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MGT 822: Managerial Economics for MMHCOwen Graduate School of Management
Vanderbilt UniversityFall Semester 2009
Contact InformationProfessor: Luke Froeb (http://mba.vanderbilt.edu/luke.froeb/) E-mail: [email protected] – this is the best and most efficient way to contact me.Office: (615) 322-9057 Fax: (615) 343-7177TAs:
Burch S. Wood ([email protected])- MMHC lead—contact Burch to set up tutoring or help sessions
Bradford Cayer ([email protected])- MMHC TA
Ankit Gupta ([email protected])- Quiz and Blackboard
Course Goals After completing this class you should be able to:
Use the rational-actor paradigm to predict firm and individual behavior. Compute the relevant costs of any decision. Use marginal analysis to make extent (how much) decisions. Make investment decisions that increase firm value. Set optimal prices and price discriminate. Predict industry-level changes using demand/supply analysis. Develop long-run strategies to increase firm value. Use game theory to predict how your actions influence those of others. Bargain effectively Make decisions in uncertain environments. Solve the problems caused by moral hazard and adverse selection. Align individual incentives with the goals of the company. Align division incentives with the goals of the company. Manage relationships between upstream suppliers or downstream retailers. Identify unconsummated wealth-creating transactions and devise ways to profitably consummate them.
Class Material Froeb, L. M., Managerial Economics: A Problem-Solving Approach, (Cincinnati: Southwestern, 2008).
REQUIRED. This is the text for the class, and corresponds closely to the lectures. Learn this material well. It may seem simple, but the only way to tell if you are keeping up is to do the problems, and then explain the answers to someone else. One of the best ways to understand this material is to explain economic reasoning to others—especially those without an economics background. In previous years’ evaluations, the textbook was regarded as one of the best aspects of the class.
Managerial Economics module of MBA Primer (bundled with textbook: http://v2.MBAPrimer.com/)
REQUIRED. This is a hands-on “how to” primer that teaches the mechanics of costs, demand, marginal analysis, and benefit-cost analysis. There are primers for Financial Accounting, Managerial Economics, Finance, Accounting, and Statistics. Be sure to select MBA Primer Online: Managerial Economics Module Volume 2, 2nd Edition and NOT any of the other primers. Read the material, do the exercises, and take the quiz at the end of each chapter. Repeat the quizzes and review the material until you are comfortable with the concepts and techniques. Quiz yourself using variations of the MBA Primer questions. You are encouraged to discuss the MBA Primer concepts and quizzes with classmates and the TAs. No deliverables are required from the MBA Primer.
When you know the material well, take a similar timed quiz (30 minute limit) on the Blackboard website http://mba.vanderbilt.edu/Intranet/. DO NOT LOG ON TO UNTIL YOU ARE READY TO TAKE THE QUIZ. The Blackboard quizzes count toward your grade and once you log on, you do not get a second chance. The due dates for each quiz are listed in the schedule at the end of this syllabus and on Blackboard.
Managerial Econ, Blog, http://www.ManagerialEcon.com/
REQUIRED. On the right hand side of the blog, below the graphic of the textbook, is a list of the book chapters, with links to the blog entries relevant to each chapter. Keep up with current management issues by reading this blog. Some blog entries will be the basis of in class discussion. Please feel free to post comments and/or discussion points.
James Brickley, Clifford Smith, Jerold Zimmerman, “The Economics of Organizations,” Journal of Financial Economics, Vol. 8:2 (Summer, 1995) pp. 19-31.
REQUIRED. I not only want you to be able to identify profitable decisions using benefit-cost analysis (the main thrust of the course as reflected in course goals), but I also want to make sure that you can implement them within your organization. Identifying profitable decisions without being able to implement them, or implementing decisions without knowing whether they are profitable, are both fruitless exercises. This article provides the basis for our study of behavior within organizations.
Economics Interactive Tutorials (http://hadm.sph.sc.edu/courses/econ/tutorials.html)
RECOMMENDED. While these interactive tutorials have a health care focus, they do an excellent job of introducing basic concepts of economics, especially for students with little background in economics. They are a little easier than the MBAprimer.com. I strongly urge those of you without a strong economics background to go through these. By Samuel L. Baker, Ph.D., Associate Professor, University of South Carolina, Norman J. Arnold School of Public Health, Dept. of Health Administration. These interactive tutorials are great practice for learning the concepts and the quizzes.
Deliverables & Grading
Best 4 of 5 on-line quizzes testing the mechanics of cost/benefit analysis. 20Final Exam covering readings, lecture notes, MBA Primer 35Best 2 of 3 Individual HW’s 104 Group Presentations (slides and memo) applying class ideas to your companies 35My perception of your contribution to the class may also affect grade
Group HW’s:Answer one of the group HW’s at the end of one of the assigned chapters. These are a designed to give you an opportunity to apply the ideas in class to your own companies. Choose a problem at one of your companies that fits the one of the questions at the end of the relevant chapter and answer it by pretending that you are a consultant hired by the company to fix a problem in your company. You analysis should implicitly answer 3 questions:
1. What’s wrong?;
2. How do we fix it?; and
3. How much will the company save by fixing it, compared to either the status quo or another alternative solution. I want a number and backup support for the number.
