Managerial Economics 2

Topics: Consumer theory, Indifference curve, Economics Pages: 22 (7146 words) Published: June 23, 2013
Chapter 02 - Economists’ View Of Behavior


CHAPTER SUMMARY This chapter uses the cheating scandal at Merrill Lynch to illustrate how a manager’s view of behavior can affect decision making. It summarizes the economic view of behavior and contrasts it with other views. The chapter presents a graphical analysis of utility maximization and decision making under uncertainty. The concepts in this chapter are an important foundation for subsequent material in the book. CHAPTER OUTLINE ECONOMIC BEHAVIOR: AN OVERVIEW Economic Choice Marginal Analysis Managerial Application: Marginal Analysis of Customer Profitability Opportunity Costs Managerial Application: Opportunity Costs and V-8 Creativity of Individuals Managerial Application: Creative Gaming of the System GRAPHIC TOOLS Individual Objectives Indifference Curves Constraints Individual Choice Changes in Choice MOTIVATING HONESTY AT MERRILL LYNCH MANAGERIAL IMPLICATIONS Managerial Application: Medicare Creates Perverse Incentives for Doctors ALTERNATIVE MODELS OF BEHAVIOR Only-Money-Matters Model Happy-Is-Productive Model Managerial Application: Happy-Is-Productive versus Economic Explanations of the Hawthorne Experiments Good-Citizen Model Managerial Application: Culture and Behavior Product-of-the-Environment Model WHICH MODEL SHOULD MANAGERS USE? Academic Application: The Economic Framework and Criminal Behavior Academic Application: Criticisms of the Happy-Is-Productive Model


Chapter 02 - Economists’ View Of Behavior

DECISION MAKING UNDER UNCERTAINTY Expected Value Variability Risk Aversion Certainty Equivalent and Risk Premium Risk Aversion and Compensation SUMMARY APPENDIX: CONSUMER CHOICE Marginal Utility Slope of an Indifference Curve Individual Choice Solving for the Optimal Consumption Bundle Demand Functions Income and Substitution Effects Magnitude of the Substitution Effect Additional Considerations Calculus Derivation of the Equal Marginal Principle TEACHING THE CHAPTER This chapter begins to focus on the economic tools that are used throughout the rest of the text. Depending upon the background of the students who are in the class and the importance of the topic to the overalls goals of the course, instructors will need to spend varying amounts of time on this chapter and will opt to cover the appendix in varying levels of detail. The utility-maximization framework is presented graphically and numerically, with a detailed presentation included in the appendix. Undoubtedly, this concept is the most difficult part of the chapter but this economic model is vital to understand. It is imperative that students not only understand how the tools are used for quantitative and graphical analysis, but also why these tools represent the concepts they are used to portray (such as opportunity cost). The remaining concepts of the chapter are not technical in nature so instructors can make use of the Managerial Applications to generate class discussion of these topics rather than lecturing on them. Alternative views of behavior are presented and their resulting managerial implications can be used for class discussion. The last section of the chapter focuses on how decisions are made when individuals face uncertainty. The Self-Evaluation Problems cover some of the quantitative tools introduced in the chapter, including consumer choice analysis, but there are numerous Review Questions that also cover the quantitative analysis and key concepts. It would be worthwhile to devote time in class to these questions since this chapter is the foundation for many of the chapters that follow.


Chapter 02 - Economists’ View Of Behavior

There are five Analyzing Managerial Decisions Scenarios presented in the chapter. The first scenario, ―Marginal Analysis‖, is based on determining the relevant costs that should be considered when making decisions. The second scenario, ―Consumer Choice and Graphical Tools‖, asks students to...
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