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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
Questions 310
Problems 357
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
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
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
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
Questions 644
Problems 689
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
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 • Accept responsibility for your mistakes, and fix them. Be
unscrupulous business behavior.However, unethical conduct quick to share credit for success.
is inconsistent w ith value maximization and contrary to • Leave something on the table. Profit with your customer,
the enlightened self-interest of management and other not offyour customer.
employees. tf 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
Does the 'high road'lead to corporate success? Consider the
out. For better or worse, we are known by the standards we
experience of A.P. Moller/Maersk - a Scandinav ian company.
adopt. To become successful in business, everyone must
At AP. Moller/Maersk their founder used the phra.se:'no loss
adopt a set of principles. Ethical rules to keep in mind w hen
should hit us, which by due diligence could be averted'.
conducting business include:
• 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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There is no peace, nor ever can be, for the soul of man, but in the
purity and perfection of its first-created nature; nor can it have its
purity and perfection in any other way, than in and by the spirit of
love. For love is the purity, the perfection of all created things; and
nothing can live in God but as it lives in love. Look at every vice,
pain, and disorder, in human nature, it is in itself nothing but the spirit
of the creature turned from the universality of love to some self-
seeking in created things. So that love alone is the cure of every evil;
and he that lives in the purity of love, is risen out of the power of evil,
into the freedom of the one spirit of heaven. The schools have given
us very accurate definitions of every vice, whether it be
covetousness, pride, wrath, or envy, and shewn us how to conceive
them as notionally distinguished from one another. But the Christian
has a much shorter way of knowing them, and what they all are, and
do, in himself. For, call them by what names you will, they are all,
that same one thing, and all do that same one work, as the Scribes,
the Pharisees, and rabble of the Jews, who crucified Christ, were all
but one and the same thing, and all did one and the same work,
however different they were in outward names. If you would
therefore have a true sense of the nature and power of pride, wrath,
covetousness, envy, they are in their whole nature nothing else but
the murderers and crucifiers of the true Christ of God; not as the
high-priests did many hundred years ago, nailing his outward
humanity to an outward cross, but crucifying afresh the Son of God,
who is the Christ that every man crucifies as often as he gives way
to wrath, pride, envy, or covetousness. For where pride, and envy,
and hatred, are wilfully indulged, there the same thing is done, as
when Christ was killed, and Barabbas was saved alive.
In all the universe, nothing but heaven and heavenly creatures
could have been known, had every creature continued in that state in
which it came forth from God. For God can will nothing in the life of
the creature but a manifestation of his own goodness, happiness,
and perfection. And therefore when this is wanted, it is certain, the
creature hath lost its first state that it had from God. Every thing
therefore, which is the vanity, the torment, and evil, of man, or any
intelligent creature, is solely the effect of his will turned from God.
Misery and wickedness can have no other root; for whatever wills
and works with God, must partake of the happiness and perfection of
God.
This therefore is a certain truth, that hell and death, curse and
misery, can never be removed from the creation, till the will of the
creature is again as it came from God, a spirit of love, that willeth
nothing but goodness. All the whole fallen creation, stand it never so
long, must groan and travel in pain, till every contrariety to the divine
will is entirely taken from every creature.
Thus, Sir, you have seen the original, immutable ground of the
spirit of love. It is no imaginary refinement, or speculative curiosity;
but is of the highest reality. It stands in the immutability and
perfection of God; and not only every intelligent creature, be it what
and where it will, but every inanimate thing must work in vanity till it
works under the spirit of love.
*Every son of fallen Adam is under this same necessity of
working and striving after something that he neither is nor hath. All
evil as well as good men, all the wisdom and folly of this life, are a
proof of this. For the vanity of wicked men in their various ways, and
the labours of good men in faith and hope, proceed from the same
cause, viz. from a want and desire of having and being something
that they neither are nor have. The evil seek wrong, and the good
seek right; but they both are seekers, and for the same reason;
because their present state has not that which it wants to have. And
this must be the state of every creature that has fallen from its first
state. It must do as the polluted fluid does; it must ferment and work,
either right or wrong, to mend its state. The muddled wine always
works right to the utmost of its power, because it works according to
nature; but if it had an intelligent free will, it might work as vainly as
man does; it might continually thicken itself, be always stirring up its
own dregs, and then it would seek for its purity, just as well as the
soul of man seeks for its happiness in the lusts of the flesh, the lust
of the eyes, and the pride of life. All which must fall away from the
heart of man before it can find its happiness in God, as the dregs
must separate from the wine before it can have its perfection and
clearness.
*Purification therefore is so necessary, that nothing will do in the

