Managerial Economics in a Global Economy

Dominick Salvatore is Distinguished Professor of Economics and Business and Director of the Global Economic Policy Center at Fordham University. He is also Honorary Professor at Shanghai Finance University, Nanjing Finance and Economics University, Hunan University, and the University of Pretoria. He also acts as a consultant to the Economic Policy Institute, the World Bank, the International Monetary Fund, the United Nations, and various other global banks and corporations. Professor Salvatore has authored International Economics (2016) and Microeconomics: Theory and Applications (Oxford University Press, 2009), coauthored Income Distribution (Oxford University Press, 2006), and edited Where Is the World Economy Headed? (2017) and Why Is World Growth Slowing Down? (2016). He has also been the editor of Open Economies Review and The American Economist, and he serves as the current coeditor of the Journal of Policy Modeling.

PART ONE: INTRODUCTION

CHAPTER 1. The Nature and Scope of Managerial Economics
1-1 The Scope of Managerial Economics
Definition of Managerial Economics
Relationship to Economic Theory
Relationship to the Decision Sciences
Relationship to the Functional Areas of Business Administration Studies
1-2 The Basic Process of Decision Making
CASE STUDY 1-1 Peter Drucker-The Man Who Invented Management
CASE STUDY 1-2 The Management Revolution
1-3 The Theory of the Firm
Reasons for the Existence of Firms and Their Functions
The Objective and Value of the Firm
Constraints on the Operation of the Firm
Limitations of the Theory of the Firm
BOX 1 Managerial Economics at Work: The Objective and Strategy of Firms in the Cigarette Industry
1-4 The Nature and Function of Profits
Business versus Economic Profit
Theories of Profit
Function of Profit
CASE STUDY 1-3 Profits in the Personal Computer Industry
1-5 Business Ethics
CASE STUDY 1-4 Business Ethics at Boeing
CASE STUDY 1-5 Enron-Andersen and Other Financial Disasters
CASE STUDY 1-6 The Global Financial Crisis
1-6 The International Framework of Managerial Economics
CASE STUDY 1-7 The Rise of the Global Corporation
CASE STUDY 1-8 The Global Business Leader
CASE STUDY 1-9 Global Most Admired Companies
1-7 Managerial Economics in a More Risky, Crisis-Prone, and Sluggish Global Economy
CASE STUDY 1-10 Terrorism, Cyber Espionage, Financial Crises, and Globalization
1-8 Managerial Economics and the Internet
CASE STUDY 1-11 The Most Important Internet Site Addresses for Managerial Economics
Summary
Discussion Questions
Problems
Appendix to Chapter 1: Solving Managerial Decision Problems Using Spreadsheets
Microsoft Excel
Example
Solution
Spreadsheet Problem
Supplementary Readings

CHAPTER 2. Demand, Supply, and Equilibrium Analysis
2-1 Market Analysis
2-2 Market Demand
Demand Schedule and Demand Curve
Changes in Demand
2-3 Market Supply
Supply Schedule and Supply Curve
Changes in Supply
2-4 When Is a Market in Equilibrium?
2-5 Adjustment to Changes in Demand and Supply: Comparative Static Analysis
CASE STUDY 2-1 Equilibrium Price by Auction
Adjustment to Changes in Demand
Adjustment to Changes in Supply
CASE STUDY 2-2 Changes in Demand and Supply and Coffee Prices
2-6 Domestic Demand and Supply, Imports, and Prices
CASE STUDY 2-3 Lower Consumer Prices with Imports
2-7 Interfering with versus Working through the Market
CASE STUDY 2-4 Rent Control Harms the Housing Market
CASE STUDY 2-5 The Economics of U.S. Farm Support Programs
CASE STUDY 2-6 Working through the Market with an Excise Tax
BOX 2 Managerial Economics at Work: Nonclearing Financial and Other Markets
Summary
Discussion Questions
Problems
Spreadsheet Problems
Appendix to Chapter 2 The Algebra of Demand, Supply, and Equilibrium
Market Equilibrium Algebraically
Shifts in Demand and Supply, and Equilibrium
The Effect of an Excise Tax
Appendix Problems
Supplementary Readings

