MC Economic Decision Making and Managerial Decisions Essay


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1. Maximizing Value
2. Corporate Social Responsibility
27. Aluminum vs. Steel in Cars and
3. Lower Drug Prices in Africa
28. Allocating Costs
4. Conflict in Fast-Food Franchising
29. Starting a New Business
5. Manufacturing Microchips
30. Sunk Costs
6. Responding to Exchange Rate
31. Pricing E-books
7. Pricing Amazon’s Kindle
32. Comparative Advantage and
International Trade
8. Airline Ticket Pricing
33. E-Commerce and Cost Economies
9. Ticket Pricing for a Sports
34. Flexibility and Innovation
35. Betting the Planet
10. Pricing in Practice
36. The Market for Day Care
11. Multinational Production and
37. Market Competition and the
12. Information Goods
38. President Trump’s Tariffs
13. Estimating Movie Demand
39. New York City’s Taxicabs
14. New Coke
40. Intel’s Monopoly
15. Data-Driven Business
41. The OPEC Cartel
16. Estimating the Demand for Air
42. Elevated Prices in the Infant
Formula Industry
17. Forecasting Cable TV Customers
43. The Five-Forces Model
18. The Demand for Toys
44. Concentration Ratios in US
19. The Housing Bubble and Crash
20. Forecasting the Fate of Euro
45. Global Airfares
46. A Price War
21. Forecasting Performance
47. Modern “Prisoner Dilemmas”
22. Allocating a Sales Force
48. When to Cut Price
23. A Production Function for Auto
24. Winning in Football and Baseball
25. Estimating Production Functions
26. Allocating Production between
49. Strategic Commitments
50. Bundling Films
51. A Battle for Air Passengers
52. Jockeying in the TV Ratings Game
53. Market-Share Competition
54. Two-Tiered Tender Offers
86. English and Sealed-Bid Auctions
55. A Common Standard for Electricity
87. Common-Value Auctions and The
and Charging Electric Cars
56. Staples versus Office Depot
57. An International Mineral Lease
58. Entry Deterrence
59. Establishing a Reputation
60. A Game of Trust
61. The FDA and Hepatitis C Drugs
62. Rent Seeking
63. Antitrust and the Tech Giants
64. Global Warming
65. Regulatory Reform and
Winner’s Curse
88. Microsoft’s Pivot on Paying Legal
89. A Loss-Making Benefits Plan
90. A “Lemons” Market
91. A Building Contract
92. Health Insurance and Medical
93. The Financial Meltdown
94. Airbus’s Dysfunctional
95. DHL Worldwide Express
96. Motivating Workers
66. Expanding a Highway
97. Integration or Franchising?
67. Public Investment in a Bridge
98. Information Technology and
68. Valuing Lives
69. Battelle Memorial Institute
70. Pricing Chips for Non-Profit
Organizational Structure
99. Executive Compensation and
100. Enron, WorldCom, and Tyco
71. Promoting Charitable Donations
101. Sanofi’s Bid for Genzyme
72. The Firm’s Long-Term Value
102. Selling a Warehouse
73. Gearing Down for a Recession
103. The Paperback Rights for Fifty
74. An Oil Drilling Decision
75. The Perils of International
76. Developing a New Drug
77. Pitfalls in Making Risky Decisions
78. The Boeing 737 Max Disaster
79. The Demand for Insurance
80. Risk Management at Microsoft
81. The Stock Market and the
82. Evaluating a Seismic Test
83. Predicting Credit Risks
84. Decision Pitfalls
85. The Challenger Disaster and
NASA’s Risk Analysis
Shades of Grey
104. A Patent Conflict
105. General Motors versus the United
Auto Workers
106. A Complex Procurement
107. Wooing David Letterman
108. Making a Tender Offer
109. Failed Agreements
110. An Investment Problem
111. An Optimal Computer Mix
112. Clean-Water Funding
113. Allocating HIV Resources
114. Staffing a Police Force
115. Clean Coal
116. A School Bussing Problem
William F. Samuelson
Boston University
Stephen G. Marks
Boston University
Jay L. Zagorsky
Boston University
Mike McDonald
Lise Johnson
Jennifer Manias
Kali Ridley
Judy Howarth
Martin Tribe
Mary Corder
Loganathan Kandan
Rachel Karach
© Photobac / Shutterstock
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ISBN: 978-1-119-55491-2 (PBK)
ISBN: 978-1-119-76087-0 (EVALC)
Library of Congress Cataloging-in-Publication Data
Names: Samuelson, William F., author. | Marks, Stephen G. (Stephen Gary) |
Zagorsky, Jay L., author.