stead of it. But man is not purified, till every earthly, wrathful,
sensual, selfish temper is taken from him. He is not dying to himself,
till he is dying to these tempers; and he is not alive in God, but as he
is dead to them. It is the purity and perfection of the divine nature
that must be brought again into him: nor are you to think that these
words, the purity and perfection of God, are too high to be used on
this occasion; for they only mean, that the will of the creature must
will and work with the will of God; and whatever does not thus, is at
enmity with God, and cannot have life and happiness with him.
Now, nothing wills and works with God but the spirit of love;
because nothing else works in God himself. The Almighty brought
forth all nature for this only end, that boundless love might have its
infinity of height and depth to dwell and work in; and all the
properties of nature are only to give life and strength to the spirit of
love, that it may come forth into outward activity, and manifest its
blessed powers; that all creatures may communicate the spirit of
love and goodness, give and receive delight to and from one
another. All below this state of love, is a fall from the one life of God,
the only life in which the God of love can dwell.
Now who can restore this life? The unbelieving Jews said of our
Lord, How can this man forgive sins? Christ shewed them how, by
appealing to that power which they saw he had over the body:
whether, says he, is it easier to say, Thy sins are forgiven thee, or to
say, Arise, take up thy bed, and walk? But the delusion of the
unbelieving Deist is greater than that of the Jew. For the Deist sees,
that his reason has no power over his body; can remove no disease,
blindness, deafness, or lameness, from it; and yet will pretend to
have power enough from his reason, to help the soul out of all its
evil; not knowing that he only, who can say to the dead body of
Lazarus, Come forth, can say to the soul, Be thou clean. The Deist
therefore, if he pleases, may stile himself a natural, or a moral
philosopher, but with no more truth, than he can call himself an
healer of all the maladies of the body. And for a man to think himself
a moral philosopher, because he has made a choice collection of
syllogisms, in order to quicken and revive a divine goodness in the
soul; or that no Redeemer need come from heaven, because human
reason, when truly left to itself, has great skill in chopping of logic;
may justly be deemed such an ignorance of the nature of things, as
is seldom found in the transactions of illiterate and vulgar life. But
this by the by.
To return to our chief subject: the sum is this: all evil, all misery of
every kind, is nothing else but nature left to itself; and therefore,
there is no possibility for the natural, earthly man to escape eternal
wrath, but solely in the way the gospel teacheth, by denying and
dying to himself. On the other hand, all the goodness and perfection,
all the happiness, glory, and joy, that any intelligent creature can be
possessed of, is, and can be, from nothing else, but the invisible
uncreated light and Spirit of God manifesting itself in the creatures,
filling, blessing, and uniting them all in one love.
And thus again: there is no possibility of man’s attaining to any

