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 Managerial Economics

Mark Hirschey
University of Kansas

Eric Bentzen
Copenhagen Business School

CENGAGE
Learn ing-
Australia • Brazil .. Mexico • Singapore • United Kingdom • United States

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 eo..-ents vii

Transitive Property, 54 • Commutative Properties, Determinants of Demand, 79 • Industry Demand Vers11s

54 • Associative Properties, 55 • Distrib11tive Finn Demand, 80
Properties, 55 • Inverse Properties, 55 • Exponents Demand Curve 81
and RadiCllls, 55
Demand Curve Determination, 81 • Relation
Equations 56 Between the Demand Curve and Demand
Equivalent Operations, 56 • Linear Equations, 57 F11nction, 82
• Quadratic Equations, 57 • Multiplirotive Basis for Supply
Equations, 57 • Exponential Functions, 57
• Logarithmic Functions, 58 Haw Output Prices Affect Supply, 84 • Other
Factors that Influence Supply, 85
Concept of a Marginal 59
Market Supply Function 85
Rules for Differentiating a Function 61
Determinants of Supply, 85 • Industry Supply
Constants, 61 • Pawers, 62 • Sums and Versus Firm Supply, 87
Differences, 62 • Products, 63 • Quotients, 64
• Logarithmic Functions, 64 • Function of a Supply Curve 87
Function (Chain Rule), 65 Supply Curve Determination, 87 • Relation
Appendix 28: Multivariate Optimization and Between Supply Curve and Supply Function, 89
the Lagrangian Technique 67 Market Equilibrium 91
Partial Derivative Concept, 67 • Maximizing Surpl11s and Shortage, 91 • Comparative Statics:
Multivariate Functions, 68 Changing Demand, 93 • Comparative Statics:
Constrained Optimization 69 Changing Supply, 95 • Comparative Statics:
Changing Demand and Supply, 96
Role of Constraints, 70 • Lagrangian Multipliers, 71
Summary 97
Problem 75
Questions 97
Chapter 3 : Demand and Supply 77 Self-Test Problems and Solutions 98
Basis for Demand 77 Problems 101
Direct Demand, 77 • Derived Demand, 78 Case Study: Spreadsheet Analysis of Demand
Managerial Application 3.1: How the Internet and Supply for Sunbest Orange Juice 105
Affects Demand and Supply 79 Selected Reference 107
Market Demand Function 79

Part 2: Demand Analysis and Estimation 109

Chapter 1t: Demand Analysis SH Price-Consumption Curve, 122 • lncome-

Utility Theory 111
Consumption Curve, 125 • Engle Curves, 125
Basic Assumptions, 111 • Utility Functions, 112 Managerial Application 4.2: Relationship
• Marginal Utility, 113 • Law of Diminishing Marketing 128
Marginal Utility, 114 Optimal Consumption 128
Managerial Application 4.1: Odd-Num ber Marginal Utility and Consumer Choice, 128
Pricing Riddle 116 • Marginal Rate of Substitution, 129 • Utility
Indifference Curves 116
Maximiu,tion, 131
Basic Characteristics, 116 • Perfect Substit11tes Demand Sensitivity Analysis: Elasticity 132
and Perfect Complements, 118 Elasticity Concept, 132 • Point Elasticity, 132
Budget Constraints 118
• Arc Elasticity, 133
Characteristics of Budget Constraints, 118 • Effects Price Elasticity of Demand 133
of Changing Income and Changing Prices, 121 Price Elasticity Fomwla, 133 • Price Elasticity
• Income and Substitution Effects, 122 and Total Revenue, 135
Individual Demand 122 Price Elasticity And Marginal Revenue 137

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 viii Contents

Elasticity Varies Along a Linear Demand C11rve, 137 Standard Error of the Estimate, 175 • Goodness
• Price Elasticity and Price Chauges, 138 of Fit, 176 • F Statistic, 178
Managerial Application 4.3: Haggling Judging Variable Significance 179
in the Car Business 141 nvo-Tail t Tests, 179 • One-Tail t Tests, 181
Price Elasticity and Optimal Pricing Policy 141 Summary 182
Optimal Price Fonuula, 141 • Optimal Pricing Questions 183
Policy Example, 142
Self-Test Problems and Solutions 183
Cross-Price Elasticity of Demand 143
Problems 188
Cross-Price Elasticity Formula, 143 • Substitutes
aud Complemeu ts, 144 Case Study: Demand Estimation for
Mrs Smyth's Pies 192
Income Elasticity of Demand 144
Selected Reference 194
• Income EJIISlidty Formula, 144 • Nonna/ Versus
Inferior Goods, 145 Chapter 6 : Forecasting 195
Managerial Application 4.4: What's in a Name? 146 Forecasting Applications 195
Summary 146 Macroeconomic Applirotious, 195 • Microeconomic
Questions 147 Applications, 196 • Forecast Tec/111iq11es, 196
Self-Test Problems and Solutions 148 Managerial Application 6.1: Economic
Forecasting: The Art and the Science 197
Problems 153
Qualitative Analysis 198
Case Study: Optimal Level of Advertising 156
Expert Opi11io11, 198 • Survey Tech11iq11es, 198
Selected References 157
Trend Analysis and Projection 199
Chapter 5: Demand Estimation 159 Trends iu Economic Data, 199 • Linear Trend
Interview and Experimental Methods 159 Analysis, 199 • Growth Trend Analysis, 202
Consumer Interviews, 159 • Market • Linear and Growth Trend Comparison, 204
Experiments, 160 Managerial Application 6.2: Prediction Markets 204
Simple Demand Curve Estimation 160 Business C yde 205
• Simple l.i11ear Demand C11rves, 160 What is the Busiuess Cycle?, 205 • Economic
• Usiug Simple Linear Demaud C11rves, 162 lndirotors, 207 • Economic Recessions, 208
Managerial Application 5.1: Sampling • Sources of Forerost Infonuation, 210
Technology for TV Advertising 161 Managerial Application 6.3: The Stock Market
Simple Market Demand Curve Estimation 163 and the Business Cycle 211

Graphiug the Market Demand Curve, 163 Exponential Smoothing 212

• E1111/11ati11g Market Demaud, 164 Exponential Smoothing Concept, 212
Identification Problem 166 • Oue-Parnmeter (Simple) Expouential
Smoothiug, 212 • nuo-Parnmeter (Holt)
Cha11gi11g Nature of Demaud Relatious, 166 Exponential Smoothing, 213 • Three-Parameter
• lllterplay of Demaud and Supply, 166 • Shifts (Winters) Expouential Smoolhiug, 214 • Practical
i11 Demand and S11pply, 167 • Simultaueous Use of Expo11e11tial Smoothiug, 214
Relatious, 169
Econometric Forecasting 215
Regression Analysis 169
Advnutages of Ecouometric Methods, 215
What is a Statistirol Relation?, 169 • Specifyiug the • Si11gle-Eq11atio11 Models, 217 • Multiple-Equation
Regressiou Model, 172 • Least Squam Method, 173 Systems, 218
Managerial Application 5.2: Market Experiments Managerial Application 6.4: How Good is Your
on the Web 170 Forecasting Ability? 216
Measures of Regression Model Significance 175 Judging Forecast Reliability 220

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 eo..-ents

Tests of Predictive Capability, 220 • Correlatio11 Questions 224

A11alysis, 220 • Sample Mea11 Forecast Error Self-Test Problems and Solutions 225
A11nlysis, 220
Case Study: Forecasting Global Performance
Choosing the Best Forecast Technique 221 for a Mickey Mouse Organization 233
Data Requirements, 221 • Time Horizo11 Selected Reference 236
Co11siderntio11s, 221 • Role of Judgme11t, 223
Summary 223