Title: Managerial economics / William F. Samuelson, Boston University,
Stephen G. Marks, Boston University, Jay L. Zagorsky, Boston University.
Description: Ninth Edition. | Hoboken : Wiley, 2021. | Revised edition of
the authors’ Managerial economics, [2015] | Includes bibliographical
references and index.
Identifiers: LCCN 2020032117 (print) | LCCN 2020032118 (ebook) | ISBN
9781119554912 (paperback) | ISBN 9781119760757 (adobe pdf) | ISBN
9781119554943 (epub)
Subjects: LCSH: Managerial economics. | Decision making.
Classification: LCC HD30.22 .S26 2021 (print) | LCC HD30.22 (ebook) | DDC
LC record available at
LC ebook record available at
The inside back cover will contain printing identification and country of origin if omitted from this page. In addition, if the ISBN on the back cover
differs from the ISBN on this page, the one on the back cover is correct.
To Our Families
W. F. S
S. G. M
J. L. Z
The last 25 years have witnessed an unprecedented increase in competition in both national and
world markets. In this competitive environment, managers must make increasingly complex business decisions that will determine whether the firm will prosper or even survive. Today, economic
analysis is more important than ever as a tool for decision making.
The aims of this textbook are to illustrate the central decision problems managers face and to
provide the economic analysis they need to guide these decisions. It was written with the conviction that an effective managerial economics textbook must go beyond the “nuts and bolts” of
economic analysis; it should also show how practicing managers use these economic methods.
Our experience teaching managerial economics to undergraduates, MBAs, and executives alike
shows that a focus on applications is essential.
Managerial Decision Making
The main feature that distinguishes Managerial Economics, Ninth Edition, is its consistent
emphasis on managerial decision making. In a quest to explain economics per se, many texts
defer analysis of basic managerial decisions such as optimal output and pricing policies until later
chapters—as special applications or as relevant only to particular market structures. In contrast,
decision making is woven throughout every chapter in this book. Each chapter begins with a
description of a real managerial problem that challenges students to ponder possible choices
and is concluded by revisiting and analyzing the decision in light of the concepts introduced
in the chapter. Without exception, the principles of managerial economics are introduced and
analyzed by extended decision-making examples. Some of these examples include pricing airline
seats (Chapter 3), competing as a commercial day-care provider (Chapter 7), fighting global
warming (Chapter 11), choosing between risky research and development projects (Chapter 13),
and contract negotiations between car manufacturers and the United Auto Workers Union
(Chapter 16). In addition to reviewing important concepts, the summary at the end of each
chapter lists essential decision-making principles.
The analysis of optimal decisions is presented early in the book. Chapter 2 introduces and
analyzes the basic profit-maximization problem of the firm. Chapter 3 begins with a traditional
treatment of demand and goes on to apply demand analysis to the firm’s optimal pricing problem.
Chapters 5 and 6 take a closer look at production and cost as guides to making optimal managerial decisions. The emphasis on decision making continues throughout the remainder of the book
because, in our view, this is the best way to teach managerial economics. The decision-making
approach also provides a direct answer to students’ perennial question: How and why is this concept useful? A list of real-world applications used throughout the text precedes this preface.
New Topics
At one time, managerial economics books most closely resembled intermediate microeconomics
texts with topics reworked here and there. Due to the advance of modern management techniques,
the days when this was sufficient are long past. This text goes far beyond current alternatives by
integrating the most important of these advances with the principal topic areas of managerial economics. Perhaps the most significant advance is the use of game theory to illuminate the firm’s
strategic choices. Game theoretic principles are essential to understanding strategic behavior.
