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Managerial Economics

By | September 2012
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Sections 1: Problem Solving and Decision Making
Company wanted to purchase an oil tract. Managers outbid other company by $20 million versus $750,000. Why? Chapter 1 (Page 16) Intro – what the book is about
Problem Solving
Figuring out what is wrong and how to fix it.
Economists unite when it comes to rational-actor paradigm to predict behavior. This paradigm not only helps you figure out why people behave the way they do but also suggests how to motivate them to change. To change behavior, you have to change people’s self-interests; you can do that by changing incentives. Manager’s purchasing of oil reserves was tied to their bonus. Thus, you must fix the problem by better aligning their goals. Difficult to do! Rational, self-interested rational actors make mistakes for one of two reasons: 1. Not enough info to make good decisions

2. Lack incentives to do so
When using rational-actor paradigm, must ask yourself 3 questions: 1. Who is making the bad decision?
2. Does the decision maker have enough information to make a good decision? 3. Does the decision maker have the incentives to make a good decision? Answers to these 3 questions will immediately suggest ways to fix the problem by: Letting someone else make the decision

Giving more info to the decision maker OR
Changing the decision makers’ incentives
Ethics and Economics
Using raiontal-actor paradigm in this way –to change behavior by changing incentives-makes some students uncomfortable because it seems to deny the altruism, affection, and personal ethics that most people use to guide their behavior. These students resist learning the paradigm because they think it implicitly endorses self-interested behavior, as if the primary purpose of economics were to teach students to behave rationally,...

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