heavenly perfection and happiness, but only in the way of the
gospel, by the union of the divine and human nature, by man’s being
born again from above, of the Word and Spirit of God. There is no
possibility of any other way, because there is nothing that can
possibly change us into an heavenly state, but the presence and
power of the Deity united with, and working in us. And therefore the
Word was made flesh, and must of all necessity be made flesh, if
man is to have an heavenly nature. Now as all evil, sin, and misery,
have no beginning, nor power of working, but in the manifestation of
contrary properties; so man has nothing to turn to, seek, or aspire
after, but the lost spirit of love. And therefore it is, that God only can
be his Redeemer; because God only is love; and love can be no
where else, but in God, and where God dwelleth and worketh.
Now the difficulty you find in attaining this spirit of love, is
because you seek for it, in the way of reasoning: you would be
possessed of it only from a rational conviction of the fitness and
amiableness of it. And as this clear idea does not put you into the
possession of it, your reason begins to waver; and suggests to you,
that it may be only a fine notion, that has no ground but in the power
of imagination. But this, Sir, is all your own error; as if you would
have your eyes do that, which only your hands or feet can do for
you. The spirit of love is a spirit of nature and life; and therefore can
only be produced in you, by that Almighty power which produced all
nature, and gave life to every living thing. Life can only arise in its
own time and place from its proper cause, and as the genuine effect
of it. Nature and life do nothing by chance, or accidentally, but every
thing in one uniform way. Fire, air, and light, do not proceed
sometimes from one thing, and sometimes from another: but
wherever they are, they are always born in the same manner, and
from the same working in the properties of nature. So in like manner,
love is an immutable birth, always proceeding from the same cause,
and cannot be in existence till its own true parents have brought it
forth.
*How unreasonable would it be to doubt whether strength and

health of body were real things, or possible to be had, because you
could not by the power of your reason take possession of them? Yet
this is as well as to suspect the purity and perfection of love to be
only a notion, because your reason cannot bring it forth in your soul.
For reason has no more power of altering the life and properties of
the soul, than of altering the life and properties of the body. That, and
that only, can cast devils, and evil spirits, out of the soul, that can say
to the storm, Be still; and to the leper, Be thou clean.
And now, Sir, you see the absolute necessity of the gospel-
doctrine of the cross; viz. of dying to ourselves, as the only way to
life in God. This is the one morality that does man any good. Fancy
as many rules as you will, of modelling the moral behaviour of man,
they all do nothing, because they leave nature still alive; and
therefore can only help a man to an art of concealing his own inward
evil. But still nature can no more change from evil to good, than
darkness can work itself into light. The one work therefore is to resist
and deny nature, that a supernatural power may take possession of
it.
There is no standing still, life goes on, and is always bringing

forth its realities, which way soever it goeth. You see the true state of
every natural man, whether he be Cæsar or Cato, whether he
gloriously murders others, or only stabs himself; blind nature does all
the work, and must be the doer of it, till the light of God has helped
them to one common good, in which they all willingly unite, rest, and
rejoice. In a word, goodness is only a sound, and virtue a mere strife
of natural passions, till the spirit of love is the breath of every thing
that lives, and moves in the heart. For love is the one only blessing,
and goodness, and God of nature; and you have no true religion, are
no worshipper of the one true God, but in and by that Spirit of love,
which is God himself living and working in you.
An Extract from Mr. Law’s
Spirit of L O V E.
P A R T II.
A dialogue between Theogenes, Eusebius, and Theophilus.
Y heart embraces you both with the greatest