An entire chapter (Chapter 10) is devoted to this topic. Other chapters apply the game-theoretic
approach to settings of oligopoly (Chapter 9), asymmetric information and organization design
(Chapter 15), and negotiation (Chapter 16).
A second innovation of the text is its treatment of decision making under uncertainty. Managerial success—whether measured by a particular firm’s profitability or by the international
competitiveness of our nation’s businesses as a whole—depends on making decisions that
involve risk and uncertainty. Managers must strive to envision the future outcomes of today’s
decisions, measure and weigh competing risks, and determine which risks are acceptable. Other
managerial economics textbooks typically devote a single, short chapter to decision making
under uncertainty after devoting a dozen chapters to portraying demand and cost curves as if they
were certain.
Decision making under uncertainty is a prominent part of Managerial Economics, Ninth Edition. Chapter 13 shows how decision trees can be used to structure decisions in high-risk environments. Chapter 14 examines the value of acquiring information about relevant risks, including
competing in high-risk auction and procurement settings. Subsequent chapters apply the techniques of decision making under uncertainty to topics that are on the cutting edge of managerial
economics: organization design and negotiation.
A third innovation is the expanded coverage of international topics and applications. In place
of a stand-alone chapter on global economic issues, we have chosen to integrate international
applications throughout the text. For instance, early applications in Chapters 2 and 3 include
responding to exchange-rate changes and multinational pricing. Comparative advantage, tariffs
and quotas (including an extended discussion of President Trump’s tariffs), and the risks of doing
international business are additional applications taken up in later chapters. In all, 14 of the
17 chapters contain international applications. In short, our aim is to leave the student with a
first-hand appreciation of business decisions within the global economic environment.
A fourth innovation is the inclusion of end-of-chapter spreadsheet problems. In the last
30 years, spreadsheets have become the manager’s single most important quantitative tool. It
is our view that spreadsheets provide a natural means of modeling managerial decisions. In
their own way, they are as valuable as the traditional modeling approaches using equations and
graphs. (This admission comes from a long-ago college math major who first saw spreadsheets as
nothing more than “trivial” arithmetic and a far cry from “true” programming.) Optimization is
one hallmark of quantitative decision making, and with the advent of optimizer tools, managers
can use spreadsheets to model problems and to find and explore profit-maximizing solutions.
A second hallmark is equilibrium analysis. Again, spreadsheet tools allow immediate solutions
of what otherwise would be daunting sets of simultaneous equations.
Spreadsheets offer a powerful way of portraying economic decisions and finding optimal solutions without a large investment in calculus methods. We have worked hard to provide a rich
array of spreadsheet problems in 14 of the 15 principal chapters. Some of these applications
include optimal production and pricing, cost analysis with fixed and variable inputs, competitive
market equilibrium in the short and long runs, monopoly practices, Nash equilibrium behavior,
identifying superior mutual fund performance, and the welfare effects of externalities. In each
case, students are asked to build and analyze a simple spreadsheet based on an example provided for them. In addition, a special appendix in Chapter 2 provides a self-contained summary
of spreadsheet optimization. In short, using spreadsheets provides new insights into managerial
economics and teaches career-long modeling skills.
Organization, Coverage, and Level
This textbook can be used by a wide range of students, from undergraduate business majors in
second-level courses to MBA students and executive program participants. The presentation of all
topics is self-contained. Although most students will have taken an economics principles course in
their recent, or not so recent, past, no prior economic tools are presumed. The presentations begin
simply and are progressively applied to more and more challenging applications. Each chapter
contains a range of problems designed to test students’ basic understanding. A number of problems explore advanced applications and are indicated by an asterisk. Suggested references at the
end of each chapter direct students to extensions and advanced applications of the core topics
presented in the chapter.
Although this text has many unique features, its organization and coverage are reasonably
standard. All of the topics that usually find a home in managerial economics are covered and are
in the usual sequence. As noted earlier, the analytics of profit maximization and optimal pricing
are presented up front in Chapter 2 and the second part of Chapter 3. If the instructor wishes, he
or she can defer these optimization topics until after the chapters on demand and cost. In addition, the book is organized so that specific chapters can be omitted without loss of continuity.