CHAPTER 3. Optimization Techniques and New Management Tools
3-1 Methods of Expressing Economic Relationships
3-2 Total, Average, and Marginal Relationships
Total, Average, and Marginal Cost
Geometric Derivation of the Average- and Marginal-Cost Curves
CASE STUDY 3-1 Total, Average, and Marginal Cost in the
U.S. Steel Industry
3-3 Optimization Analysis
Profit Maximization by the Total-Revenue and Total-Cost Approach
Optimization by Marginal Analysis
CASE STUDY 3-2 Optimal Pollution Control
3-4 Constrained Optimization
CASE STUDY 3-3 Pursuing Multiple Objectives under Constraints by Global Corporations
3-5 New Management Tools for Optimization
Benchmarking
Total Quality Management
CASE STUDY 3-4 Benchmarking at Xerox, Ford, and Mobil
Reengineering
CASE STUDY 3-5 Total Quality Management at Johnson & Johnson, Motorola,
General Electric and Ford
CASE STUDY 3-6 Reengineering at GE
The Learning Organization
CASE STUDY 3-7 Applying Learning-Organization Principles at Ford and Southwest Airlines
Big Data and Big Data Analytics
CASE STUDY 3-8 Big Data Analytics at Amazon, MIT, and Johns Hopkins School of Medicine
3-6 Other Management Tools for Optimization
3-7 New Management Tools and Functional Specialization
CASE STUDY 3-9 The American Business Model
CASE STU DY 3-10 When Governance Rules Fail, Public Trust Is Eroded
BOX 3 Managerial Economics at Work: Management Practices across the World
Summary
Discussion Questions
Problems
Spreadsheet Problems
Appendix 1 to Chapter 3 Optimization Using Spreadsheets
Appendix Problems
Appendix 2 to Chapter 3 Differential Calculus and Optimization Techniques
The Derivative and Rules of Differentiation
The Concept of the Derivative
Rules of Differentiation
Optimization with Calculus
Determining a Maximum or a Minimum by Calculus
Distinguishing between a Maximum and a Minimum: The Second Derivative
Multivariate Optimization
Partial Derivatives
Maximizing a Multivariable Function
Constrained Optimization
Constrained Optimization by Substitution
Constrained Optimization by the Lagrangian Multiplier Method
Appendix Problems
Supplementary Readings
INTEGRATING CASE STUDY 1 Steve Jobs: A Genius Departs: The Astonishing Career of the World's Most Revered Chief Executive
Three-Way Marriage
Oh, and One More Thing


PART TWO: DEMAND ANALYSIS

CHAPTER 4. Demand Theory
4-1 The Demand for a Commodity
An Individual's Demand for a Commodity
From Individual to Market Demand
CASE STUDY 4-1 The Demand for Big Macs
The Demand Faced by a Firm
4-2 Price Elasticity of Demand
CASE STUDY 4-2 The Demand for Sweet Potatoes in the United States
Point Price Elasticity of Demand
Arc Price Elasticity of Demand
Price Elasticity, Total Revenue, and Marginal Revenue
Factors Affecting the Price Elasticity of Demand
4-3 Income Elasticity of Demand
CASE STUDY 4-3 Price Elasticities of Demand in the Real World
CASE STUDY 4-4 Income Elasticities of Demand in the Real World
4-4 Cross-Price Elasticity of Demand
CASE STUDY 4-5 Cross-Price Elasticities of Demand in the Real World
CASE STUDY 4-6 Substitution between Domestic and Foreign Goods
4-5 Using Elasticities in Managerial Decision Making
BOX 4 Managerial Economics at Work: Decision Time at the Aromatic Coffee Company
CASE STUDY 4-7 Demand Elasticities for Alcoholic Beverages in the United States
4-6 International Convergence of Tastes
CASE STUDY 4-8 Gillette Introduces Space-Technology Global Razors
CASE STUDY 4-9 Ford's World Car(s)
4-7 Electronic Commerce
CASE STUDY 4-10 E-Commerce at Amazon.com
CASE STUDY 4-11 Amazon Puts an End to eBay Star Performance
Summary
Discussion Questions
Problems
Spreadsheet Problems
Appendix to Chapter 4 Behind the Market Demand Curve-The Theory of Consumer Choice
The Consumer's Tastes: Indifference Curves
The Consumer's Constraints: The Budget Line
The Consumer's Equilibrium
Derivation of the Consumer's Demand Curve
Income and Substitution Effects of a Price Change
The Theory of Consumer Choice Mathematically
Appendix Problems
Supplementary Readings