Theophilus. M affection, and I am much pleased at the occasion
of your coming, which calls me to the most
delightful subject in the world, to help both you and myself, to rejoice
in that adorable Deity, whose infinite being is an infinity of mere love,
an unbeginning, never-ceasing, and for ever over-flowing ocean of
meekness, sweetness, delight, blessing, goodness, patience, and
mercy; and all this, as so many blessed streams breaking out of the
abyss of universal love. Father, Son, and Holy Ghost, a triune infinity
of love and goodness, for ever and ever, giving forth nothing but the
same gifts of light and love, of blessing and joy, whether before or
after the fall, either of angels, or men.
Look at all nature, through all its height and depth, in all its variety
of powers, it is what it is, for this only end, that the hidden riches, the
invisible blessings, glory and love of the unsearchable God, may
become visible, sensible, and manifest in it, and by it.
Look at all the variety of creatures, they are what they are, for this
only end, that in their infinite variety, degrees, and capacities, they
may be as so many speaking figures, so many sounds and voices,
preachers and trumpets, giving glory and praise, and thanksgiving to
that Deity of love, which gives life to all nature.
For every creature, call it by what name you will, had its form,
and power, and state, and place in nature for no other end, but to
open and enjoy, to manifest and rejoice in some share of the love
and happiness, and goodness of the Deity.
Now this is the one will and work of God, in, and through all
creatures. From eternity to eternity he can will, and intend nothing
towards them, in them, or by them, but the communication of various
degrees of his own love, goodness and happiness to them,
according to their state and place, and capacity. This is God’s
unchangeable disposition towards the creature; he can be nothing
else, but all goodness towards it; because he can be nothing
towards the creature, but that which he is, and was, and ever shall
be in himself.
Theogenes. Pray, Theophilus, let me ask you, Does not patience

and pity, and mercy begin to be in God, and only then begin, when
the creature has brought forth itself into misery? They could have no
existence in the Deity before.
Theophilus. ’Tis true, Theogenes, that God can only then begin to
make known his mercy and patience, when the creature has lost its
rectitude and happiness; yet nothing then begins to be in God, or to
be found in him, but that which was always in him, in the same
infinite state, viz. a will to all goodness, and which can will nothing
else. And his patience and mercy, which could not shew forth
themselves, till sin had brought forth misery, were not new tempers,
or the beginning of some new disposition, that was not in God
before, but only new and occasional manifestations of that
boundless, eternal will to all goodness, which always was in God in
the same height and depth. The will to all goodness, which is God
himself, began to display itself in a new way, when it first gave birth
to creatures. The same will to all goodness began to manifest itself
in another new way, when it became patience and compassion
towards fallen creatures. But neither of these ways are the beginning
of any new tempers or qualities in God, but only new and occasional
manifestations of that true eternal will to all goodness, which always
was, and always will be, in the same fulness in God.
And salvation is, and can be nothing else, but the manifestation
of the life of God in the soul. How clearly does this give the solid
distinction between inward holiness, and all outward practices. All
that God has done for man by any particular dispensations, whether
by the law or the prophets, by the scriptures, or ordinances of the
church, are only as helps to an holiness, which they cannot give, but
are only suited to the death and darkness of the earthly life, to turn it
from itself, from its own workings, and awaken in it a faith and hope,
a hunger and thirst after that first union with the Deity, which was lost
in the fall of the first father of mankind.
*How unreasonable is it, to call perpetual inspiration fanaticism,

and enthusiasm, when there cannot be the least degree of goodness
or happiness in any intelligent being, but what is in its whole nature,
merely and truly the breathing, the life, and the operation of God in
the life of the creature? For if goodness can only be in God, if it
cannot exist separate from him, if he can only bless and sanctify by
himself becoming the blessing and sanctification of the creature,
then it is the highest degree of blindness to look for any goodness,
and happiness from any thing but the immediate indwelling, union
and operation of the Deity in the creature. Perpetual inspiration,
therefore, is in the nature of the thing as necessary to a life of
goodness, holiness, and happiness, as the perpetual respiration of
the air is necessary to animal life.
*For the life of the creature, whilst possessing nothing but itself, is
hell; that is, it is all pain and want and distress. Now nothing can help
it to be in light and love, in peace and goodness, but the union of
God with it, and the life of God working in it, because nothing but
God is light, and love, and heavenly goodness. And, therefore,
where the life of God is not become the life and goodness of the
creature, it cannot have the least degree of goodness in it.
What a mistake is it, therefore, to confine inspiration to particular
times and occasions, to prophets and apostles, and extraordinary
messengers of God! and to call it enthusiasm, when the common
Christian looks, and trusts to be continually led and inspired by the
Spirit of God! For tho’ all are not called to be prophets, or apostles,
yet all are called to be holy, as he who has called them is holy, to be
perfect as their heavenly Father is perfect, to be like minded with
Christ, to will only as God wills, to do all to his honour and glory, to
renounce the spirit of this world, to have their conversation in
heaven, to set their affections on things above, to love God, with all
their heart, soul, and spirit, and their neighbour as themselves.
Behold a work as great, as divine and supernatural, as that of a