In the first section of the book, Chapters 4 and 5 fit into this category. In the second section of
the book, Chapters 7, 8, and 9 are core chapters that can stand alone or be followed by any combination of the remaining chapters. The book concludes with applications chapters, including
chapters on decision making under uncertainty, asymmetric information, negotiation, and linear
programming that are suitable for many broad-based managerial economics courses.
Analyzing managerial decisions requires a modest amount of quantitative proficiency. In our
view, understanding the logic of profit-maximizing behavior is more important than mathematical
sophistication; therefore, Managerial Economics, Ninth Edition, uses only the most basic techniques of differential calculus. These concepts are explained and summarized in the appendix
to Chapter 2. Numerical examples and applications abound throughout all of the chapters. In
our view, the best way for students to master the material is to learn by example. Four to six
“Check Stations”—mini-problems that force students to test themselves on their quantitative
understanding—appear throughout each chapter. In short, the text takes a quantitative approach
to managerial decision making without drowning students in mathematics.
While continuing to emphasize managerial decision making, the Ninth Edition of Managerial
Economics contains several changes.
First, we have written a new chapter focusing on the economics of non-profit organizations.
Though they are a small fraction of the US economy, non-profits have grown rapidly over the last
thirty years. Eschewing the goal of maximizing profit, non-profits provide significant collective
societal benefits. In this sense, many non-profits occupy a middle ground between the domains of
purely private output and public goods and services. Although such organizations cannot lawfully
distribute profits, they must still be run like a business if they are to be sustainable and survive.
In Chapter 12, we model the economics and operating strategies of non-profit organizations and
contrast them with profit-maximizing firms serving shareholders. We pay particular attention to
how they price their goods and services (including non-price allocation schemes) and how they
use economic methods to enlist charitable donations and support.
Second, we have extensively revised and updated the many applications in the text. Analyzing
the pricing of Amazon’s Kindle; using regression analysis to estimate box-office revenues for film
releases; assessing the impact of OPEC’s oil cartel; analyzing the economic impacts of President
Trump’s trade tariffs; or weighing the challenges of corporate governance in the aftermath of the
financial crisis—these are all important and timely economic applications.
Third, we have highlighted and expanded an applications feature called Business Behavior. The
rapidly growing area of behavioral economics asks: How does actual decision making behavior
and practice compare with the prescriptions of economics and decision analysis? In many cases,
the answer is that decisions rely on psychological responses, heuristic methods, and bounded
rationality as much as on logic and analysis. In almost every chapter, we take deliberate time to
provide an assessment (based on cutting-edge research findings) of real-world decision-making
behavior, noting the most common pitfalls to avoid.
Throughout the text, we have included a wide range of end-of-chapter problems, from basic
to advanced. Each chapter also contains a wide-ranging discussion question designed to frame
broader economic issues. We have also updated each chapter’s suggested bibliographic references,
including numerous Internet sites where students can access and retrieve troves of economic
information and data on almost any topic.
The Ninth Edition examines the economics of information goods, e-commerce, and the
Internet—topics first introduced in previous editions. While some commentators have claimed
that the emergence of e-commerce has overturned the traditional rules of economics, this text
takes a more balanced view. In fact, e-commerce provides a dramatic illustration of the power of
economic analysis in analyzing new market forces. Any analysis of e-commerce must consider
such issues as network and information externalities, reduced marginal costs and transaction
costs, pricing and revenue sources, control of standards, e-commerce strategies, product versioning, and market segmentation, to name just a few topics. E-commerce applications appear
throughout the text in Chapter 3 (demand), Chapter 6 (cost), Chapters 7 and 9 (competitive
effects), and Chapter 15 (organization of the firm).
Finally, the Ninth Edition is significantly slimmer than earlier editions. Inevitably, editions
of textbooks grow longer and longer as authors include more and more concepts, applications,
and current examples. By pruning less important material, we have worked hard to focus student
attention on the most important economic and decision-making principles. In our view, it is better
to be shorter and clearer than to be comprehensive and overwhelming. Moreover, most of the
interesting examples have not been lost, but rather have been moved to the Samuelson and Marks
website at, where they can be accessed
by instructors and students.