Part 3: Production and Competitive Markets 237

Chapter 7: Production Analysis Productivity Measurement 262
and Compensation Policy 239 Eco11omic Productivity, 263 • Productivity a11d
Production Functions 239 Investment i11 Computer Tech110/ogy (JCT), 264
Properties of Produdio11 Fu11ctio11s, 239 • Reflm1s to Managerial Application 7.4: Labor productivity
Scale and Returns ton Factor, 240 growth in selected countries 2009-2012. 263
Total, Marginal, and Average Product 240 Summary 265
• Total Product, 241 • Margi11al and Average Questions 266
Product, 242 Self-Test Problems and Solutions 266
Law of Diminishing Returns to a Factor 245 Problems 269
lllustrntiolt of Di111inishi11g Retums ton Factor, 247 Case Study: Worker Productivity Among
Managerial Application 7.1: Efficiency Wages 246 Giant US Corporations 274
Input Combination Choice 248 Selected References 276
Productio11 lsoqua11ts, 248 • l11put Factor Appendix 7A: A Constrained Optimization
Substifl1tion, 248 • Margi11al Rate of Tee/mien/ Approach to Developing the Optimal Input
Substifl1tion, 251 • Rational Limits of Input Combination Relationships 277
Substifl1tion, 251 Constrained Production Maximization 277
Marginal Revenue Product and Optimal Constrained Cost Minimization 279
Employment 252
Problem 280
Margi11nl Revenue Product, 252 • Optimal
Leve/ of n Single Input, 253 • lllustration of Chapter 8 : Cost Analysis and Estimation 281
Optimal Employment, 254
Economic and Accounting Costs 281
Managerial Application 7.2: National minimum
wages in the EU 253 Historical Versus Curre11t Costs, 281
• Opportunity Costs, 282
Optimal Combination of Multiple Inputs 255
Role of Time in Cost Analysis 283
Budget Li11es, 255 • Expansio11 Path, 257
lncreme11tnl Versus Sunk Cost, 283 • How is
• lllustration of Optimal Input Proportions, 258
the Operati11g Period Defi11ed?, 284
Managerial Application 7.3: The Future of
Managerial Application 8.1: GE's '20-70-10' Plan 284
Manufacturing in Europe 2015-2020 259
Short-Run Cost Curves 285
Optimal Levels of Multiple Inputs 259
Short-Run Cost Categories, 285 • Short-Run
Optimal Employme11t n11d Profit Mnrimi111tio11, 259
• lllustration of Optimal Levels of Multiple Cost Relations, 286
Inputs, 260 Managerial Application 8.2: GAAP and IRFS 288
Returns to Scale 260 Long-Run Cost Curves 288
• Output Elasticity a11d Returns to l.011g-Run 1btal Costs, 288 • Eanromies of Scale, 290
Scale, 260 • Reft1ms to Scale Estimation, 261 • Cost Elasticities and Eco110111ies of Scale, 290
• Long-Ru11 Average Costs, 291

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 x Contents

Managerial Application 8.3: Cost Stickiness 293 Objective Function Specification, 330 • Constraint
Minimum Efficient Scale 293 Equation Specifirotion, 331 • Non-negativity
Requirement, 331
Competitive Implications of Minimum Efficient
Scale, 293 • Transportation Costs and MES, 293 Graphic Specification and Solution 332

Firm Size and Plant Size 295 Analytic Expression, 332 • Graphing the
Feasible Space, 332 • Graphing the Objective
Mu/tip/ant Economies and Diseconomies of Fundion, 334 • Graphic Solution, 335
Scale, 295 • Economics of Mu/tip/ant
Operation: an Example, 296 • Plant Size and Algebraic Specification and Solution 336
Flexibility, 298 Algebraic Specification, 336 • Algebraic
Learning Cur ves 300 Solution, 338
I.earning Curve Concept, 300 • I.earning Curve Managerial Application 9.3: LP on the PC! 341
Example, 302 • Strategic Implications of the Dual in Linear Programming 342
I.earning Curve Concept, 303 Duality Concept, 342 • Shadow Prices, 342
Managerial Application 8.4: Bigger isn't Dual Specification 343
Always Better 301
Dual Objective Function, 343 • Dual
Economies of Scope 304 Constraints, 343 • Dual Slack Variables, 344
Economies of Scope Concept, 304 • Exploiting Solving the Dual Problem 345
Scope Economies, 305
Dual Solution, 345 • Using the Dual Solution
Cost-Volume-Profit Analysis 305 to Solve the Primal, 346
• Cost-Volume-Profit Charts, 305 • Degree Summary 348
of Operating Leverage, 307
Questions 349
Summary 309
Self-Test Problems and Solutions 349
Questions 310
Problems 357
Self-Test Problems and Solutions 311
Case Study: A LP Pension Funding Model 362
Problems 313
Appendix 9A: Rules for Forming the Dual linear
Case Study: Estimating Hospitalization Costs Programming Problem 365
for Regional Hospitals 317
Primal Problem 365
Selected References 320
Dual P roblem 366
Chapter 9 : Linear Programming 321 Selected References 367
Basic Assumptions 321
Chapter so: Competitive Markets 369
Inequality Constraints, 321 • Linearity
Assumption, 322 Competitive Environment 369
Managerial Application 9.1: Karmarkar's LP What is Market Struchire?, 369 • Vital Role
Breakthrough 322 of Potential Entrants, 370
Production Planning fo r a Single Product 323 Factors that Shape the Competitive Environment 370
Production Processes, 323 • Production Product Differentiation, 370 • Production
Isoquants, 324 • Least-Cost Input Combinations, 326 Methods, 372 • Entry and Exit Conditions, 372
• Optimal luput Combinations with Limited Managerial Application JO.I : Benefits From
Resources, 327 Free Trade 371
Managerial Application 9.2: LP: More than a Competitive Market Characteristics 373
Visual Approach 330
Basic Feat11res, 373 • Examples of Competitive
Production Planning fo r Multiple Products 330 Markets, 373 • Profit Maximization Imperative, 375
• Role of Marginal Analysis, 375

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 eo..-ents

Managerial Application I 0.2: Seasonality Role for Government 410

on Stock Markets? 374 How Government Influences Competitive
Marginal Cost and Firm Supply 379 Markets, 410 • 8T0<1d Social Co11sideratio11s, 411
Short-Run Finn Supply Curve, 379 • Long-Run Managerial Application 11.2: Corn Growers
Finn Supply Curve, 381 Discover Oil' 411
Managerial Application I 0.3: Dot.com 382 Subsidy and Tax Policy 411
Competitive Market Supply Curve 382 Anti-Subsidy Rules, 412 • Dendweight Loss
Market Supply with a Fixed Number of from Taxes, 412
Competitors, 382 • Market Supply with Entry Tax Incidence and Burden 414
and Exit, 384 Role of Elasticity, 414 • Tax Cost- Sharing
Competitive Market Equilibrium 385 Example, 415
Balance of Supply and Demand, 386 • Normnl Managerial Application 11.3: Measuring
Profit Equilibrium, 387 Economic Profits 418
Managerial Application I 0.4: The Enron Price Controls 418
Debacle 388 Price Floors, 418 • Price Ceilings, 420
Summary 388 Business Profit Rates 422
Questions 389 Return 011 Stockholders' Equity, 422 • Typical
Self-Test Problems and Solutions 390 Profit Rates, 423
Problems 395 Market Structure and Profit Rates 425
Case Study: Profitability Effects of Firm Profit Rates in Competitive Markets, 425
Size for DJIA Companies 399 • Mean Reversion in Profit Rates, 426
Selected References 401 Competitive Market Strategy 426

Chapter 11: Performance and Strategy

Short-Run Finn Performance, 427
in Competitive Markets 403 Long-Run Firm Performance 428
Competitive Market Efficiency 403 Summary 428
Why is it Called Perfect Competition?, 403 Questions 430
• Deadweight Loss Problem, 404 • Deadweight Self-Test Problems and Solutions 431
Loss Illustration, 406
Problems 437
Managerial Application 11.1: The Wal-Mart
Phenomenon 407 Case Study: The Most Profitable S&P 500
Companies 441
Market Failure 408
Selected References 444
Strnctural Problems, 408 • Incentive Problems, 409

Part 4: Imperfect Competition ltltS

Chapter 12: Monopoly and Monopsony ltlt7 Price-Output Decisions, 449 • Role of Marginal
Monopoly Market Characteristics 447 Analysis, 451
Basic Features, 447 • Examples of Monopoly, 448 Social Costs of Monopoly 453

Managerial Application 12.1: The EU Monopoly Underproduction, 453 • Dendweight Loss

Commission fines parking heaters producer from Monopoly, 453
€68 million in cartel settlement 449 Social Benefits of Monopoly 457
Profit Maximization Under Monopoly 449 Economies of Scale, 457 • Invention and Innovation, 457

