Managerial Economics in a Global Economy / Edition 7

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Reflecting the highly globalized nature of tastes, production, labor markets, and financial markets in today's world, Managerial Economics in a Global Economy, Seventh Edition, is ideal for undergraduate and MBA courses in managerial economics. Thoroughly adopting a global perspective, it synthesizes economic theory, decision science, and business administration studies, examining how they interact as a firm strives to reach optimal profitability and efficiency in the face of modern constraints.


* Integrates examples, data, and theories on the international ramifications of managerial decisions into the entire text, rather than segregating the material in a separate chapter
* Demonstrates how firms actually reach managerial decisions with 122 real-world case studies and 11 more extensive integrating studies, along with additional case studies and applications on the Companion Website
* Prominently features those tools of decision making, such as spreadsheet applications, that are so in demand by students
* Introduces many new and exciting topics, including firm architecture, firm governance, and business ethics; Porter's strategic framework and the evolution of the creative firm; electronic commerce and risk management; and more
* Offers instructors maximum flexibility with a modular structure that is suitable for both full-term and briefer courses, and can be used with or without calculus


* Extensive revisions to every chapter that consider the consequences and lessons of the 2008 global financial crisis
* A new Chapter 2: Demand, Supply, and Equilibrium Analysis, to refresh students on relevant principles of economic analysis
* Expanded coverage of spreadsheets and Microsoft Excel, including new appendices and spreadsheet-based problems in every chapter
* Nearly 80 new or completely updated case studies and 5 new integrating case studies
* An updated and expanded Companion Website at featuring student resources: an online study guide, an extra chapter on linear programming, and additional case studies
* An extensive instructor ancillary package, including online resources, making this text the perfect choice for lecture-based, online, or hybrid managerial economics courses

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Product Details

  • ISBN-13: 9780199811786
  • Publisher: Oxford University Press, USA
  • Publication date: 7/22/2011
  • Edition description: Older Edition
  • Edition number: 7
  • Pages: 784
  • Sales rank: 249,803
  • Product dimensions: 7.80 (w) x 9.40 (h) x 1.30 (d)

Meet the Author

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).

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Table of Contents

About the Author
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
• Discussion Questions
• Problems
Appendix: Solving Managerial Decision Problems Using Spreadsheets
Microsoft Excel
Spreadsheet Problem
• Supplementary Readings
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
• 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
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
Total Quality Management
Case Study 3-4: Benchmarking at Xerox, Ford, and Mobil
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
• 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
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
Case Study 4-11: Amazon Puts an End to eBay Star Performance
• 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
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
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
• Discussion Questions
• Problems
Appendix: Regression Analysis with Excel
Simple Regression
Multiple Regression Analysis
Appendix Problems
• Supplementary Readings
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
• 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
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
• Discussion Questions
• Problems
• Spreadsheet Problems
Appendix: Production Analysis with Calculus
Constrained Output Maximization
Constrained Cost Minimization
Profit Maximization
Appendix Problems
• Supplementary Readings
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 Functons
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
• 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
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
• Discussion Questions
• Problems
• Spreadsheet Problems
Appendix: Profit Maximization with Calculus
Appendix Problems
• Supplementary Readings
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
• 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
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
• Discussion Questions
• Problems
• Spreadsheet Problems
• Supplementary Readings
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
• 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
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
• Discussion Questions
• Problems
• Spreadsheet Problems
• Supplementary Readings
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
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?
Case Study 14-10: Auctioning of the Airwaves
• Discussion Questions
• Problems
• Spreadsheet Problems
• Supplementary Readings
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
• Discussion Questions
• Problems
• Spreadsheet Problems
• Supplementary Readings
Integrating Case Study 10: How Silicon Valley Conquered the Carriers
Integrating Case Study 11: Phone Fight!
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
Subject Index

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