Study Guide The student study guide is designed to teach the concepts and problem-solving
skills needed to master the material in the text. Each chapter contains multiple-choice questions,
quantitative problems, essay questions, and mini-cases.
Instructor’s Manual, Test Bank, and PowerPoints The Instructor’s Manual includes suggestions for teaching managerial economics, additional examples to supplement text applications,
suggested cases, references to current articles in the business press, anecdotes, follow-up on
text applications, and answers to the back-of-chapter problems. The test bank contains over
500 multiple-choice questions, quantitative problems, essay questions, and mini-cases.
Respondus Test Bank The test bank is available electronically in Respondus format on the book
companion site.
Online Chapter Chapter 18 (Auctions and Competitive Bidding) is now available on the book
companion site at www.
All instructor materials are available by accessing Wiley’s website at
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In preparing this revision, we have benefited from suggestions from the following reviewers
and survey respondents: Richard Beil, Auburn University; Shawn Carter, Jacksonville State
University; Ann Garnett, Murdoch University; Koushik Ghosh, Central Washington University;
Theodore Groves, University of California–San Diego; Duncan Holthausen, North Carolina State
University; John R. McNamara, Lehigh University; Kofi O. Nti, Pennsylvania State University;
Nicola Persico, University of Pennsylvania; Franklin Robeson, College of William and Mary; Don
Stengel, California State University–Fresno; Charles B. Wagoner, Delta State University; Craig
Walker, Delta State University; Ron Wilder, University of South Carolina, and Chris Woodruff,
University of California–San Diego.
We have also had valuable help from colleagues and students who have commented on parts
of the manuscript. Among them are Alan J. Daskin; Cliff Dobitz, North Dakota State University;
Howard Dye, University of South Florida; David Ely, San Diego State University; Steven Felgran,
Northeastern University; William Gunther, University of Alabama; Robert Hansen, Dartmouth
College; George Hoffer, Virginia Commonwealth University; Yannis Ioannides, Tufts University;
Sarah Lane; Darwin Neher; Albert Okunade, Memphis State University; Mary Jean Rivers, Seattle
University; Patricia Sanderson, Mississippi State University; Frank Slesnick, Bellarmine College;
Leonard Tashman, University of Vermont; Rafael Tenorio, University of Notre Dame; Lawrence
White, New York University; Mokhlis Zaki, Northern Michigan University; and Richard Zeckhauser, Harvard University. Other colleagues provided input on early teaching and research materials that later found prominent places in the text: Max Bazerman, Harvard University; John Riley,
University of California–Los Angeles; James Sebenius, Harvard University; and Robert Weber,
Northwestern University.
In addition, we have received many detailed comments and suggestions from our colleagues at
Boston University, Shulamit Kahn, Michael Salinger, and David Weil. The feedback from students
in Boston University’s MBA and executive programs has been invaluable. Special thanks to Diane
Herbert and Robert Maurer for their comments and suggestions.
Finally, to Susan and Mary Ellen: We cannot thank you enough.
William F. Samuelson
Stephen G. Marks
William F. Samuelson is professor of economics and finance at Boston University’s Questrom
School of Business. He received his BA and PhD from Harvard University. His research interests
include game theory, decision theory, bidding, bargaining, and experimental economics. He has
published a variety of articles in leading economics and management science journals including
The American Economic Review, The Quarterly Journal of Economics, Econometrica, The Journal
of Finance, Management Science, and Operations Research. His teaching and research have been
sponsored by the National Science Foundation and the National Institute for Dispute Resolution,
among others. He currently serves on the editorial board of Group Decision and Negotiation.
Stephen G. Marks is associate professor of law at Boston University. He received his JD, MA,
and PhD from the University of California–Berkeley. He has taught in the areas of managerial
economics, finance, corporate law, and securities regulation. His research interests include
corporate governance, law and economics, finance, and information theory. He has published
his research in various law reviews and in such journals as The American Economic Review, The
Journal of Legal Studies, and The Journal of Financial and Quantitative Analysis.