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 xii Contents

Monopoly Regulation 458 Oligopoly 498

Dilemma of Natural Monopoly, 458 • Utility Price Oligopoly Market Characteristics, 499
and Profit Regulation, 460 • Utility Price and Profit • Examples of Oligopoly, 499
Regulation Example, 462 • Problems with Utility Price Cartels and Collusion 500
and Profit Regulation, 464
Overt and Covert Agreements, 500
Managerial Application 12.2: Is Ticketmaster • Enforcement Problems, 501
a Monopoly? 459
Oligopoly Output-Setting Models SOI
Monopsony 464
Coumot Oligopoly, 501 • Stackelberg
Buyer Puwer, 464 • Bilateral Monopoly Oligopoly, 504
11/ustration, 465
Oligopoly Price-Setting Models 507
Managerial Application 12.3: is this why
they Call it 'Hardball'? 468 Bertrand Oligopoly: Identical Products, 507
• Ber/rand Oligopoly: Diffem1tinted Products,
Antitrust Policy 468 508 • Sweezy Oligopoly, 511 • Oligopoly Model
Overview of Antitrust !.Jlw, 468 Comparison, 512
Managerial Application 12.4: Price Fixing Managerial Application 13.3: Contestable
by the Insurance Cartel 469 Airline Passenger Service Markets 513
Competitive Strategy in Monopoly Markets 469 Market Structure Measurement 513
Market Niches, 469 • Information Ba"iers to Economic Census, 513 • NAICS System, 514
Competitive Strategy, 470 Census Measures of Market Concentration 516
Summa ry 472 Concentration Ratios, 516 • Herfindahl-
Questions 473 Hirschmann Index, 518 • Limitations of
Self-Test Problems and Solutions 473 Census lnfonnation, 518
Problems 480 Managerial Application 13.4: Horizonta l
Merger Guidelines 519
Case Study: Effect of R&D on Tobin's q 484
Summary 522
Selected References 487
Questions 524
Chapter 13: Monopolistic Competition Self-Test Problems and Solutions 524
and Oligopoly 489 Problems 528
Contrast Behveen Monopolistic Competition Case Study: Market Structure Analysis
and Oligopoly 489 at Columbia Drugstores, Inc. 533
Monopolistic Competition, 489 • Oligopoly, 490 Selected References 535
• Dynamic Nature of Competition, 491
Chapter 14: Game Theory and Competitive
Monopolistic Competition 491
Strategy 537
Monopolistic Competition Characteristics, 491 Game Theory Basics 537
• Monopolistic Competition Price-Output
Decisions, 493 Types of Games, 537 • Role of Interdependence,
538 • Strategic Considerations, 539
Managerial Application 13.1: Dell's Price
War with Dell 492 Managerial Application 14.1: Asymmetric
Information 539
Managerial Application 13.2: Intel: Running
Fast to Stay in Place 495 Prisoner's Dilemma 540
Monopolistic Competition Process 495 Classic Riddle, 540 • Business Application,
541 • Broad lmplirotions, 542
Short-Run Monopoly Equilibrium, 495
• Long-Run High-Price/Low-Output Nash Equilibrium 543
Equilibrium, 496 • Long-Run Low-Price/ Nash Equilibrium Concept, 543 • Nash
High-Output Equilibrium, 498 Bargaining, 544

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 eo..-ents xiii

Infinitely Repeated Games 545 Price Discrimination Example 580

Role of Reputation, 545 • Product Quality Price-Output Determination Case I, 581
Games, 546 • One-Price Alternative, 583 • Price-Output
Managerial Application 14.2: The Market Determination Case 11, 585
for Lemons 547 Managerial Application 15.2: Do Colleges
Finitely Repeated Games 547 Price Discriminate? 581
Uncertain Final Period, 547 • End-cf-Game Two-Part Pricing 586
Problem, 548 One-Price Policy and Consumer Surplus, 586
Game Theory and Auction Strategy 549 • Capturing Consumer Surplus with nuo-Part
First-Mover Adtxmtages, 549 • Auction Types, 549 Pricing, 588 • Consumer Surplus and Bundle
• Public Policy Applications, 550 Pricing, 588
Managerial Application 14.3: Wrigley's Success Multipl~Product Pricing 589
Formula 551 Demand Interrelations, 589 • Production
Competitive Strategy 551 lnterrelations, 590
Competitive Advantage, 551 • When Large Siu Joint Products 591
is a Disadvantage, 553 Joint Products in Variable Proportions, 591
Pricing Strategies 553 • Joint Products in Fixed Proportions, 591
l.imit Pricing, 553 • Network Externalities, 555 Joint Product Pricing Example 593
• Market Penetration Pricing, 555 Joint Products without Excess By-Product, 593
Managerial Application 14.4: Network • Joint Production with Excess By-Product
Switching Costs 556 (Dumping), 596
Nonprice Competition 556 Managerial Application 15.3: I Oe for a Gallon
Advantages of No11price Competition, 556 of Gas in Dayton, Ohio 594
• Optimal Level of Advertising, 557 Managerial Application 15.4: Why Some
• Optimal Advertising Example, 559 Price Wars Never End 598
Summary 561 Summary 598
Questions 562 Questions and Answers 599
Self-Test Problems and Solutions 562 Self-Test Problems and Solutions 600
Problems 565 Problems 602
Case Study: Time Warner, Inc., is Playing Case Study: Pricing Practices in the Denver,
Games with Stockholders 570 Colorado, Newspaper Market 606
Selected References 572 Selected References 608
Chapter 15: Pricing Practices 573 Appendix ISA: Transfer Pricing 609
Pricing Rules-of-Thumb 573 Transfer Pricing Problem 609
Competitive Markets, 573 • Imperfectly Divisional Relationships, 609 • Products without
Competitive Markets, 574 Extemal Markets, 610 • Products with Competitive
Managerial Application JS.I: Mark-Up Pricing Extemal Markets, 610 • Products with Imperfectly
Technology 575 Competitive External Markets, 611
Mark-Up Pricing and Profit Maximization 575 Global Transfer Pricing Example 611
Optimal Mark-Up 011 Cost, 575 • Optimal Profit Maximiurtion for an lntegrated Firm, 611
Mark-Up 011 Price, 576 • Why Do Optimal • Transfer Pricing with No External Market, 612
Mark-Ups Vary?, 577 • Competitive External Market with Excess lnternal
Price Discrimination 578 Demand, 613 • Competitive Extemal Market with
Excess lntemal Supply, 614
Profit-Making Criteria, 578 • Degrees of Price
Discrimination, 579 Problem 615

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 xiv Contents

Part 5: Long-Term Investment Decisions 617

Chapter 16: Risk Analysis 619 Sequence of Project Valuation, 660 • Cash
Concepts of Risk and Uncertainty 619 Flow Esti111ation, 661 • Incremental Cash
Flow Evaluation, 661
Econo111ic Risk a11d U11certai11ty, 619 • General
Risk Categories, 620 • Special Risks of Globnl Managerial Application 17.1: Market-Based
Operotio11s, 621 Capital Budgeting 662
Probability Concepts 621 Cash Flow Estimation Example 662
Project Descriptio11, 662 • Cash Flow
• Probnbility Distribution, 622 • Expected
Esti111ation a11d A11nlysis, 663
Value, 623 • Absolute Risk Measure111ent, 625
• Relative Risk Measure111ent, 627 • Other Risk Capital Budgeting Decision Rules 665
Measures, 627 Net Prese11t-Value A11alysis, 665 • Profitability
Managerial Application 16.1: Behavioral Finance 622 Index or Be11efit/Cost Ratio A11alysis, 668
• Internal Rate of Return Analysis, 668
Standard Normal Concept 628 • Paybnck Period A11alysis, 669
Nor111al Distribution, 628 • Standardiud Project Selection 670
Variables, 629 • Use of the Sta11dard Normal
Concept: a11 Exa111ple, 629 Decisio11 Rule Co11flict Problem, 670
Managerial Application 16.2: Why are Managerial Application 17.2: Is the Sun
Lotteries Popular? 630 Setting on Japan's Vau nted MOF? 671
Utility Theory and Risk Analysis 630 Reasons for Decision Rule Conflict, 672
• Rnnki11g Reversal Problem, 672 • Making
Possible Risk Attih,des, 631 • Relation the Correct lnvesh11ent Decisio11, 675
Betwee11 Money a11d its Utility, 631
Cost of Capital 675
Adjusting the Valuation Model for Risk 632
Compo11e11t Cost of Debt Fina11ci11g, 675
Basic Valuatio11 Model, 632 • Certai11ty • Co111po11e11t Cost of Equity Fi11ancing, 676
Equivalent Adjust111ents, 633 • Certai11ty • Weighted-Average Cost of Capital, 679
Equivalent Adjust111ent Exa111ple, 635 Managerial Application 17.3: Federal Government
• Risk-Adjusted Discou11t Rates, 636,
Su pport for R&D 676
• Risk-Adjusted Discou11t Rate Example, 637
Managerial Application 17.4: Capital Allocation
Managerial Application 16.3: Stock Option at Berkshire Hathaway, Inc. 681
Backdating Scandal 633
Optimal Capital Budget 681
Decision Trees and Computer Simulation 638
Investment Opportunity Schedule, 681
Decisio11 'frees, 638 • Computer Sitnulation, 639 • Margi11al Cost of Capital, 683 • Postaudit, 683
• Co111puter Simulation Exo111ple, 640
Su mmary 684
Managerial Application 16.4: Internet Fraud 642
Questions 684
Su mmary 643
Self-Test Problems and Solutions 685
Questions 644
Problems 689
Self-Test Problems and Solutions 645
Case Study: Sophisticated NPV Analysis a t
Problems 649 Level 3 Communications, Inc. 694
Case Study: Stock-Price Beta Estimation Selected References 698
for Google, Inc. 653
Chapter 11: Organization Structure and
Selected References 657
Corporate Governance 701
Chapter 17: Capital Budgeting 659 Organization Structure 701
Capital Budgeting Process 659 What is Orga11izatio11 Stmcture?, 701 • Opti111al
What is Capital Budgeti11g?, 659 • Project Design is Dy11amic, 702
Classification Types, 660 Transaction Cost Theory of the Firm 703
Steps in Capital Budgeting 660 Nature of Fin11s, 703 • Coase Theore111· 704