prophet and an apostle. But to suppose that we ought, and may
always be in this spirit of holiness, and yet are not, and ought not to
be always moved and led by the Spirit of God, within us, is to
suppose, that there is a holiness and goodness which comes not
from God; which is no better than supposing, that there may be true
prophets and apostles who have not their truth from God.
Now the holiness of the common Christian is not an occasional

thing, that begins and ends, or is only for such a time, or place, or
action, but is the holiness of that, which is always alive, and stirring
in us, namely, of our thoughts, wills, and affections. If therefore these
are always alive in us, always governing our lives, then a perpetual
operation of the Spirit of God within us, is absolutely necessary. For
we cannot be inwardly led and governed by a spirit of goodness, but
by being governed by the Spirit of God himself.
If our thoughts, wills, and affections, need only be now and then
holy and good, then, indeed, the Spirit of God need only now and
then govern us. But if our thoughts and affections are to be always
holy, then the holy Spirit of God is to be always operating within us.
The scripture saith, We are not sufficient of ourselves to think a
good thought. If so, then we cannot be chargeable with not thinking,
and willing that which is good, but upon this supposition, that there is
always a supernatural power ready, and able to help us to the good,
which we cannot have from ourselves.
How firmly our established church adheres to this doctrine of the

necessity of the perpetual operation of the Holy Spirit, as the one
only source of any degree of divine light, wisdom, virtue, and
goodness in the soul of man; how earnestly she requires all her
members to live in the most open profession of it, and in the highest
conformity to it, may be seen by many such prayers as these in her
ordinary, public service.
O God for as much as without thee, we are not able to please

thee, grant that thy Holy Spirit may in all things direct and rule our
hearts. Again we pray thee, that thy grace may ALWAYS prevent and
follow us, and make us CONTINUALLY to be given to all good
works. Again, Grant to us, Lord, we beseech thee, the Spirit to think
and do ALWAYS such things as be rightful, that we, who cannot do
ANY THING that is good, WITHOUT thee, may, by thee, be enabled
to live according to thy will. Again, Because the frailty of man,
WITHOUT thee, CANNOT BUT FALL, keep us EVER, by thy HELP,
from all things hurtful, and LEAD us to all things profitable to our
salvation, &c. Again, O God from whom all good things do come,
grant to us, thy humble servants, that by THY holy INSPIRATION,
we may THINK those things that be good, and, by thy merciful
GUIDING, may PERFORM the same.
And now, Eusebius, how is the great controversy about religion,

and salvation, ♦shortened.
♦ “shortned” replaced with “shortened”

For since the one work of Christ as your Redeemer, is to take
from the earthly life of flesh and blood, its usurped power, and to
raise the smothered spark of heaven, out of death, into life, your one
work also, under your Redeemer is fully known. And you have the
utmost certainty, what you are to do, where you are to seek, and in
what you are to find your salvation. All that you have to do, is to
oppose, resist, to renounce the evil tempers, and workings of your
earthly nature. You want no deliverance, but from the power of
yourself. This is the one murderer of the divine life within you. And
every thing that your earthly nature does, is under the influence of
self-will, self-love, and self-seeking, whether it carries you to
laudable, or blameable practices, all is done in the nature and spirit
of Cain, and only helps you to such goodness, as when Cain slew
his brother. For every action and motion of self, has the spirit of
antichrist, and murders the divine life within you.
Judge not therefore of yourself, by considering how many of