CHAPTER 5. Demand Estimation
5-1 The Identification Problem
5-2 Marketing Research Approaches to Demand Estimation
Consumer Surveys and Observational Research
CASE STUDY 5-1 Micromarketing: Marketers Zero in on Their Customers
Consumer Clinics
Market Experiments
Behavioral Economics and Marketing
CASE STUDY 5-2 Estimation of the Demand for Oranges by Market Experiment
Virtual Shopping and Virtual Management
CASE STUDY 5-3 Reaching Consumers in the Vanishing Mass Market
5-3 Introduction to Regression Analysis
5-4 Simple Regression Analysis
The Ordinary Least-Squares Method
Tests of Significance of Parameter Estimates
Other Aspects of Significance Tests and Confidence Intervals
Test of Goodness of Fit and Correlation
5-5 Multiple Regression Analysis
The Multiple Regression Model
The Coefficient of Determination and Adjusted R2
Analysis of Variance
Point and Interval Estimates
5-6 Problems in Regression Analysis
Multicollinearity
Heteroscedasticity
Autocorrelation
5-7 Demand Estimation by Regression Analysis
Model Specification
Collecting Data on the Variables
Specifying the Form of the Demand Equation
Testing the Econometric Results
5-8 Estimating the Demand for U.S. Imports and Exports
CASE STUDY 5-4 Estimation of the Demand for Air Travel over the North Atlantic
CASE STUDY 5-5 Price and Income Elasticities of Imports and Exports in the Real World
CASE STUDY 5-6 The Major Commodity Exports and Imports of the United States
CASE STUDY 5-7 The Major Trade Partners of the United States
CASE STUDY 5-8 The Top U.S. International Exporters
BOX 5 Managerial Economics at Work: BlackBerry Crumbles
Summary
Discussion Questions
Problems
Appendix to Chapter 5 Regression Analysis with Excel
Simple Regression
Multiple Regression Analysis
Appendix Problems
Supplementary Readings

CHAPTER 6. Demand Forecasting
6-1 Qualitative Forecasts
Survey Techniques
Opinion Polls
Soliciting a Foreign Perspective
6-2 Time-Series Analysis
CASE STUDY 6-1 Forecasting the Number of McDonald's Restaurants Worldwide
Reasons for Fluctuations in Time-Series Data
Trend Projection
Seasonal Variations
CASE STUDY 6-2 Forecasting New-Housing Starts with Time-Series Analysis
6-3 Smoothing Techniques
Moving Averages
Exponential Smoothing
CASE STUDY 6-3 Forecasting Lumber Sales with Smoothing Techniques
6-4 Barometric Methods
CASE STUDY 6-4 Forecasting the Level of Economic Activity with Composite and Diffusion Indexes
CASE STUDY 6-5 The Index of Leading Indicators Goes Global
6-5 Econometric Models
Single-Equation Models
CASE STUDY 6-6 Forecasting the Demand for Air Travel over the North Atlantic
Multiple-Equation Models
CASE STUDY 6-7 Economic Forecasts with Large Econometric Models
BOX 6 Managerial Economics at Work: Risks in Demand Forecasting
6-6 Input-Output Forecasting
Summary
Discussion Questions
Problems
Appendix to Chapter 6 Forecasting Fluctuations in Time-Series Analysis Using Excel
Forecasting New-Housing Starts with Regression Analysis
Adjusting the Trend Forecasts of New-Housing Starts for Seasonal Variations by the Ratio-to-Trend Method
Adjusting the Trend Forecasts of New-Housing Starts for Seasonal Variations by Using Seasonal Dummies
Appendix Problems
Supplementary Readings
INTEGRATING CASE STUDY 2 Ford's Bet: It's a Small World After All
Ford in the U.S. Automobile Industry
Staking Ford's Future
Epilogue
INTEGRATING CASE STUDY 3 Estimating and Forecasting the U.S. Demand for Electricity