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 eo..-ents xv

The Firm's Agency Problem 704 Rivnlry and Exclusion, 740 • Free Riders and
Sources of Conflict within Firms, 704 • Risk Hidden Preferences, 741
Management Problems, 705 • Investment Horizon Managerial Application 19.2: Political
Problems, 707 • lnfonnation Asymmetry Corruption 743
Problems, 707
Optimal Allocation of Social Resources 744
Managerial Application 18.1: Organization
Design at GE 705 Pareto Improvement, 744 • Marginal Socinl
Costs and Benefits, 744
Organization Design 708
Benefit-Cost Methodology 746
Resolving Unproductive Conflict within
Finns, 708 • Centraliwtion Versus Benefit-Cost Concepts, 746 • Social Rate
Decentraliwtion, 709 of Discount, 747
Decision Management and Control 710 Benefit-Cost Criteria 748
Assigning Decision Rig/Jts, 710 • Decision Socinl Net Present-Vnl11e, 748 • Benefit-Cost
Process, 711 Ratio, 750 • Social luternal Rate of Return, 751
Corporate Governance 712 • Limitations of Benefit-Cost Analysis, 752
Role Played by Boards of Directors, 712 Additional Methods of Improving Public
Managerial Application 18.2: Company Management 752
Information on the Internet 713 Cost-Effectiveness Analysis, 752 • Privatiwtion, 753
Corporate Governance Inside the Firm, 714 Managerial Application 19.3: Free Trade Helps
Managerial Application 18.3: Sarbanes-Oxley 715 Everyone 753
Ownership Structure as a Corporate Regulatory Reform in the New Millennium 755
Governance Mechanism 715 Promoting Competition in Electric Power
Dimensions of Ownership Structure, 715 Generation, 755 • Fostering Competition in
• ls Ownership Structure Endogenous?, 719 Telecommunications, 755 • Reforming
Managerial Application 18.4: Institutional Environmental Regulation, 756 • Improving
Investors are Corporate Activists no Regulation of Health and Safety, 756
Agreements and Alliances Among Firms no Managerial Application 19.4: Price Controls
Franchising, 720 • Strategic Alliances, 721 for Pharmaceutical Drugs 757
Legal and Ethical Environment 722 Health Care Reform 757
Sarbanes-Oxley Act, 722 • Business Ethics, 723 Managed Competition, 757 • Outlook for
Summary 723
Health Care Reform, 759
Questions 725 Summary 760
Self-Test Problems and Solutions n6 Questions 761
Problems n8 Self-Test Problems and Solutions 762
Case Study: Do Boards of Directors Make Problems 767
Good Corporate Watchdogs? 731 Case Study: Oh, Lord, Won't You Buy
Selected References 734 Me a Mercedes-Benz (Factory)? 772
Chapter 19: Government in the Market Selected References 774
Economy 735 Appendix A: Compounding and the
Externalities 735 Time Value of Money 775
Negative Externalities, 735 • Positive
Externalities, 736 Appendix B: Interest Factor Tables 791
Managerial Application 19.1: 'Tobacco' Ethics 738 Appendix C: Statistical Tables 799
Solving Externalities 738
Selected Check Figures for End-of-Chapter
Government Solutions, 738 • Market Problems 805
Solutions, 739
Public Goods 740 Index 811

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 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 them 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 i11terdiscipli11ary 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 for understanding the
economics of resource allocation and employment.
Once the internal workings of a successful firm are understood, attention can turn
toward 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 health care, the use of economic principles to understand and improve public
management is also considered.
Managerial Eco11omics, 14th 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.

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 Prerace xvii

r THIS UfTH EDITION

Students and instructors will find that Managerial Economics, 14th 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 Lagmngian 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, 14th Edition provides an intuitive guide to marginal 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. The concept of a
marginal can also be described graphically in an intuitive noncalculus-based approach. Once
students learn to grasp the importance of marginal revenue and marginal cost concepts, the
process of economic optimization becomes intuitively obvious. 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.
• Each chapter is 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.

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 xviii 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.

Ancillary Package
Managerial Economics, 14th Ed ition, is supported by the most comprehensive ancillary
package available in managerial economics to make teaching and learning the material
both easy and enjoyable.

Instructor's Manual The Instructor's Manual offers learning suggestions, plus detailed
answers and solutions for all chapter questions and problems. Case study data are also
provided to adopters with the Instructor's Manual. The Instructor's Manual files can be found
on the website intemational.cengage.com.

Test Bank A comprehensive Test Bank is also provided that offers a variety of multiple-choice
questions, one-step, and multistep problems for every chapter. Full solutions are included, of
course. With nearly 1,000 questions and problems, the Test Bank is a valuable tool for exam
preparation. The Test Bank files can be found on the website intemational.cengage.com.

Acknowledgments
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
Carston, 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.
For the present edition I thank Kjeld Tyllesen and Carsten Scheibye both from
Copenhagen Business School.
I am also indebted to staff at Cengage Leaming for making the 14th a reality.
Many thanks to the reviewers of this ed ition, 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 ingred ient 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.
Finally, I would like to thank my wife Birgitte for her patience and understanding.

Eric Bentzen
bentzen@cbs.dk
November 2015

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 CHAPTER 1
Nature and Scope
of Managerial Economics

CHAPTER 2
Economic Optimization

CHAPTER 3
Demand and Supply

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 Nature and Scope
of Managerial Economics

Warren E. Buffett, celebrated chairman of Omaha, Nebraska-based Be rkshire Hathaway, Inc., started
an investment partnership with $100 in 1956 and went on to accumulate a personal net worth in
excess of $50 billion.

Buffett is famous for his razor-sharp focus on the competitive advantages of Berkshire's wide
assortment of operating companies, including Benjamin Moore (paints), Borsheim's ijewelry), Clayton
Homes, Dairy Queen, Fruit of the Loom, GEICO (insurance), General Re Corporation (reinsurance),
MidAmerican Energy, the Nebraska Furniture Mart, See's Candies and Shaw's Industries (carpet and
floor coverings). Berkshire subsidiaries commonly earn more than 30 per cent per year on invested
capital, compared with the 10 per cent to 12 per cent rate of return earned by other well-managed
companies. Additional contributors to Berkshire's outstanding performance are substantial common
stock holdings in American Express, Coca-Cola, Procter & Gamble and Wells Fargo among others. As
both a skilled manager and an insightful investor, Buffett likes wonderful businesses with high rates
of return on investment, lofty profit margins and consistent earnings growth. Complicated businesses
that face fierce competition and require large capital investment are shunned.•

Buffett's 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 meager pay? Successful managers make good
decisions, and one of their most useful tools is the methodology of managerial economics.

r 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 behavior. It also links economic
Applies economic
tools and techniques concepts, data and quantitative methods to develop vital tools for managerial dedsion-
to business and making. This process is illustrated in Figure 1.1.
administrative d ecision-
making.

1 Information about Warren Buffctt"s investment philosophy and Berkshire Hatha,'/ayi Inc., can be found
on the Internet, http://www.bcrkshirchathaway.com
3

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 4 Part 1: Ove1view o f Manage1ial Economics

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

ManageriaJ economics uses econon,ic concepts and quantitative n1ethods to solve n\anagerial problen1S.

Management Decision Problems

• Product selection, output and pricing
• Internet strategy
• Organization desig:i
• 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
behavior • Optimization techniques
• Poolic choice theory • Information systems

~ Managerial Economics
Use of economic concepts and
quantitative methods to solve
management decision problems
/
Optimal solutions to management
decision problems

Managerial economics identifies ways to achieve goals efficiently. For example,

suppose a small business seeks rapid growth to reach a size that permits efficient use
of national media adver tising, managerial economics can be used to identify pricing
and production strategies to help meet this shor t-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 mar ket 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, manager ial economics helps managers
arrive at a set of operating rules that aid in the efficient use of scarce human and capital

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 Chapte, I: Nature and Scope ol Managerial Economics s

resources. By following these rules, businesses, nonprofit organizations and government

agencies are able to meet objectives efficiently.

Making the Best Decision

To establish appropriate decision rules, managers must understand the economic
environment in which they operate. For example, a grocery retailer may offer consumers
a highly price-sensitive product, such as milk, at an extremely low markup over
cost - say, 1 per cent to 2 per cent - while offering less price-sensitive products, such
as nonprescription drugs, at markups of as high as 40 per cent over cost. Managerial
economics describes the logic of this pricing practice with respect to the goal of profit
maximization. Similarly, managerial economics reveals that auto import quotas reduce
the availability c.>f substitutes fc.>r dc.>mestically prc.>duced cars, raise autc.> prices, and
create the possibility of monopoly profits for domestic manufacturers. It does not explain
whether imposing quotas is good public policy; that is a decision involving broader
political considerations. Managerial economics only describes the predictable economic
consequences of such actions.
Managerial economics offers a comprehensive application of economic theory and
methodology to management decision-making. It is as relevant to the management
of government agencies, cooperatives, schools, hospitals, museums, and similar not-
for-profit institutions as it is to the management of profit-oriented businesses. Although
this text focuses primarily on business applications, it also includes examples and
problems from the government and nonprofit sectors to illustrate the broad relevance of
managerial economics.

