extraordinary reasons for the same, and
she has written repeatedly to remonstrate with the
publisher. Poor man! No doubt he has cartloads of such
rubbish tilted upon his devoted head. I feel a certain sense
of satisfaction in having never contributed my quota to the
load,—though perhaps I could achieve a passable second-
rate story, if I chose.
Maggie's remonstrances having brought no result, she

persuaded her father to write. I believe Mr. Romilly
accomplished some six pages, to be fired by post at the
same luckless publisher, after a morning of dire effort and
mighty consultation. And the six pages, whether read or
unread, took effect. For within forty-eight hours a tied up
manuscript arrived; and—this being the "most unkindest cut
of all,"—no letter of explanation accompanied it; not even
one half-page.
The publisher's ears ought to have burned that

morning, with the things said of him at our breakfast-table.
Everybody, trying in affectionate family conclave to comfort
the crest-fallen Maggie, vied one with another in hot
indignation at his decision. Never was there living man so
lacking in taste, so utterly unappreciative. Such a sweet
pretty story,—and he not to want to bring it out! Well, then
he didn't deserve to have it! Maggie would soon find a more
sensible publisher. Of course it was well-known that all the
greatest authors always have the most difficulty at the
beginning, and all the best books are always refused by a
dozen publishers before one enlightened man consents to
bring them out! So being refused meant nothing at all: only
he might just have had the politeness to write and explain
exactly why he didn't want it, and what he disliked in the
tale. And of course he would have done so, if there were
anything really to dislike. But never mind, Maggie must just
try somebody else, and she would be sure to succeed, and
very likely would get twenty pounds after all, instead of only
fifteen.
I could not help remembering, as I listened in silent

amusement to all this, how Gladys had remarked, a day or
two before, "What kind pleasant people editors and
publishers seemed to be!" But it was not for me to remark
on the contrast. Maggie must, find her own level, through
the stern realities of failure.
June 17. Wednesday.—At last I have seen again my

travelling companion, Sir Keith Denham!
He and his mother, Lady Denham, have been absent
from The Park almost entirely since my arrival in Glynde. At
one time they were coming home, then suddenly changed
their plans and went abroad. Sir Keith has paid one or two
flying visits, I believe, lately, but he and I have not met.
I stood still to break off a small spray of may.

Now they will be at The Park for some weeks, and the
girls are quite excited,—Thyrza excepted, and Maggie
especially. But I fancy the chief source of their excitement is
the prospect of tennis there.
Thyrza and I had a walk alone together this afternoon,

the twins going by invitation to the Hepburns. I always
enjoy a ramble with Thyrza: for if no one else is present,
she opens out, shakes off the shackles of reserve, and
allows me some glimpses of her true self. It is an
interesting "self" to me, crude and unformed indeed, but
thoughtful, earnest, full of vague longings and high aims. If
only Mrs. Romilly could see her thus!
Coming homeward after a long round, we passed

through a pretty lane, arched over by trees. I stood still to
break off a small spray of may from the hedge, and Thyrza
knelt down on the bank for the better securing of a few
violets. She loves flowers almost as much as I do.
Footsteps drew near, and I looked up. Somebody

following in our rear had just overtaken us; and for a
moment I was under a puzzled sense of familiarity with the
face and form, though I could not recall who it might be.
Apparently he had not yet become aware of our presence.
He was walking swiftly, and gazing steadfastly downward.
"Miss Con, just smell these! How sweet they are!" cried
Thyrza.
Then two large brown eyes were lifted in a curious slow

fashion to meet mine, as if their owner had been very far-
away in thought; and at once I knew. I should not have
expected him to recognise me. The instant pause and the
raised hat were a surprise.
"Thyrza!" I said, for her back was turned.

She glanced round, and sprang up, freezing into her
usual unapproachable stiffness.
"How do you do?" Sir Keith said, giving her his ungloved
hand, or rather taking the rigid member which she poked
half-way towards him. "I hope you are all well at home.
Pleasant day, is it not?"
He looked towards me again, and Thyrza ungraciously

mumbled something about—"Miss Con—at least, Miss
Conway!"—which was doubtless intended for an
introduction.
Sir Keith's hat was lifted afresh, with his air of marked
and simple courtesy,—simple, because so absolutely
natural. I have never seen a more thoroughly high-bred
manner.
"I must supply Thyrza's omission," he said, smiling. "My

name is Denham, and we are near neighbours. We have
met before: and the name of Miss Conway is by no means
unknown to me, as Mrs. Romilly's friend."
"And governess," I said. I could not help noticing the

flash of his eyes, curiously soft and gentle eyes for a man.
It meant approval, certainly, and something else beyond
approval which I could not fathom. One never loses in the
end by claiming no more than one's rightful position. It is
rather absurd of me to care what Sir Keith does or does not
think about the matter. But I should say that he is a man
whose good opinion one could hardly help valuing.
"I hope you caught your train that day?" he said, after a
few remarks had passed between us.
"Thanks to you, I did," was my answer.