PART THREE: PRODUCTION AND COST ANALYSIS

CHAPTER 7. Production Theory and Estimation
7-1 The Organization of Production and the Production Function
The Organization of Production
The Production Function
7-2 The Production Function with One Variable Input
Total, Average, and Marginal Product
The Law of Diminishing Returns and Stages of Production
7-3 Optimal Use of the Variable Input
CASE STUDY 7-1 Labor Productivity and Total Compensation in the United States and Abroad
7-4 The Production Function with Two Variable Inputs
Production Isoquants
Economic Region of Production
Marginal Rate of Technical Substitution
Perfect Substitutes and Complementary Inputs
7-5 Optimal Combination of Inputs
Isocost Lines
Optimal Input Combination for Minimizing Costs or Maximizing Output
Profit Maximization
Effect of Change in Input Prices
CASE STUDY 7-2 Substitutability between Gasoline Consumption and Driving Time
7-6 Returns to Scale
CASE STUDY 7-3 Returns to Scale in U.S. Manufacturing Industries
CASE STUDY 7-4 General Motors Decides Smaller Is Better
7-7 Empirical Production Functions
CASE STUDY 7-5 Output Elasticities in U.S. Manufacturing Industries
7-8 The Innovation Process
Meaning and Importance of Innovations
CASE STUDY 7-6 How Do Firms Get New Technology?
How Innovative Is Your Company's Culture?
The Open Innovation Model
CASE STUDY 7-7 Open Innovations at Procter & Gamble
The Next Step in Open Innovation
7-9 Innovation and Global Competitiveness
Innovations and the International Competitiveness of U.S. Firms
BOX 7 Managerial Economics at Work: How Xerox Lost and Regained International Competitiveness and Became a Leader in Information Technology
The New Computer-Aided Production Revolution, 3-D Printing, and the International Competitiveness of U.S. Firms
CASE STUDY 7-8 The New U.S. Digital Factory
CASE STUDY 7-9 The Euro and the International
Competitiveness of European Firms
Summary
Discussion Questions
Problems
Spreadheet Problems
Appendix to Chapter 7 Production Analysis with Calculus
Constrained Output Maximization
Constrained Cost Minimization
Profit Maximization
Appendix Problems
Supplementary Readings

CHAPTER 8. Cost Theory and Estimation
8-1 The Nature of Costs
8-2 Short-Run Cost Functions
Short-Run Total and Per-Unit Cost Functions
Short-Run Total and Per-Unit Cost Curves
CASE STUDY 8-1 Per-Unit Cost Curves in the Cultivation of Corn and in Traveling
8-3 Long-Run Cost Curves
Long-Run Total Cost Curves
Long-Run Average and Marginal Cost Curves
CASE STUDY 8-2 The Long-Run Average Cost Curve in Electricity Generation
8-4 Plant Size and Economies of Scale
CASE STUDY 8-3 The Shape of the Long-Run Average Cost Curves in Various Industries
8-5 Learning Curves
CASE STUDY 8-4 To Reduce Costs, Firms Often Look Far Afield
8-6 Minimizing Costs Internationally-The New Economies of Scale
International Trade in Inputs
BOX 8 Managerial Economics at Work: Dell PCs and Apple iPhones and iPads Sold in the United States Are Anything but American!
The New International Economies of Scale
Immigration of Skilled Labor
8-7 Logistics or Supply-Chain Management
CASE STUDY 8-5 Logistics at National Semiconductors, Saturn, and Compaq
8-8 Cost-Volume-Profit Analysis and Operating Leverage
Cost-Volume-Profit Analysis
Operating Leverage
CASE STUDY 8-6 Breakeven Analysis for Lockheed's Tri-Star and Europe's Airbus Industrie
8-9 Empirical Estimation of Cost Functions
Data and Measurement Problems in Estimating Short-Run Cost Functions
The Functional Form of Short-Run Cost Functions
CASE STUDY 8-7 Estimates of Short-Run and Long-Run Cost Functions
Estimating Long-Run Cost Functions with Cross-Sectional Regression
Analysis
Estimating Long-Run Cost Functions with Engineering and Survival Techniques
Summary
Discussion Questions
Problems
Spreadsheet Problems
Appendix to Chapter 8 Cost Analysis with Calculus
Appendix Problems
Supplementary Readings
INTEGRATING CASE STUDY 4 Competition in High-Tech Industries in the Age of Disruptive Innovations
INTEGRATING CASE STUDY 5 The Third Industrial Revolution
Toward a Third Dimension
The Shock of the New