Business Ethics

In Finandal Times, you can sometimes find evidence of
unscrupulous business behavior.However, unethical conduct
is inconsistent w ith value maximization and contrary to
the enlightened self-interest of management and other
employees. tf honesty didn't pervade corporations, the ability
to conduct business would collapse. Eventually, the truth
always comes out, and when it does the unscrupulous lose
out. For better or worse, we are known by the standards we
adopt. To become successful in business, everyone must
adopt a set of principles. Ethical rules to keep in mind w hen
conducting business include:
• Accept responsibility for your mistakes, and fix them. Be
quick to share credit for success.
• Leave something on the table. Profit with your customer,
not offyour customer.
• Stick by your principles.Principles are not for sale at any
price.
Does the 'high road'lead to corporate success? Consider the
experience of A.P. Moller/Maersk - a Scandinav ian company.
At AP. Moller/Maersk their founder used the phra.se:'no loss
should hit us, which by due diligence could be averted'.

• Above all else, keep your word. Say what you mean. and See: hnP'Jlwww.maetSk.com
mean w hat you say.
• Do the right thing. A handshake with an honorable
person is worth more than a ton of legal documents from
a corrupt individual.

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 6 Part 1: Ove1view of Manage1ial Economics

rTHEORY OF THE FIRM

Firms are useful for producing and distributing goods and services.

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 o(
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 model, the primary goal of the firm is long-term expected value maximization.
Maximization The value of the firm is the present value of the firm's expected future net cash
Optimization of
profits in light of flows. If cash flows are equated to profits for simplicity, the value of the firm today, or
uncertainty and its present value, is the value of expected profits, discounted back to the present at an
the time value of appropriate interest rate.2
money.
This model can be expressed as follows
Value of the Firm
Presen t value of
the firm's expected Value of the Firm= Present Value of Expected Future Profits
future net cash
flo\\'S. = '7Tt + 1T2 + . ..+ 'IT,, 1.1
(1 + i)I (1 + 1)2 (1 + /)"
Present Value
\.\'orth in current
dollars.
= I." '7Tt
·-· (1 + ,)'
Here, '7Tt, 1T2, ..., '7T11 represent expected profits in each year, t, and i is the appropriate
interest, or discount, rate. The final form for Equation (1.1) is simply a shor thand
expression in which sigma (l:) stands for 'sum up' or 'add together'. The term
"
I.
I• I

means, 'Add together as t goes from 1 ton 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 '7T1 /(1 + i)l, the
present value of year 1 profit; then let t = 2 and calculate '7T2/(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 ('IT) are equal to total revenues (TR) minus total costs (TC), Equation
(1.1) can be rewritten as
Value = ! TR, - TC, 1.2
l•I (1 + l)I

2 Discounting is required because profits obtained in the future arc less valuable than profits earned
presently. One curo today is \'/Orth more than €1 to be received a year from no,,r because €1 today can
be invested andi with interest, g·ro,'i to a larger amount by the end of the year. One euro invested at
10 per cent interest ,,rould gro\'i to €1 .10 in 1 year. Thusi €1 is defined as the present value of €1.10 due in
1 year when the appropriate interest rate is 10 per cent.

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Another random document with
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best. There are some among the older officials who affirm that
the old ways are best and need no alteration, and that the new
plans are not required. Such babblings are vain and useless.

"The Emperor puts the question before you thus: In the present
condition of Imperial affairs, with an untrained army, with
limited funds, with ignorant 'literati,' and with artisans
untaught because they have no fit teachers, is there any
difficulty in deciding, when China is compared with foreign
nations, who is the strong and who is the weak? It is easy to
distinguish between the rich and the poor. How can a man armed
with a wooden stick smite his foe encased in a coat of mail?
The Emperor sees that the affairs of the Empire are in an
unsettled condition, and that his various Decrees have availed
nothing, Diversity of opinion, each unlike another as fire
differs from water, is responsible for the spread of the
existing evil. It is the same evil as that which existed in
the Sung and Ming dynasties (circa A. D. 1000 and 1500). Our
present system is not of the slightest use. We cannot in these
modern days adhere to the ways of the five Kings(circa B. C.
2500); even they did not continue exactly after the manner of
their respective predecessors. It is like wearing thick
clothes in summer and thin ones in winter. "Now, therefore,
the Emperor orders all officials, metropolitan and provincial,
from prince down to 'literati,' to give their whole minds to a
real endeavour to improvement. With perseverance, like that of
the saints of old, do your utmost to discover which foreign
country has the best system in any branch of learning and
learn that one. Your great fault is the falseness of your
present knowledge. Make a special effort and determine to
learn the best of everything. Do not merely learn the outside
covers of the books of knowledge, and do not make a loud boast
of your own attainments. The Emperor's wish is to change what
is now useless into something useful, so that proficiency may
be attained and handed on to posterity. The Metropolitan
College will be the chief one, and must be instituted at once.
The Emperor orders the Grand Councillors to consult with the
Tsung-li Yamên on the subject, and to come to a decision as
soon as possible, and then to memorialize the Throne. Any of
the compilers and graduates of the Hanlin College, the
secretaries of the Boards, the officers of the Palace Guards,
expectant Intendants, Prefects, district Magistrates, and
subordinate officials, sons and brothers of officials, the
hereditary officials of the Eight Banners, and the sons of the
military officials of the Empire, can enter the College who wish
to do so. By this means knowledge will be handed down from one
generation to another. It will be strictly forbidden to
members of the College to be careless or dilatory in their
studies, or to introduce as students any of their friends
without regard for the latter's capabilities; for such things
would frustrate the benefit of this excellent plan of His
Imperial Majesty."

A day later he issued the following: "The Tsung-li Yamên have

reported to the Throne that in obedience to instructions they
have considered the requests contained in the memorial of the
Vice-President Jung Hui, for the appointment of special
Ministers of Commerce, and the sending of members of the
Imperial family to visit foreign nations. Commercial matters
are of the highest importance, and the suggestion is one which
deserves to be acted upon. As the result of a former
consultation of the Tsung-li Yamên on the subject, commercial
bureaus have been established at the capitals of the
provinces, and the officials of each province have ordered the
leading gentry and merchants to elect from their numbers managers
of the bureaus, who will then draw up commercial regulations.
It is to be hoped that strict conformity to these Regulations
will lead to a daily improvement in trade; and the Emperor
orders the Viceroys and Governors of the provinces to direct
the gentry and merchants to strictly obey the official
instructions, and to consult together for the most speedy and
satisfactory arrangement of commercial matters; it is to be
hoped that in this way the officials will be kept in touch
with the merchants. We must not adhere blindly to our old
 customs. Let the officials of each province memorialize the
Throne, and inform the Emperor how commercial affairs are
managed in their respective provinces.
{92}
With regard to the suggestion that members of the Imperial
Family should go abroad, this is a new departure, but is quite
in accordance with modern custom. The Emperor, therefore,
orders the Court of the Imperial clan to select from the
Princes of the first three ranks any who are well versed in
modern affairs and ideas, and who are on the side of modern
improvement, and to inform the Emperor of their selection. The
selected Princes will then await the Emperor's orders with
regard to their journey."

On the 15th the following imperial mandate was published:

"Wêng T'ung-ho, Assistant Grand Secretary and President of the
Board of Revenue, has of late made many errors in the conduct
of business, and has forfeited all confidence; on several
occasions he has been impeached to the Throne. At his private
audiences of the Emperor he has replied to His Majesty's
questions with no regard for anything except his own personal
feeling and opinion, and he has made no attempt to conceal his
pleasure or displeasure either in his speech or in his
countenance. It has gradually become clear that his ambition
and rebellious feeling have led him to arrogate to himself an
attempt to dictate to the Emperor. It is impossible to permit
him to remain in the responsible position of a Grand
Councillor. In former days a strict inquiry would have been
held, and his crime punished with the utmost rigour of the
law. Taking into consideration, however, his long service as
tutor to the Emperor, His Majesty cannot bring himself to mete
out to him such a severe penalty. Let Wêng T'ung-ho vacate his
posts, and retire into private life, as a warning that he is
preserved (from a worse fate)."

In transmitting this mandate to the British Foreign Office,

Sir Claude MacDonald explained that Wêng T'ung-ho was a
"reactionary," whose "influence was invariably against
innovation and progress," but personally "prepossessing,
courteous, and scholarly—an excellent type of the Conservative
Chinese statesman." But that the dismissal of Wêng T'ung-ho
did not signify the triumph of the reform party was shown the
same day by a decree commanding special honors to the Empress
Dowager, who seemed to be losing no time in reasserting
herself. "In future," said the edict, "whenever officials
receive favours or gifts from the Empress Dowager, or receive
promotion to the highest civil or military rank or to the
Vice-Presidency of a Board, they must (after thanking the
Emperor) present themselves before the Empress Dowager and
thank her; and in similar cases all provincial
Tartar-Generals, Lieutenant-Generals, Viceroys, Governors, and
Commanders-in-chief must write their thanks to the Empress
Dowager (as well as to the Emperor)."