those things you do, which divines and moralists call virtue and
goodness, nor how much you abstain from those things, which they
call sin and vice.
But daily and hourly, in every step that you take, see to the spirit
that is within you, whether it be heaven, or earth that guides you.
And judge every thing to be sin and Satan, in which your earthly
nature, has any share of life in you; nor think that any goodness is in
you, but so far as it is an actual death to the pride, the vanity, the
wrath, and selfish tempers of your fallen, earthly life.
Again, here you see, where and how you are to seek your
salvation, not in taking up your travelling-staff, or crossing the seas
to find out a new Luther or a new Calvin, to cloath yourself with their
opinions. No. The oracle is at home, that always speaks the truth to
you; nothing is your truth, but that good and that evil which is within
you. For salvation or damnation is not an outward thing, but springs
up within you. What you are in yourself, what is doing in yourself, is
either your salvation or damnation.
Again nothing that we do is bad, but for this reason, because it
resists the power, and working of God within us; and nothing that we
do, can be good, but because it conforms, to the Spirit of God within
us. And therefore, you have the utmost certainty, that God, salvation
and the kingdom of heaven, are within you, and that all outward
religion, from the fall of man to this day, is not for itself, but merely for
the sake of an inward and divine life, which was lost when Adam
died his first death in paradise. So that it may well be said,
circumcision is nothing, and uncircumcision is nothing, because
nothing is wanted, but a new creature, called out of the death and
darkness of flesh and blood, into the light, life and perfection of its
first creation.
And thus also, you have the fullest proof in what your salvation
precisely consists. Not in any historic faith, or knowledge of any thing
absent, or distant from you, not in any variety of restraints, rules, and
methods of practising virtues, not in any formality of opinion about
faith and works, repentance, forgiveness of sins, or justification, and
sanctification, not in any truth, or righteousness, that you can have
from yourself, from the best of men or books, but wholly and solely in
the life of God.
Theogenes. I have not the least doubt about any of these things.
It is visible, that there can be no medium in this matter, either religion
must be all spiritual, or all carnal; that is, we must either take up with
the grossness of the Sadducees, who say, there is neither angel nor
spirit, or with such purification as the Pharisees had from their
washing of pots and vessels, and tithing their mint and rue; we must,
I say, either acquiesce in this carnality, or we must profess a religion,
that is all spirit and life, and merely for the sake of raising up an
inward spiritual life of heaven, that fell into death in our first father.
*Theophilus. Oh Theogenes! What an eternity is that, out of
which, and for which thy eternal soul was created? What little,
crawling things are all that an earthly ambition can set before thee?
Bear with patience for awhile the rags of thy earthly nature, the veil
and darkness of flesh and blood, as the lot of thy inheritance from
father Adam, but think nothing worth a thought but that which will
bring thee back to thy first glory, and land thee safe in the region of
eternity.
An Extract from Mr. Law’s
Spirit of L O V E.
P A R T III.
A dialogue between Theogenes, Eusebius, and Theophilus.
HE doctrine of the spirit of love, cannot have more

Eusebius. T power over me, or be more deeply rooted in me, than
it is already. It has so gained possession of my whole
heart, that every thing else must be under its dominion. I can do
nothing else but love; it is my whole nature, I have no taste for any
thing else. Can this matter be carried higher in practice?
Theophilus. No higher, Eusebius. And was this the true state of
your heart, you would bid fair to leave the world as Elijah did. For
was there nothing but this divine love alive in you, your fallen flesh
and blood would be in danger of being burnt up by it. What you have
said of yourself, you have spoken in great sincerity, but in a total
ignorance of yourself, and of the spirit of divine love. You are as yet
only charmed with the sight, or rather the sound of it; its real birth is
as yet unfelt, and unfound in you. Your natural complexion has a
great deal of the animal meekness and softness of the lamb, and the
dove; your blood and spirit are of this turn; and therefore a God all
love, and a religion all love, quite transport you; and you are so
delighted with it, that you fancy you have nothing in you, but this
religion of love. But, my friend, bear with me, if I tell you, that all this
is only the good part of the spirit of this world, and may be in any
unregenerate man, that is of your complexion. It is so far from being
a genuine fruit of divine love, that if it be not well looked to, it may
prove a real hindrance of it, as it oftentimes does, by its appearing to
be that which it is not.
You have quite forgot all that was said in the letter to you on the
spirit of love. You may love it as much as you please, think it the
most charming thing in the world, fancy every thing but dross and
dung, in comparison of it, and yet have no more of it in you, than the
blind man has of that light, of which he has got a most charming
notion.
Eusebius. But if I am got no farther than this, what good have I