PART FOUR: MARKET STRUCTURE AND PRICING PRACTICES

CHAPTER 9. Market Structure: Perfect Competition, Monopoly, and Monopolistic Competition
9-1 Market Structure and Degree of Competition
9-2 Perfect Competition
Meaning and Importance of Perfect Competition
Price Determination under Perfect Competition
CASE STUDY 9-1 Competition in the New York Stock Market
Short-Run Analysis of a Perfectly Competitive Firm
Short-Run Supply Curve of the Competitive Firm and Market
Long-Run Analysis of a Perfectly Competitive Firm
CASE STUDY 9-2 Long-Run Adjustment in the U.S. Cotton
Textile Industry
9-3 Competition in the Global Economy
Domestic Demand and Supply, Imports, and Prices
The Dollar Exchange Rate and the International Competitiveness of U.S. Firms
CASE STUDY 9-3 Foreign Exchange Quotations of the Dollar
CASE STUDY 9-4 The Exchange Rate of the U.S. Dollar and the
Profitability of U.S. Firms
9-4 Monopoly
Sources of Monopoly
CASE STUDY 9-5 Barriers to Entry and Monopoly by Alcoa
Short-Run Price and Output Determination under Monopoly
Long-Run Price and Output Determination under Monopoly
CASE STUDY 9-6 The Market Value of Monopoly Profits in the
New York City Taxi Industry
Comparison of Monopoly and Perfect Competition
BOX 9 Managerial Economics at Work: De Beers Abandons Its Diamond Monopoly
9-5 Monopolistic Competition
Meaning and Importance of Monopolistic Competition
CASE STUDY 9-7 The Monopolistically Competitive Restaurant Market
Short-Run Price and Output Determination under Monopolistic Competition
Long-Run Price and Output Determination under Monopolistic Competition
Product Variation and Selling Expenses under Monopolistic Competition
CASE STUDY 9-8 Advertisers Are Taking on Competitors by Name . . . and Being Sued
Summary
Discussion Questions
Problems
Spreadsheet Problems
Appendix to Chapter 9 Profit Maximization with Calculus
Appendix Problems
Supplementary Readings