Other radically reforming decrees that were issued by the

Emperor during June and early in July were described by the
British Minister in a despatch dated July 9, as follows:

"To effect a change in the agricultural methods of an ancient

Eastern nation would seem a very hopeless task, but from a
Decree published on the 4th instant, it appears that a censor
has made proposals for the establishment of a school of
agriculture, on which the Tsung-Ii Yamên were asked to report.
The Decree founded on their Report states that agriculture is
the basis of the States' wealth, and that measures for its
revival are urgently needed. The provincial authorities are,
therefore, directed to examine all methods of cultivation,
whether Chinese or foreign, with a view to their adoption by
the people. … The Decree proceeds to promise rewards for
successful treatment of agricultural problems, and to direct
the translation and circulation in provincial Colleges of
foreign works on the subject.

"Two Decrees, published on the 27th June and 5th July, have
reference to reforms in the Chinese army, but they throw no
light on the nature of them, and merely refer certain
suggestions to various Departments for examination. The last
Decree I shall mention, which appeared on the 5th instant,
contains a very frank admission of the need of reforms. It
states that in foreign countries commerce and industry thrive
and progress, while in China, though there is no lack of
ability, it is fettered in the bonds of ancient custom, and
cannot free itself. As one means of assisting in its
liberation it is ordained that any persons producing 'new
books' (presumably books that show originality of thought), or
being the first to use new methods, or to produce new
instruments or appliances suitable for use, are to receive
rewards from the State in the shape either of official
employment, if they are fitted for it, or of some other
distinction. In the case of inventions a certificate will be
given, and the profits secured to the inventor for a fixed
term of years—in fact patent rights will be granted. Rewards
will also be given to those who, with their own resources,
establish colleges, open up mines, or set up arsenals for the
manufacture of rifles and cannon. In conclusion, the Tsung-li
Yamên are directed to draw up Regulations for effecting the
above objects."

The zeal of the reforming movement was kept alive and its
authors held their ground throughout the summer, and nearly to
the end of September. On the 17th of that month, Sir Claude
MacDonald wrote to Lord Salisbury: "Imperial Decrees intended
to launch China on the path of reform continue to appear,
though there are few signs of any of them taking practical
effect. The Emperor is evidently learning that it is one thing
to issue a reform Edict and another to get it obeyed. Not long
ago a Decree was issued, the object of which was to make the
Throne more accessible to the subordinate portion of the
official world. At the beginning of this month a case was
brought to His Majesty's notice, in which the Board of
Ceremonies disobeyed this Decree by refusing to transmit a
 Memorial sent in by a Secretary. He was much enraged, and
forthwith cashiered the six head officials of the Board, that
is to say, the two Presidents and four Vice-Presidents.

"On the 12th instant he followed this up by a fresh Decree

dwelling on the circumstances and reiterating his previous
instructions. Memorials were to be presented as they came in,
it being of the highest importance, in the present critical
state of public affairs, that all such communications should
be examined as soon as possible. Obstruction and delay were to
be punished with the utmost rigour, and special commands were
given that the previous Edicts on reform, all of which were
enumerated, were to be hung up in a public place in each Yamên
throughout the Empire, so that no one should be ignorant of
their contents.
{93}
Not satisfied with all this, he issued, also on the 12th
instant, a long and remarkable Decree calling attention to the
advantages of Western methods, and inveighing against
degenerate officials and conservative Ministers, who not only
could not assist him in adopting their methods, but spread
reports instead calculated to disturb the minds of the people.
He wanted his subjects to know that they 'could depend on
their Prince,' and appealed to them to make China powerful by
working for reform with 'united minds.' The previous orders
were amplified, and the privilege of memorializing the Throne,
which formerly stopped at officers of a high rank, is now
extended to practically every soul in the Empire.

"Next day, the 13th September, another Decree repeated the

terms of the above in clearer detail, and laid down precisely
the procedure each class was to observe in making itself
heard. The severest penalties were threatened should there be
any interference with the free exercise of this privilege by
the high officers of Government, who were commanded to report
by telegram the steps they were taking to fulfil the Imperial
wishes. The series of Decrees above quoted are naturally
 creating a great commotion in the Chinese official world, and
it will be interesting to note their effect."

Great Britain, Papers by Command:

China, Number 1, 1899, page 179-279.

The effect was soon known. It was one which brought the
reformers to grief and their reforms to an end.

CHINA: A. D. 1898 (September).

Overthrow of the Reformers.
Subjugation of the Emperor by the Empress-Dowager.
His countermanding decrees.

The Imperial reformer announced the downfall of his own

authority on the 21st of September, in the following
significant decree:

"The affairs of the nation are at present in a difficult

position, and everything awaits reform. I, the Emperor, am
working day and night with all my powers, and every day
arrange a multitude of affairs. But, despite my careful toil,
I constantly fear to be overwhelmed by the press of work. I
reverently recall that Her Majesty the Empress Dowager has on
two occasions since the reign of Tung Chih (1861) assumed the
reins of Government with great success in critical periods. In
all she did Her Majesty showed perfection. Moved by a deep
regard for the welfare of the nation, I have repeatedly
implored Her Majesty to be graciously pleased to advise me in
government, and have received her assent. This is an assurance
of prosperity to the whole nation, officials and people. Her
Majesty will commence to transact business from to-day in the
side Hall. On the 23rd September, I, the Emperor, will lead my
princes and high officials to make obeisance in the Ch'in
Chêng Hall. Let the proper officials reverently and carefully
prepare the fitting programme of the ceremony."
On the 25th he announced: "Since the 4th moon, I, the Emperor,
have been frequently ailing in health, and in spite of
long-continued treatment there is still no great improvement.
Should there be any persons, either in the capital or the
provinces, who are highly skilled in the treatment of disease,
let the officials at once recommend them to the throne and
await our orders. Should such men be in the provinces let them
be sent to the capital without the least delay."

On the 26th the unfortunate Emperor was made to send forth

another decree, countermanding the greater part of the orders
he had been giving, on the pretext that they had been
misunderstood and badly carried out. The obstructive offices
which he had abolished were restored; the permission given to
scholars and people to present memorials was withdrawn. "The
original purpose," said the decree, "was that we should see
with the eyes and hear with the ears of everybody, but the
Court has now opened wide the path of access to the throne,
and if there are useful proposals for reform made in the
statements of any of the different classes of officials they
are bound to be observed at once and set into operation. At
present, careless documents all alike in character pour in.
All are full of frivolous statements, some even touch on the
extravagant, and all are much wanting in order. Hereafter all
officers whose duty it is to speak shall say what they have to
say in fitting language. In accordance with the prescribed
rules, persons or officers who are not competent to
memorialize the throne are not permitted to submit sealed
documents. The 'Times,' official newspaper, is of no benefit
to good government and will vainly disturb men's minds: let it
be abolished at once. The Imperial colleges will be ground for
the cultivation of talent. Apart from those which are already
being gradually established in Peking and the provincial
capitals, let the local officials in all prefectures and
districts where it is proposed to establish minor colleges
consider the local conditions and the convenience of the
people. Let the temples [which were to have been turned into
 colleges] in the provinces remain as before; there is no need
to make colleges of them and disturb the feelings of the
people. Over and above the matters above mentioned, there are
others which have been duly considered and put into operation,
and others which are under consideration, such as trade,
agriculture, reorganization of the army, and the development
of resources, all of which are of undoubted consequence to the
State and the people, and must imperatively be introduced
gradually. Those measures which are of no benefit to the
present system of government, and are detrimental to the
Constitution, need not be discussed. Let the six Boards and
the Tsung-li Yamên make an investigation of these matters,
consider them with special care, and submit a report to the
throne so that they may be dealt with."

The events which attended and followed these decrees were

reported by Sir Claude MacDonald on September 28, as follows:
"The Decree [of the 21st] naturally created much excitement in
Peking, and rumours of impending disaster to the most prominent
of the advocates of reform were prevalent. Subsequent
proceedings justified the alarm and assumed the character of a
coup d'etat. The same day the house of Chang Yin-huan was
surrounded by the police in search of one K'ang Yu-wei. This
K'ang Yu-wei is a Chinese scholar of high repute who was,
until lately, editor of a Chinese newspaper in Shanghae known
as 'Progress.' He was a strong advocate of reform, and was
this year recommended to the Emperor, and on his arrival in
Peking was given a position of Secretary in the Board of
Works. He is said to have acquired great influence over the
Emperor, and to have been his adviser in his recent reform
measures. K'ang Yu-wei could not be found, and it has
subsequently transpired that he has escaped and left Shanghae
on the 27th in the English mail for Hong Kong.
{94}
So keen was the hunt for him that on the 22nd all traffic was
stopped on the Tien-tsin Railway line to prevent his passage.
On the 24th instant orders were issued for the arrest of
several officials who had been in relation with him, including
Chang Yin-huan and Hsü Chih-ch'ing. The latter had recommended
K'ang to the throne, and had been recently appointed President of
the Board of Rites. Chang Yin-huan went to the Board of
Punishments and has remained a prisoner since. The precise
charge against K'ang and his friends has not transpired, but
it is supposed to be one of conspiracy against the liberty and
even the life of the Empress Dowager.

