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Managerial Economics 2

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Managerial Economics 2
Chapter 02 - Economists’ View Of Behavior

CHAPTER 2 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

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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

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