CHAPTER 10. Oligopoly and Firm Architecture
10-1 Oligopoly and Market Concentration
Oligopoly: Meaning and Sources
CASE STUDY 10-1 Brands: Thrive or Die
Concentration Ratios, the Herfindahl Index, and Contestable Markets
CASE STUDY 10-2 Industrial Concentration in the United States
10-2 Oligopoly Models
The Cournot Model
The Kinked Demand Curve Model
Cartel Arrangements
CASE STUDY 10-3 The Organization of Petroleum
Exporting Countries (OPEC) Cartel
Price Leadership
10-3 Profitability and Efficiency Implications of Oligopoly
Porter's Strategic Framework
Efficiency Implications of Oligopoly
CASE STUDY 10-4 Firm Size and Profitability
CASE STUDY 10-5 Measuring the Pure Efficiency of Operating Units
10-4 The Sales Maximization Model
10-5 The March of Global Oligopolists
CASE STUDY 10-6 The Globalization of the Automobile Industry
CASE STUDY 10-7 Rising Competition in Global Banking
CASE STUDY 10-8 The Globalization of the Pharmaceutical Industry
BOX 10 Managerial Economics at Work: Multinational Corporations Follow Better Management Practices Than National Corporations
10-6 The Architecture of the Ideal Firm and the Creative Company
The Architecture of the Ideal Firm
The Evolution of the Creative Company
CASE STUDY 10-9 Firm Architecture and Organizational Competitiveness of High-Performance Organizations
CASE STUDY 10-10 The Most Innovative Companies in the World
10-7 The Virtual Corporation and Relationship Enterprises
The Virtual Corporation
Relationship Enterprises
CASE STUDY 10-11 Relationship Enterprises in Aerospace, Airlines, Telecommunications, and Automobiles
Summary
Discussion Questions
Problems
Spreadsheet Problems
Appendix to Chapter 10 Oligopoly Theory Mathematically
The Cournot Model
The Kinked Demand Curve Model
The Centralized Cartel Model
The Market-Sharing Cartel
The Sales Maximization Model
Appendix Problems
Supplementary Readings

CHAPTER 11. Game Theory and Strategic Behavior
11-1 Strategic Behavior and Game Theory
CASE STUDY 11-1 Military Strategy and Strategic Business Decisions
11-2 Dominant Strategy and Nash Equilibrium
Dominant Strategy
Nash Equilibrium
CASE STUDY 11-2 Dell Computers and Nash Equilibrium
11-3 The Prisoners' Dilemma
11-4 P rice and Nonprice Competition, Cartel Cheating, and Prisoners' Dilemma
Price Competition and the Prisoners' Dilemma
CASE STUDY 11-3 The Airlines' Fare War and the Prisoners' Dilemma
Nonprice Competition, Cartel Cheating, and the Prisoners' Dilemma
11-5 Repeated Games and Tit-for-Tat Strategy
11-6 Strategic Moves
Threat, Commitments, and Credibility
Entry Deterrence
CASE STUDY 11-4 Wal-Mart's Preemptive Expansion Marketing Strategy
11-7 Strategic Behavior and International Competitiveness
BOX 11 Managerial Economics at Work: Companies' Strategic Mistakes and Failures
11-8 Sequential Games and Decision Trees
CASE STUDY 11-5 Airbus's Decision to Build the A380 and Boeing's Sonic Cruiser Response and the 747-8
Summary
Discussion Questions
Problems
Spreadsheet Problems
Supplementary Readings

CHAPTER 12. Pricing Practices
12-1 Pricing of Multiple Products
Pricing of Products with Interrelated Demands
Plant Capacity Utilization and Optimal Product Pricing
Optimal Pricing of Joint Products Produced in Fixed Proportions
Optimal Pricing and Output of Joint Products Produced in Variable Proportions
CASE STUDY 12-1 Optimal Pricing and Output by Gillette
12-2 Price Discrimination
Meaning of and Conditions for Price Discrimination
First- and Second-Degree Price Discrimination
Third-Degree Price Discrimination Graphically
CASE STUDY 12-2 Price Discrimination by Con Edison
Third-Degree Price Discrimination Algebraically
12-3 International Price Discrimination and Dumping
BOX 12 Managerial Economics at Work: Kodak Antidumping Disputes with Fuji and Loss of Market
12-4 Transfer Pricing
Meaning and Nature of Transfer Pricing
Transfer Pricing with No External Market for the Intermediate Product
Transfer Pricing with a Perfectly Competitive Market for the Intermediate Product
Transfer Pricing with an Imperfectly Competitive Market for the Intermediate Product
CASE STUDY 12-3 Transfer Pricing by Multinationals Operating in Emerging Markets
CASE STUDY 12-4 Transfer Pricing in Advanced Countries
12-5 Pricing in Practice
Cost-Plus Pricing
Evaluation of Cost-Plus Pricing
Incremental Analysis in Pricing
CASE STUDY 12-5 Incremental Pricing at Continental Airlines
Peak-Load Pricing, Two-Part Tariff, Tying, and Bundling
CASE STUDY 12-6 Peak-Load Pricing by Con Edison
CASE STUDY 12-7 Bundling in the Leasing of Movies
Other Pricing Practices
CASE STUDY 12-8 No-Haggling Value Pricing in Car Buying
CASE STUDY 12-9 Name Your Price at Priceline
Discussion Questions
Problems
Spreadsheet Problems
Appendix to Chapter 12 Third-Degree Price Discrimination with Calculus
Appendix Problems
Supplementary Readings
INTEGRATING CASE STUDY 6 E-Books Rewrite Bookselling
INTEGRATING CASE STUDY 7 Has Apple Peaked and Are Its Best Days Behind It?
INTEGRATING CASE STUDY 8 Pricing on the Internet