"It was reported on the 25th that Chang was to be executed the
same evening or early next morning, and I thought it advisable
to make an appeal on his behalf for at least due consideration
of any charge brought against him. The report reached me late
in the afternoon, and it was therefore necessary to take
prompt measures. It was supposed that Li Hung-chang had been
consulted by the Empress Dowager in the matter. I accordingly
addressed a letter to his Excellency pointing out the horror
with which such sudden executions were regarded by all Western
nations, and the bad effect the secret and hasty condemnation
of an official of Chang's rank, who was so well known in
Europe, would produce, and begged his Excellency to use what
influence he possessed to prevent such hurried action. I
concluded my letter by saying that I appealed to him, Li,
because he was the only Statesman now in Peking who was
conversant with European methods, and would, therefore,
thoroughly realize the disastrous impression which such a
summary execution would produce throughout the Western world.
It is well known that Li Hung-chang and Chang Yin-huan are
deadly enemies, and it was generally reported that Chang's
imprisonment was due to Li. The Grand Secretary replied saying
that he highly respected my generous and humane motives, and
he assured me that no summary action would be taken."

On the 30th Sir Claude reported: "Six of the reformers

referred to in my despatch of the 28th September were executed
on the 28th instant. They included a brother of K'ang Yu-wei,
the chief reformer, and, though subordinates, all were
 graduates and men of standing. Chang Yin-huan has been
banished to Chinese Turkestan, where he is to be kept under
rigorous surveillance. No precise crime is charged against
him. The Edict announcing his punishment accuses him vaguely
of being treacherous, fickle, and a sycophant. Last night a
long Decree appeared dealing with the so-called conspiracy.
K'ang Yu-wei is declared to have taken advantage of the
Emperor's leaning towards beneficial reforms to plot a
revolution, which was to be opened by surrounding the Palace
at Wan Shoushan and seizing the Empress-Dowager and the
Emperor. The haste in executing K'ang's chief accomplices, for
it appears that the legal formalities had not been observed,
is admitted to have been caused by Memorials, whose dominant
note was fear of a revolution if punishment was delayed."

Great Britain,
Papers by Command: China,
Number 1, 1899, pages 291-294.

CHINA: A. D. 1898 (October).

The Empress-Dowager.
Her past career.
Her character.

The Empress-Dowager, so called, who now recovered her

ascendancy over the weak young Emperor, which the reformers
had momentarily overcome, and who became again the real
Sovereign of the Empire, as she had been for the past thirty
years, "was never Empress, not even as imperial consort,
having been but the secondary wife of Hsien-fêng, the Emperor
who fled from his capital on the approach of the Anglo-French
forces in 1860 [see, in volume 1, CHINA: A. D. 1856-1860]. But
she took the title as the mother of that ill-starred monarch's
heir, in which capacity she was allowed to share with the
widow proper the regency during the minority of the Emperor
Tung-Chih (or Che, for there is no agreement as to the
transliteration of Chinese sounds). … The female duumvirate
was not what was intended—was in fact an unforeseen result of
the last will and testament of the Emperor Hsien-fêng, who
died at his hunting lodge at Jêho, whither he himself had been
hunted by the victorious invaders. …

"The fundamental law of the Ta-tsing dynasty is the Salic law.

No woman and no eunuch can ever reign or rule. Conforming to
the laws of his house, the Emperor in his will nominated a
Council of Regency during the minority of his infant son,
afterwards known as the Emperor Tung-Chih. The Council was
composed of two imperial princes and the Minister Sun-che. To
his two wives, the true but childless one and the secondary
one who was mother of the Prince Imperial, he bequeathed the
guardianship of the infant. The Emperor placed his real
confidence in the first, the legal wife; but he was fond of
the other, the mother of his heir. A serious dilemma thus
confronted him, which he thought to evade by placing in the
hands of the Empress a private and personal testament, giving
her absolute authority over her colleague, only to be
exercised, however, in certain emergencies. As a matter of
fact, the power was never called into exercise.

"The Empress-mother was twenty-seven years old, clever,

ambitious, and apparently fearless. … She conceived a scheme
by which the position might be reversed, and confided it to
her brother-in-law, Prince Kung. … The ambition which the
Empress-mother confided to Prince Kung was nothing less than
to suppress the Council of Regency, and set up in its place
the authority of the two Empresses. Inasmuch, however, as they
were ignorant of affairs, and women to boot, the Prince
himself was to be the real executive and de facto ruler of the
empire. Prince Kung yielded to the seduction, and thus became
accessory to the violation of the dynastic law. … The Regents
were returning from the obsequies of the deceased Emperor when
Prince Kung launched trumped-up charges against them of
neglect of certain funeral rites, had them arrested on the
road, and executed. By this summary violence the two Empresses
 were securely established as Regents, with Prince Kung as
Chancellor of the empire. For a few years things went
smoothly. … The two Regents seldom met. … From the relative
position of the buildings in which they had their respective
apartments, the ladies were known as the Eastern and Western
Empresses, the former being the title commonly applied to the
one whom we have termed the true Empress. …

{95}

"The 'Eastern Empress' was full of gentleness, meditation, and

widowhood. … She was, therefore, unequally yoked with her
sterner sister, and the pair could never have really worked
together to any practical end. The eclipse of the weaker
luminary was only a question of time. … The life and death of
the young Emperor Tung-Chih, the son of Hsien-fêng and the
present Empress-regnante, seems little more than an episode in
the career of his imperial—and imperious—mother. He died
within two years of his full accession, removed by his own
mother as some would have us believe, but by quite other
agencies as others no less boldly affirm. … With the
disappearance of her son, the last plank in the legal platform
of the Empress-mother disappeared. But her appetite had grown
by what it fed upon. She had now had fourteen years' schooling
in statecraft, and she resolved that, 'per fas et nefas,'
reign who might, she would govern. … The story of her second
coup d'etat of January, 1875, has been often related,—how the
Empress so-called caused her own sister's child to be snatched
out of its warm bed on a bitter night and conveyed into the
Palace, whence he was proclaimed Emperor at daybreak. By this
stroke the Regent at once aggrandised her own family, made a
friend of a younger brother-in-law, the father of the child,
to replace the elder who had become an enemy, and, to sum up
all, secured for herself a new lease of power. For she who
could thus make an emperor could also make a regent."

The Empress-Regent of China

 (Blackwood's Magazine, November 1898).

CHINA: A. D. 1898. (October-November).

Outbreaks of popular hostility to foreigners.
Guards for the Legations sent to Peking.
Chinese troops removed.

The palace revolution which overthrew the reforming party was

followed quickly by outbreaks of popular hostility to
foreigners. Two messages were cabled to Lord Salisbury from
Peking October 1st. One informed him: "A Chinese mob at a
point between Peking and the railway station yesterday
afternoon violently assaulted several foreigners who had to
pass that way from the train. Among those assaulted was Mr.
Mortimore of this Legation, and an English lady, who were
severely attacked with mud and stones; a member of the United
States' Legation had one of his ribs broken. There is a
decided spirit of disturbance among the Chinese, though the
fact that many bad characters were about yesterday in
consequence of the mid-autumn festival may go some way towards
accounting for these outrages. I have requested Admiral
Seymour by telegraph to despatch a vessel to Taku, in case a
guard should be required for the protection of this Legation,
and I am making strong representations to the Tsung-li Yamên."

In his second despatch the British Minister announced: "I do

not anticipate any danger, but a good and reassuring effect
will be produced, as after the Japanese war, by the presence
of a guard. The foreign Representatives decided this morning
to send for a small guard to protect the respective Legations.
I have asked Admiral Seymour to send me twenty-five marines
with a machine-gun. The German, Russian, Japanese, and Italian
Representatives had previously arranged for their guards."

On the 5th, Sir Claude MacDonald reported: "A meeting of

foreign Representatives yesterday decided to notify the
Chinese Government of the proposed departure from Tien-tsin
for Peking to-morrow of bodies of British, German, and Russian
marines, and to ask that all facilities, including a special
train, should be extended to them by the Chinese authorities;
the French, American, Japanese, and Italian marines to come
straight on to Peking on their arrival at Tien-tsin. The
meeting was held in consequence of the refusal of the Viceroy
of Chihli to permit any foreign soldiers to leave Tien-tsin
for Peking without special permission from the Tsung-li Yamên.
It is very likely that the Chinese Government will make a
protest similar to that of 1895, but it would be very
ill-advised at the present crisis to give way to their
protests, and it is absolutely necessary that the decision of
the foreign Representatives should be put into effect."