Jay Zagorsky is a senior lecturer at Boston University’s Questrom School of Business. He
received his PhD and MA in Economics from Boston University. He has worked and consulted
for a variety of high technology companies and served as Economist and Research Scientist for
the US government’s National Longitudinal Surveys. He has published a variety of articles on
personal finance in economics, law, sociology, and psychology journals and has authored two
other textbooks, Business Macroeconomics: A Guide for Managers, Investors and Traders and
Business Information: Finding and Using Data in the Digital Age.
Introduction to Economic Decision Making
2 Optimal Decisions Using Marginal Analysis
Demand Analysis and Optimal Pricing
Estimating and Forecasting Demand
5 Production
Cost Analysis
Perfect Competition
10 Game Theory and Competitive Strategy
11 Regulation, Public Goods, and Benefit-Cost Analysis
12 The Economics of Non-profit Organizations
13 Decision Making under Uncertainty
14 The Value of Information
15 Asymmetric Information and Organizational Design
16 Bargaining and Negotiation
17 Linear Programming
18 Auctions and Competitive Bidding (available online)
Seven Examples of Managerial Decisions,
Six Steps to Decision Making,
Step 1: Define the Problem, 5
Step 2: Determine the Objective, 6
Step 3: Explore the Alternatives, 6
Step 4: Predict the Consequences, 7
Step 5: Make a Choice, 8
Step 6: Perform Sensitivity Analysis, 9
Private and Public Decisions: an Economic View,
Public Decisions, 12
Things to Come, 13
A Simple Model, 18
A Microchip Manufacturer,
Marginal Analysis, 24
Marginal Analysis and Calculus,
Marginal Revenue and Marginal Cost,
Marginal Revenue, 27
Marginal Cost,
Profit Maximization Revisited, 29
Sensitivity Analysis,
Asking What If,
Appendix to Chapter 2: Calculus and Optimization Techniques,
Special Appendix to Chapter 2: Optimization Using Spreadsheets, 50
Determinants of Demand,
The Demand Function,
The Demand Curve and Shifting Demand,
General Determinants of Demand, 57
Elasticity of Demand, 58
Price Elasticity, 58
Factors Affecting Price Elasticity,
Other Elasticities, 61
Price Elasticity and Prediction, 62
Demand Analysis and Optimal Pricing, 63
Price Elasticity, Revenue, and Marginal Revenue, 63
Maximizing Revenue, 66
Optimal Markup Pricing, 67
Price Discrimination,
Information Goods, 72
Appendix to Chapter 3: Consumer Preferences and Demand,
Collecting Data,
Consumer Surveys, 91
Controlled Market Studies, 92
Uncontrolled Market Data,
Regression Analysis, 94
Ordinary Least-Squares Regression,
Interpreting Regression Statistics,
Potential Problems in Regression,
Time-Series Models, 107
Fitting a Simple Trend, 109
Barometric Models, 115
Forecasting Performance, 116
Final Thoughts,
Appendix to Chapter 4: Regression Using Spreadsheets,
Special Appendix to Chapter 4: Statistical Tables, 133
Basic Production Concepts,
Production in the Short Run,
Optimal Use of an Input, 140
Production in the Long Run, 142
Returns to Scale, 142
Least-Cost Production, 143
Measuring Production Functions,
Linear Production, 148
Production with Fixed Proportions,
Polynomial Functions,
The Cobb-Douglas Function,
Other Production Decisions,
Multiple Plants,
Multiple Products, 152
Relevant Costs,
Opportunity Costs and Economic Profits,
Fixed and Sunk Costs,
The Cost of Production, 169
Short-Run Costs,
Long-Run Costs,
Returns to Scale and Scope, 177
Returns to Scale, 177
Economies of Scope, 181
Cost Analysis and Optimal Decisions,
A Single Product, 183
The Shut-Down Rule, 184
Multiple Products,
Appendix to Chapter 6: Transfer Pricing,
The Basics of Supply and Demand, 199
Shifts in Demand and Supply, 201
Competitive Equilibrium, 203
Decisions of the Competitive Firm, 203
Market Equilibrium,