"Are you going home now? My way is identical with
yours, so far as the end of the next lane," he said, and we
walked side by side, Thyrza marching solemnly, a yard off,
declining to take any share in the talk.
Sir Keith had been ill in Bournemouth, I found, from the

effects of a chill, caught on the day of our first encounter, "A
touch of rheumatic fever," he said carelessly. Since then he
and his mother had been abroad, and he "would have liked
to go on to Italy, for a peep at Mrs. Romilly, had that been
practicable."
He seemed interested to find that I had never been out

of England; and soon the subject of Beckdale came up,
whereupon he spoke with warmth of Yorkshire scenery.
"That part of the West Riding is quite unique in style,"

he said; "I have never seen anything resembling it
anywhere else."
"Not in Scotland?" I asked.
"I am not comparing degrees of beauty," he said. "That

is another question. Mountains two thousand feet high
cannot vie with mountains four thousand feet high: and
there are views in Scotland which I don't think can be
rivalled anywhere. No, not even in Switzerland. The two are
so unlike in kind, one can't compare them. But the
Yorkshire dales are peculiar to Yorkshire. English people
don't half know the loveliness of their own country. I could
envy you the first sight of such surroundings."
He went on to describe briefly the lone heights and

passes, the long parallel valleys or "dales," the brawling
"tea-coloured" torrents, the extraordinary deep caves and
underground waterfalls, the heather colouring, the frank
kind simplicity and honesty of the "northeners." Thyrza
drew near, looking interested, and I was quite sorry when
we had to part.
"How is my particular pet, the Elf?" he asked, with a

smile, as we shook hands.
"Elfie is all right," Thyrza's brusque tone answered.
Sir Keith vanished, and I said, "He looks delicate."
"I don't think he ever is very strong," said Thyrza, at

once natural again. "He never makes any fuss about his
health; but Lady Denham fusses for him."
"Is Lady Denham like Sir Keith?"
"No. She is a little plain sort of person, and rather odd,

and she thinks nobody in the world is equal to him."
"He seems to be a general favourite," I said.
"Oh yes, of course he is. Everybody sings his praises.

And I hate general favourites," cried Thyrza, with sudden
heat. "I should like him fifty times as much, if—"
"If everybody else disliked him," I suggested, as she

came to a stop.
"Yes."
"Is that perversity, my dear?" I asked.
"I don't know. I hate running with the crowd."
"If the crowd is going in a wrong direction—yes. I would

never have you follow a path merely because others follow
it."
"If everybody thinks a thing, I am not bound to think
the same, I suppose," she said, hotly still.
"Certainly not. Never think a thing merely because

others think it. But always to disagree with the majority is
quite as illogical as never to disagree with the majority. And
to refuse a particular conclusion, only because many others
have reached that same conclusion, savours of weakness."
She blushed, but did not look annoyed. When alone

with Thyrza, I can say what I like to her.
"You must learn to take everything upon its own merits,

and to weigh it with an independent judgment," I said. "A
certain animal which always goes to the right if its tail be
pulled to the left is no more really independent than—"
She interrupted me with a laughing protest.
"But I can't make myself like Sir Keith," she added.

"Perhaps I ought because he is Eustace's great friend, and
Keith was so fond of him. If only one didn't get so tired of
hearing about his virtues. And Maggie puts me out of all
patience."
I suppose I looked the inquiry which I would not ask.
"Oh, I can't tell you exactly what I mean, it is nothing

particular, only she is so silly. I hate to see a girl make a
sort of idol of a man . . . and not an atom of reason . . . Of
course he is very kind and polite; . . . but he looks upon us
as a set of schoolgirls. It is so ridiculous of Maggie. I don't
mean that she does or says anything—particular—only she
is so absurd! I should like to give her a good shaking. I do
wish, girls had a little more common self-respect!" Thyrza
concluded fiercely, with burning cheeks.

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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

• A password protected area for instructors with,

• 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

FROM MRS. ROMILLY TO MISS CONWAY.

MY DEAREST CONSTANCE,—I have persuaded

Maggie is like me, reserved as to her deepest

I know well how terribly my sweet Maggie is

It rejoices me to hear that darling Elfie is

Nona's powers will develop. I am not at all

CONSTANCE CONWAY'S JOURNAL.

May 12. Tuesday.

IF ever anybody managed to write a harmless and non-

Of course I showed Mrs. Romilly's letter to nobody:

All eyes were on me as I read, and when I put the letter

"Mrs. Romilly tells me really no news," I said.

"And no messages to any of us!" exclaimed Nona,—

"None," I replied. "Perhaps she was tired with writing,

"Jackie always showed her letters from mother!" These