The Chinese government did protest, but without effect. The

legation guards were insisted upon, and, as speedily as
possible, they were provided from the war-ships of the several
powers, and quartered in Peking. Then the Chinese authorities
brought troops to the capital, and the sense of danger at the
legations grew. On the 25th of October Minister MacDonald
cabled to London: "A serious menace to the safety of Europeans
is the presence of some 10,000 soldiers, who have come from
the Province of Kansu, and are to be quartered in the hunting
park, two miles south of Peking. A party of these soldiers
made a savage assault on four Europeans (including Mr. C. W.
Campbell, of this Legation), who were last Sunday visiting the
railway line at Lukou Chiao. The foreign Ministers will meet
this morning to protest against these outrages. I shall see
the Yamên to-day, and propose to demand that the force of
soldiers shall be removed to another province, and that the
offenders shall be rigorously dealt with."

On the 29th he telegraphed again: "The Foreign Representatives

met yesterday, and drafted a note to the Yamên demanding that
the Kansu troops should be withdrawn at once. The troops in
question have not been paid for some months, and are in a
semi-mutinous state. They have declared their intention to
 drive all Europeans out of the north of China, and have cut
the telegraph wires and destroyed portions of the railway line
between Lukouchiao and Pao-ting Fu. Some disturbances have
been caused by them on the railway to Tien-tsin, but the line
has not been touched, and traffic has not been interrupted. In
the city here all is quiet. The presence of these troops in
the immediate vicinity of Peking undoubtedly constitutes a
serious danger to all Europeans. The Yamên gave me a promise
that the force should be removed, but have not yet carried it
into effect."

On the 6th of November he reported that the Yamên had replied

to the note of the Diplomatic Body, acknowledging that the
troops lacked discipline and were a source of danger, and
again promising their removal, but that nothing had been done.
He added: "It was decided unanimously to address a note to the
Yamên, stating that if the troops in question were not
withdrawn by the 11th instant, our respective Governments
would adopt such measures as they considered necessary for the
protection during the winter months of foreigners in Peking and
Tien-tsin."

{96}

After several more exchanges of notes between the Diplomatic

Body and the Yamên, peremptory on one side, apologetic on the
other, the troops were removed to Chi-chow, about 80 miles
east of Peking, beginning their march November 15. A few days
previously Sir Claude MacDonald had been able to report "That
two of the ringleaders in the attack on Mr. Campbell and other
Europeans at Lu Kow-chiao [announced in despatch of October
25] were brought into Peking and flogged in Mr. Campbell's
presence at the Yamên of the Governor of the city on the 29th
October. The men were sentenced to 1,000 blows each, but Mr.
Campbell, after eighty blows had been inflicted, begged that
the flogging might cease. It turned out that two other
soldiers were struck by bullets from a small revolver, which
 was used by one of the railway engineers in self-defence, and,
chiefly for this reason, I did not press for more floggings.

"I attached more importance to the punishment of the officer

in command, who, it appears, had been warned beforehand by the
railway authorities to keep his men away from the railway
bridge, but had refused to do so. I consider him the person
really responsible for what happened, and at an interview on
the 31st October I told the Yamên that I should not be
satisfied, and the incident would not be closed, until I saw
his degradation published in the official Gazette. On the 4th
November an Imperial Decree was issued ordering this officer,
a Colonel named Chu Wan-jung, to be handed over to the Board
of War for punishment. The Ministers inform me that this is
likely to mean his degradation. I have, however, again warned
their Excellencies that nothing short of this punishment will
be satisfactory to Her Majesty's Government."

Great Britain, Papers by Command:

China, Number 1, 1899, pages 258-279, and 332.

CHINA: A. D. 1898 (December).

Reorganization of Chinese armies.
Reception by the Empress-Dowager to
the ladies of the Legations.

On the 20th of December Sir Claude MacDonald reported: "The

reorganization of the land forces in the north appears to be
occupying the serious attention of the Central Government. In
the early half of this month Edicts were issued by the Empress
Dowager approving proposals made by Jung Lu, who was appointed
Generalissimo of northern armies immediately after the K'ang
Yü-wei conspiracy. The following are the principal features of
these proposals. The armies under the command of Sung Ch'ing
and others, that is to say all the brigaded troops in North
China, are to be organized in four corps—front, rear, right,
and left—to occupy different strategical points. In addition,
Jung Lu will raise a centre corps of 10,000 men, to be
stationed presumably in or about Peking. … The importance of
bringing the other four corps into an efficient state is dwelt
upon, and the Edicts are stern in demanding the production of
sufficient funds for the purpose. The Viceroy of Chihli is
also instructed to closely scrutinize the condition of the
Peiyang drilled troops—formerly Li Hung-chang's army—and bring
them into order. They are to be under the orders of Jung Lu,
instead of the Viceroy.

"The Viceroys responsible for the Arsenals of North and Mid

China are also commanded to see to the immediate construction
of quick-firing guns and Mauser rifles and other war material,
and to the preparation of maps of the coast-line for military
purposes. Jung Lu has done nothing yet towards raising the
centre corps beyond calling in the assistance of a
German-educated officer named Yin Ch'ang, who holds a post in
the Tien-tsin Military Academy. He is reputedly able, and
probably one of the best Chinese available for the work, but I
question whether he will be given sufficient powers of
control. He is now engaged in drawing up a scheme."

Bearing the same date as the above, we find a despatch from

Sir Claude MacDonald descriptive of a reception given by the
Empress-Dowager, on the 13th, to the wives of the foreign
representatives at Peking, "to accept their congratulations on
the occasion of Her Imperial Majesty's birthday." "The
ceremony," said the British Minister, "passed off extremely
well. The Empress Dowager made a most favourable impression by
her courtesy and affability. Those who went to the Palace
under the idea that they would meet a cold and haughty person
of strong imperious manners were agreeably surprised to find
Her Imperial Majesty a kind and courteous hostess, who
displayed both the tact and softness of a womanly
disposition." "Thus ended," writes Sir Claude, in closing his
despatch, "the incident which may be considered to mark
another step in the nearer relations of China and foreign
 nations."

Great Britain, Papers by Command:

China, Number 1, 1900, pages 12-15.

CHINA: A. D. 1898-1899.
Rioting in Shanghai consequent on
French desecration of a cemetery.
French demand for extension of settlement ground in Shanghai.
English and American protests.
The outcome.

On the 18th of July, 1898, the following was reported by the

British Consul-General at Shanghai:

"Serious rioting took place in the French Settlement on the

16th und the morning of 17th instant, in the course of which
some fifteen natives lost their lives. The disturbance was due
to an attempt of the French authorities to take possession of
certain temple land known as the Ningpo Joss-house Cemetery.
The ground is full of graves, and it is also used for
depositing coffins until a favourable opportunity presents
itself for removing them to the native districts of the
deceased. The cemetery is within the limits of the French
Settlement; originally it was far removed from the inhabited
portion of the Settlement, but by degrees new streets have
been laid out, and houses have been built, until the cemetery
is surrounded by dwellings.

"Twenty-four years ago the French Municipality attempted to

make a road through the cemetery, but such serious rioting
broke out that the French Consul thought it prudent to abandon
his claim to the ground, and gave the Ningpo Guild to
understand that they would be left in undisturbed possession.
As years have gone on, the nuisance of having a cemetery in
the midst of a crowded Settlement has made itself more and
more felt, and some months ago the French Municipal Council
 decided to expropriate the owners and to pay them
compensation. The Ningpo Guild and the Chinese authorities
were duly apprised of the intention, and they were urged to
make their own arrangements for removing the coffins to some
other site.
{97}
They would not admit that the French had any right to
dispossess them, and they refused to vacate the land. The
French Consuls then gave the Chinese officials notice that the
Municipal Council would take possession on a certain day; and
as the day drew near the Taotai became very uneasy, and
appealed to the Foreign Consuls to interfere in the matter,
giving hints that serious rioting and loss of life, would
result if the French Consul persisted in his intentions.

"On the morning of the 16th, the day appointed for taking
possession of the cemetery, a detachment from the French
cruiser 'Éclaireur' and a strong body of police marched to the
cemetery, and afforded protection to the workmen who were told
off to make a breach in the cemetery wall by way of taking
possession. An angry mob watched these operations, and, as
time went on, the streets filled with crowds of men, who moved
about making hostile demonstrations, but the French showed great
self-restraint, and no serious collision took place on that
day. All night long the crowds filled the streets, and many
lamps were smashed and lamp-posts uprooted.

"Early on Sunday morning a determined attack was made by the

mob on one of the French police-stations, and when the small
body of men within saw that their lives were in danger, they
opened fire. About the same time the police and the
'Éclaireur's' men attacked bands of rioters in other quarters,
with the result that on Sunday morning, as far as can be
ascertained, fifteen men were shot dead or bayoneted, and
about forty were seriously wounded. After that the rioters
seemed to have become intimidated for a time, and the streets
were left to the police. Meanwhile many of the shops in both