from giving in so heartily to all that you have said of this doctrine?
Theophilus. Your error lies in this; you confound two things, which
are entirely distinct from each other. You make no difference betwixt
the doctrine, that only sets forth the nature, excellency, and
necessity of the spirit of love, and the spirit of love itself; which yet
are two things so different, that you may be quite full of the former,
and at the same time quite empty of the latter. I have said every
thing that I could, to shew you the excellency and necessity of the
spirit of love: it is of infinite importance to you to be well established
in the belief of this doctrine. But all that I have said of it, is only to
encourage you to buy it, at its own price, and to give all that for it,
which alone can purchase it. But if you think you have got it,
because you are so highly pleased with that which you have heard of
it, you only embrace the shadow, instead of the substance.
Eusebius. What is the price that I must give for it?
Theophilus. You must give up all that you are, and all that you
have from fallen Adam; for all that you are and have from him, is that
life of flesh and blood, which cannot enter into the kingdom of God.
Adam, after his fall, had nothing that was good in him, nothing
that could inherit an eternal life in heaven, but a seed of grace. Every
thing else in him was devoted to death, that this incorruptible seed
might grow up in Christ Jesus.
Theogenes. I am afraid the matter is much worse with me, than it

is with Eusebius. For tho’ this doctrine, seems to have got all my
heart, as it is a doctrine; yet I am continually thrown out of it in
practice, and find myself as much under the power of my old
tempers and passions, as I was before I was so full of this doctrine.
Theophilus. You are to know, my friends, that every kind of virtue
and goodness, may be brought into us, by two different ways. They
may be taught us outwardly by men, by rules and precepts; and they
may be inwardly wrought in us. In the former way, as we learn them
only from men, they at best, only change our outward behaviour,
leave our heart in its natural state, only put our passions under a
forced restraint, which will occasionally break forth, in spite of
precept and doctrine. Now this way of learning goodness, tho’ thus
imperfect, is yet absolutely necessary, in the nature of the thing, and
must first have its time, and place, and work in us; yet it is only for a
time, as the law was a school-master to the gospel. We must first be
babes in doctrine, as well as in strength, before we can be men. But
of all this outward instruction, whether from good men, or the letter of
scripture, it must be said, as the apostle saith of the law, that it
maketh nothing perfect.
The true profitableness of the written word of God, is fully set

forth by St. Paul to Timothy: from a child, saith he, thou hast known
the scriptures, which are able to make thee wise unto salvation,
which is by faith in Christ Jesus. Now these scriptures were the law
and the prophets, for Timothy had known no other from his youth.
And as they, so all other scriptures since, have no other good, or
benefit in them, but as they lead us to a salvation, that is not to be
had in themselves, but from faith in Christ Jesus. Their teaching is
only to teach us, where to seek and to find the fountain of all light
and knowledge.
Of the law saith the apostle, it was a school-master to Christ. The

same thing is to be affirmed of the letter of the New Testament; it is
but our school-master unto Christ. Nor can the thing possibly be
otherwise; no instruction that comes under the form of words can do
more for us, than sounds, and words can do; they can only direct us
to something that is better than themselves, that can be the true
light, life, spirit, and power of ♦holiness in us.
♦ “hoiliness” replaced with “holiness”

