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Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how a firm can make optimal managerial decisions in the face of constraints. The text exhibits four unique features: First, it uses the theory of the firm as the unifying theme to examine the managerial decision-making process. Second, it takes a uniquely global view into managerial economics to reflect the internationalization of tastes, production, distribution and competition in the world today. Third, it introduces many new and exciting topics into the study of managerial economics, such as firm architecture, firm governance and business ethics; Porter's strategic framework and the evolution of the creative firm; electronic commerce and risk management, as well as international economies of scale, the virtual corporation, reengineering, benchmarking, the learning organization, and the digital factory. Fourth, it shows how firms actually reach managerial decisions in the world today with more than 122 real-world case studies (more than any other competitor), as well as 11 more extensive integrating cases studies at the end of each of the five parts of the text. Improvements to the 7th Edition include: · Every chapter has been revised to incorporate the effects of and lessons from the recent global financial crisis. · A new Chapter 2: Demand, Supply and Equilibrium Analysis to help refresh students on the principles of economic analysis they'll need to succeed in managerial economics. The chapter is optional and may be assigned or skipped, as the instructor prefers. · The instructor ancillary package has been greatly expanded and improved, especially for instructors teaching on-line or a hybrid lecture/on-line course. Ancillaries include editable PowerPoints, computerized test bank, on-line study guide, and more. All electronic ancillaries are available to adopters of the text in a format suitable for uploading into their learning management system (e.g., Blackboard, Moodle, Desire2Learn, and others). · Coverage of spreadsheets such as Microsoft Excel has been greatly expanded, with new appendices and spreadsheet-based problems to help students become more adept at using this critical tool. · Nearly one-third of the 122 Case Applications are brand new, while half of the remaining have been updated. Among the new Case Applications are: 1-7, the World Financial Crisis; 3-1, Management Across Countries; 7-7, Open Innovation at Proctor & Gamble; 10-10, The Most Innovative Companies in the World; 13-8, The Microsoft Antitrust Case; 13-11, Corporate Taxes Around the World. · Five longer "Integrating Case Studies" have been added, one at the end of each part: The Decade of Steve, Ford's Bet: It's a Small World After All, e-Books Rewrite Bookselling, How Silicon Valley Conquered the Carriers, and Phone Fight!
Dominick Salvatore is Distinguished Professor of Economics and Business at Fordham University. He is consultant to the Economic Policy Institute (EPI) in Washington, D.C., The World Bank, the International Monetary Fund, the United Nations, and various central banks, multinational banks, and corporations. Dr. Salvatore is the author, coauthor, or editor of 51 books, including International Economics, Tenth Edition (2009), and Microeconomics: Theory and Applications, Fifth Edition (OUP, 2008).
Table of Contents
About the Author Preface 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 Case Study 1-3: 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 1-4: Profits in the Personal Computer Industry 1-5. Business Ethics Case Study 1-5: Business Ethics at Boeing Case Study 1-6: Enron-Andersen and Other Financial Disasters Case Study 1-7: The Global Financial Crisis 1-6. The International Framework of Managerial Economics Case Study 1-8: The Rise of the Global Corporation Case Study 1-9: The Global Business Leader Case Study 1-10: Global Most Admired Companies Case Study 1-11: Terrorism, the World Financial Crisis, and Globalization 1-7. Managerial Economics and the Internet Case Study 1-12: The Most Important Internet Site Addresses for Managerial Economics Summary * Discussion Questions * Problems Appendix: 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? Case Study 2-1: Equilibrium Price by Auction 2-5. Adjustment to Changes in Demand and Supply: Comparative Static Analysis 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 Summary * Discussion Questions * Problems * Spreadsheet Problems Appendix: 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 3-6. Other Management Tools for Optimization 3-7. New Management Tools and Functional Specialization Case Study 3-8: The American Business Model Case Study 3-9: When Governance Rules Fail, Public Trust Is Eroded Case Study 3-10: Management Practices across Countries Summary * Discussion Questions * Problems * Spreadsheet Problems Appendix 1: Optimization Using Spreadsheets Appendix Problem Appendix 2: 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: The Decade of Steve: How Apple's Imperious, Brilliant CEO Transformed American Business The Decade of Steve Apple's Future 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 Case Study 4-2: The Demand for Sweet Potatoes in the United States 4-2. Price Elasticity of Demand Point Price Elasticity of Demand Arc Price Elasticity of Demand Price Elasticity, Total Revenue, and Marginal Revenue Factors Affecting the Price Elasticity of Demand Case Study 4-3: Price Elasticities of Demand in the Real World 4-3. Income Elasticity of Demand 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 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 the Sensor and Mach3 Razors--Two Truly Global Products 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: 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 Consumer Clinics, Case Study 5-1: Micromarketing: Marketers Zero in on Their Customers Market Experiments Virtual Shopping and Virtual Management, Case Study 5-2: Estimation of the Demand for Oranges by Market Experiment 