PART FIVE: REGULATION, RISK ANALYSIS, AND CAPITAL BUDGETING

CHAPTER 13. Regulation and Antitrust: The Role of Government in the Economy
13-1 Government Regulation to Support Business and to Protect Consumers, Workers, and the Environment
Government Regulations That Restrict Competition
CASE STUDY 13-1 Restrictions on Competition in the Pricing of Milk in New York City and the Nation
Government Regulations to Protect Consumers, Workers, and the Environment
CASE STUDY 13-2 The FDA Steps Up Regulation of the Food and Drug Industry
CASE STUDY 13-3 Regulation Greatly Reduced Air Pollution
13-2 Externalities and Regulation
The Meaning and Importance of Externalities
Policies to Deal with Externalities
13-3 Public Utility Regulation
Public Utilities as Natural Monopolies
CASE STUDY 13-4 The Market for Dumping Rights
Difficulties in Public Utility Regulation
CASE STUDY 13-5 Regulated Electricity Rates for Con Edison
13-4 Antitrust: Government Regulation of Market Structure and Conduct
Sherman Act (1890)
Clayton Act (1914)
Federal Trade Commission Act (1914)
Robinson-Patman Act (1936)
Wheeler-Lea Act (1938)
Celler-Kefauver Antimerger Act (1950)
13-5 Enforcement of Antitrust Laws and the Deregulation Movement
Enforcement of Antitrust Laws: Some General Observations
Enforcement of Antitrust Laws: Structure
CASE STUDY 13-6 The IBM and AT&T Cases
CASE STUDY 13-7 Antitrust and the New Merger Boom
Enforcement of Antitrust Laws: Conduct
CASE STUDY 13-8 The Microsoft Antitrust Case
The Deregulation Movement
13-6 Regulation of International Competition
CASE STUDY 13-9 Deregulation of the Airline Industry: An Assessment
CASE STUDY 13-10 Voluntary Export Restraints on Japanese Automobiles to the United States
13-7 The Effect of Taxation on Business Decisions
BOX 13 Managerial Economics at Work: Corporate Tax Rates around the World and Multinationals' Behavior
CASE STUDY 13-11 U.S. Border Taxes and Export Subsidies
Summary Discussion Questions
Problems
Spreadsheet Problems
Supplementary Readings