Eusebius. I cannot deny what you say, and yet it seems to me to
derogate from scripture.
Theophilus. Would you then have me to say, that the written word
of God, is that word of God, which liveth, and abideth for ever; that
word, which was with God, which was God, by whom all things were
made; that word of God, which was made flesh for the redemption of
the world; that word which lighteth every man, that cometh into the
world; that word, which in Christ Jesus is become wisdom, and
righteousness, and sanctification in us; would you have me say, that
all this is to be understood of the written word of God? If this cannot
possibly be, then all that I have said is granted, namely, that Jesus is
alone that word of God, that can be the light, life, and salvation of
fallen man. And how is it possible more to exalt the letter of scripture,
than by owning it to be a true, outward direction to the one only true
light, and salvation of man.
Suppose you had been a true disciple of John the Baptist, whose
office was, to prepare the way to Christ, how could you have more
magnified his office, than by going from his teaching, to be taught by
Christ? The Baptist was indeed a burning and a shining light, and so
are the holy scriptures; but he was not that light, but was sent to bear
witness of that light. That was the true light, which lighteth every
man, that cometh into the world.
What a folly would it be to say that you had undervalued the

office, and the character of John the Baptist, because he was not
allowed to be the light itself, but only a true witness of it, and guide to
it? Now if you can shew, that the written word can have any other, or
higher office, or power, than such a ministerial one as the Baptist
had, I am ready to hear you.
Eusebius. There is no possibility of doing that.

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

Part 2: Demand Analysis and Estimation 109

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

Graphiug the Market Demand Curve, 163 Exponential Smoothing 212

Tests of Predictive Capability, 220 • Correlatio11 Questions 224

Part 3: Production and Competitive Markets 237

Managerial Application I 0.2: Seasonality Role for Government 410

Chapter 11: Performance and Strategy

Part 4: Imperfect Competition ltltS

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

Monopoly Regulation 458 Oligopoly 498

Infinitely Repeated Games 545 Price Discrimination Example 580

Part 5: Long-Term Investment Decisions 617

r THIS UfTH EDITION

Buffett's success is powerful testimony to the practical usefulness of managerial economics.

r HOW IS MANAGERIAL ECONOMICS USEFUL?

Evaluating Choice Alternatives

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

Management Decision Problems

Economic Concepts Quantitative Methods

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

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

Making the Best Decision

rTHEORY OF THE FIRM

Expected Value Maximization

*Purification therefore is so necessary, that nothing will do in the

And thus again: there is no possibility of man’s attaining to any

*How unreasonable would it be to doubt whether strength and

There is no standing still, life goes on, and is always bringing

An Extract from Mr. Law’s

A dialogue between Theogenes, Eusebius, and Theophilus.

Y heart embraces you both with the greatest

Theogenes. Pray, Theophilus, let me ask you, Does not patience

*How unreasonable is it, to call perpetual inspiration fanaticism,

Behold a work as great, as divine and supernatural, as that of a

Now the holiness of the common Christian is not an occasional

How firmly our established church adheres to this doctrine of the

O God for as much as without thee, we are not able to please

And now, Eusebius, how is the great controversy about religion,

♦ “shortned” replaced with “shortened”

Judge not therefore of yourself, by considering how many of

A dialogue between Theogenes, Eusebius, and Theophilus.

HE doctrine of the spirit of love, cannot have more

Eusebius. But if I am got no farther than this, what good have I

Eusebius. What is the price that I must give for it?

Theogenes. I am afraid the matter is much worse with me, than it

The true profitableness of the written word of God, is fully set

Of the law saith the apostle, it was a school-master to Christ. The

♦ “hoiliness” replaced with “holiness”

What a folly would it be to say that you had undervalued the

Eusebius. There is no possibility of doing that.

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