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 Case Study 5-4: Estimation of the Demand for Air Travel over the North Atlantic 5-8. Estimating the Demand for U.S. Imports and Exports 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 Summary * Discussion Questions * Problems Appendix: Regression Analysis with Excel Simple Regression Multiple Regression Analysis Appendix Problems * Supplementary Readings CHAPTER 6. DEMAND FOREuASTING 6-1. Qualitative Forecasts Survey Techniques Opinion Polls Soliciting a Foreign Perspective Case Study 6-1: Forecasting the Number of McDonald's Restaurants Worldwide 6-2. Time-Series Analysis 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 Case Study 6-8: Risks in Demand Forecasting 6-6. Input-Output Forecasting Summary * Discussion Questions * Problems Appendix: 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 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 U.S. 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? The Open Innovation Model Case Study 7-7: Open Innovations at Proctor & Gamble The Next Step in Open Innovation 7-9. Innovation and Global Competitiveness Innovations and the International Competitiveness of U.S. Firms Case Study 7-8: How Xerox Lost and Regained International Competitiveness and Became a Leader in Information Technology The New Computer-Aided Production Revolution and the International Competitiveness of U.S. Firms Case Study 7-9: The New U.S. Digital Factory Case Study 7-10: The Euro and the International Competitiveness of European Firms Summary * Discussion Questions * Problems * Spreadsheet Problems Appendix: 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 Case Study 8-5: The Dell and Other PCs Sold in the United States Are All but American! The New International Economies of Scale Immigration of Skilled Labor 8-7. Logistics or Supply-Chain Management Case Study 8-6: Logistics at National Semiconductors, Saturn, and Compaq 8-8. Cost-Volume-Profit Analysis and Operating Leverage Cost-Volume-Profit Analysis Operating Leverage Case Study 8-7: Breakeven Analysis for Lockheed's Tri-Star and Europe's Airbus Industries 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 Estimating Long-Run Cost Functions with Cross-Sectional Regression Analysis Case Study 8-8: Estimates of Short-Run and Long-Run Cost Functions Estimating Long-Run Cost Functions with Engineering and Survival Techniques Summary * Discussion Questions * Problems * Spreadsheet Problems Appendix: Cost Analysis with Calculus 3 Appendix Problems * Supplementary Readings Integrating Case Study 4: Production and Cost Functions in the Petroleum Industry Integrating Case Study 5: Toyota: The Machine that Ran Too Hot Integrating Case Study 6: Streamlined Plane Making 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 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: 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. March of Global Oligopolists Case Study 10-6: The Globalization of the Auto Industry Case Study 10-7: The Rising Competition in Global Banking Case Study 10-8: The Globalization of the Pharmaceutical Industry 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: 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. Price and Nonprice Competition, Cartel Cheating, and the Prisoners' Dilemma Price Competition and the Prisoners' Dilemma Nonprice Competition, Cartel Cheating, and the Prisoners' Dilemma Case Study 11-3: The Airlines' Fare War 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 Case Study 11-5: Companies' Strategic Mistakes and Failures 11-8. Sequential Games and Decision Trees Case Study 11-6: 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 Case Study 12-3: Kodak Antidumping Disputes with Fuji 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 12-4: Transfer Pricing by Multinationals Operating in Emerging Markets Case Study 12-5: Transfer Pricing by Multinationals in Advanced Countries 12-5. Pricing in Practice Cost-Plus Pricing Evaluation of Cost-Plus Pricing Incremental Analysis in Pricing Case Study 12-6: Incremental Pricing at Continental Airlines Peak-Load Pricing, Two-Part Tariff, Tying, and Bundling Case Study 12-7: Peak-Load Pricing by Con Edison Case Study 12-8: Bundling in the Leasing of Movies Other Pricing Practices Case Study 12-9: No-Haggling Value Pricing in Car Buying Case Study 12-10: Name Your Price at Priceline Summary * Discussion Questions * Problems * Spreadsheet Problems Appendix: Third-Degree Price Discrimination with Calculus Appendix Problems * Supplementary Readings Integrating Case Study 7: eBay and Competition on the Internet Integrating Case Study 8: E-Books Rewrite Bookselling Integrating Case Study 9: The Art of Devising Airfares 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 Case Study 13-4: The Market for Dumping Rights 13-3. Public Utility Regulation Public Utilities as Natural Monopolies 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 Case Study 13-11: Corporate Tax Rates Around the World Case Study 13-12: 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 Business 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 Case Study 14-7: How Foreign Stocks Have Benefited a Domestic Portfolio Case Study 14-8: 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 14-9: Do Golden Parachutes Reward Failure? Auctions Case Study 14-10: 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 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 15-5. Reviewing Investment Projects after Implementation Case Study 15-5: The Choice between Equity and Debt Case Study 15-6: Capital Budgeting Techniques of Major U.S. Firms 15-6. The Cost of Capital and International Competitiveness Summary * Discussion Questions * Problems * Spreadsheet Problems * Supplementary Readings Integrating Case Study 10: How Silicon Valley Conquered the Carriers Integrating Case Study 11: Phone Fight! APPENDIXES Appendix A. Compounding, 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 and dU Appendix D. Answers to Selected (Asterisked) Problems Glossary Subject Index