CHAPTER 14. Risk Analysis
14-1 Risk and Uncertainty in Managerial Decision Making
CASE STUDY 14-1 The Risk Faced by Coca-Cola in Changing Its Secret Formula
CASE STUDY 14-2 The 10 Biggest Failures in the United States
14-2 Measuring Risk with Probability Distributions
Probability Distributions
An Absolute Measure of Risk: The Standard Deviation
Measuring Probabilities with the Normal Distribution
A Relative Measure of Risk: The Coefficient of Variation
CASE STUDY 14-3 RiskMetrics: A Method of Measuring Value at Risk
14-3 Utility Theory and Risk Aversion
CASE STUDY 14-4 The Purchase of Insurance and Gambling by the Same Individual-A Seeming Contradiction
14-4 Adjusting the Valuation Model for Risk
Risk-Adjusted Discount Rates
Certainty-Equivalent Approach
CASE STUDY 14-5 Adjusting the Valuation Model for Risk in the Real World
14-5 Other Techniques for Incorporating Risk into Decision Making
Decision Trees
Simulation
14-6 Decision Making under Uncertainty
The Maximin Criterion
The Minimax Regret Criterion
Other Methods of Dealing with Uncertainty
CASE STUDY 14-6 Spreading Risks in the Choice of a Portfolio
14-7 Foreign-Exchange Risks and Hedging
BOX 14 Managerial Economics at Work: How Foreign
Stocks Have Benefited a Domestic Portfolio
CASE STUDY 14-7 Information, Risk, and the Collapse of Long-Term
Capital Management
14-8 Information and Risk
Asymmetric Information and the Market for Lemons
The Insurance Market and Adverse Selection
The Problem of Moral Hazard
The Principal-Agent Problem
CASE STUDY 14-8 Do Golden Parachutes Reward Failure?
Auctions
CASE STUDY 14-9 Auctioning of the Airwaves
Summary
Discussion Questions
Problems
Spreadsheet Problems
Supplementary Readings

CHAPTER 15. Long-Run Investment Decisions: Capital Budgeting
15-1 Capital Budgeting: An Overview
Meaning and Importance of Capital Budgeting
Overview of the Capital Budgeting Process
CASE STUDY 15-1 Cost-Benefit Analysis and the SST
15-2 The Capital Budgeting Process
Projecting Cash Flows
CASE STUDY 15-2 The Eurotunnel: Another Bad French-British Investment?
Net Present Value (NPV)
Internal Rate of Return (IRR)
Comparison of NPV and IRR
CASE STUDY 15-3 Pennzoil's $3 Billion Capital Budgeting Challenge
CASE STUDY 15-4 Capital Budgeting for Investments in Human Capital
BOX 15 Managerial Economics at Work: Is a College Education Still Worth It?
15-3 Capital Rationing and the Profitability Index
15-4 The Cost of Capital
The Cost of Debt
The Cost of Equity Capital: The Risk-Free Rate Plus Premium
The Cost of Equity Capital: The Dividend Valuation Model
The Cost of Equity Capital: The Capital Asset Pricing Model (CAPM)
The Weighted Cost of Capital
CASE STUDY 15-5 The Choice between Equity and Debt
CASE STUDY 15-6 Capital Budgeting Techniques of Major U.S. Firms
15-5 Reviewing Investment Projects After Implementation
15-6 The Cost of Capital and International Competitiveness
Summary
Discussion Questions
Problems
Spreadsheet Problems
Supplementary Readings
INTEGRATING CASE STUDY 9 How the U.S. Airline Industry Found Its Edge
INTEGRATING CASE STUDY 10 How Silicon Valley Conquered the Carriers
INTEGRATING CASE STUDY 11 Turning Networks into Software Will Trigger a Storm in the Telecom World
Introductory Comment
Concluding Comments


APPENDIXES

APPENDIX A COMPOUND ING, DISCOUNTING, AND PRESENT VALUE
A-1 Future Value and Compounding
A-2 Present Value and Discounting
A-3 Future Value of an Annuity
A-4 Present Value of an Annuity
A-5 Compounding and Discounting Periods
A-6 Determining the Interest Rate
A-7 Perpetuities

APPENDIX B INTEREST FACTOR TABLES
Table B-1 Compound Value of $1
Table B-2 Present Value of $1
Table B-3 Future Value of an Annuity of $1 for n Periods
Table B-4 Present Value of an Annuity of $1 for n Periods

APPENDIX C STATISTICAL TABLES
Table C-1 Areas under the Standard Normal Distribution
Table C-2 Areas in the Tails of the t Distribution
Table C-3 F Distribution for 5 Percent Significance
Table C-4 Durbin-Watson Statistic for 5 Percent Significance Points of dL dU

APPENDIX D ANSWERS TO SELECTED (ASTERISKED) PROBLEMS

Glossary
Index