As professionals, you are all aware of the importance of strong writing skills. Letters, reports, and even short e-mail notes all indicate to others our ability to communicate. Since good writing follows clear thinking, others will form opinions about your ability and work ethic based upon written correspondence. Typographical errors, grammatical errors, misspelled words, or poor diction and an awkward writing style dramatically reduce the impact of your work no matter how good the content.
In particular, avoid “Bureaucratese” (see article by Alfred Kahn on course website), and write in what Eloquence mail (password and link on course website) calls a “Direct, High Impact, and Forceful” style. Both can be found under “Course Material” in the “Syllabus” folder.
Individual HW’s:
Like the Group HW’s, the Individual HW Questions are found at the back of each chapter, and are similar to those that will appear on the Final Exam. To make sure that you understand the material, try these questions on your own. If you cannot do them, you need help in the class. Ask questions in class. Ask questions of your classmates. Explain your answers to your friends or classmates (There is an old saying in economics—you never understand the material unless you can explain it to someone else). You are allowed to discuss the questions with your classmates, but do not look at their written HW. Everything you turn in is to be your own work. Get help from classmates or from class TA’s. If you would like to set up time with a TA to answer any questions you have about the material, please email them directly (copy me on the e mail). Learning this material is hard work, and the only way you can learn it is by doing the questions yourself. If you cannot answer the question in less than 150 words, then you don’t understand the question.
If you have any questions about grades you receive on homework sets or quizzes, you should submit your question in writing to Professor Froeb.
Program Week
Date Required Recommended
1 Aug. 27 Managerial Economics:
Preface: Teaching Students to Solve Problems
1. Introduction: What This Book is
Doti, Capitalism & Greed
Videos:
Chapter 1: Problem Solving with Economics
About
2. The One Lesson of Business
3. Benefits, Costs, and Decisions
MBA Primer:
Introduction: What is Managerial Economics?
1. Using Economics in Management Decisions
Chapter 2: The One Lesson of Business
You must have completed Quizzes 1 & 2 by midnight on Tue. Sept. 1
2 Sept. 3 Managerial Economics:4. Extent (How Much) Decisions5. Investment Decisions: Look Ahead and Reason Back
MBA Primer:2. Understanding the Seller’s Costs
Group HW1(Odd’s present)
Interactive Tutorials:1. Total Cost, Variable Cost, and Marginal Cost
2. Average Cost and the Break-Even Output Rate
Make sure you understand Discounted cash flow and Net Present Value, but also why most companies do NOT use it
You must have completed Quizzes 3 & 4 by midnight on Wed. Sept. 9(Warning: Quizzes 3&4 are more difficult than Quizzes 1&2)
3 Sept. 10 Managerial Economics:6. Simple Pricing7. Economies of Scale and Scope
MBA Primer:3. Understanding the Buyer’s Demand
Group HW1(Evens present)
Interactive Tutorials:3. Marginal Cost and the Price-Taking Firm's Optimal Output Rate4. Demand5. Elasticity6. Elasticity II
Make sure you understand “critical loss” formula in Whole Foods Merger case—this is how companies do marginal analysis of pricing.
You must have completed Quiz 5 by midnight on Wed. Sept. 16
4 Sept. 17 Managerial Economics:8. Understanding Markets and Industry Changes9. Relationships between industries: The forces moving us towards long-run equilibrium10. Strategy, the quest to slow profit erosion
MBA Primer:4. Understanding Markets and Profit Maximizing
Group HW2(Odds present)
Interactive Tutorials:7. Supply, Demand, and Equilibrium
8. Monopoly: Marginal Revenue and the Profit-Maximizing Price and Output Rate
Videos:
Chapter 10: How to Keep Profit from Eroding
5 Sept. 24 Managerial Economics:13. Direct Price Discrimination14. Indirect Price Discrimination
Group HW2(Evens present)
Individual HW 1 due in class
Managerial Economics:11. Using supply and demand: Trade, bubbles, market trading.12. More realistic and complex pricing.
6 Oct. 1 Managerial Economics:15. Strategic Games16. Bargaining Group HW3(Odds present)
Individual HW 2 due in class
Simultaneous game self testhttp://www2.owen.vanderbilt.edu/mike.shor/Courses/game-theory/quiz/quiz1.html
Sequential game self testhttp://www2.owen.vanderbilt.edu/mike.shor/Courses/game-theory/quiz/quiz4.html
Play the repeated prisoners' dilemmahttp://www.gametheory.net/Mike/applets/PDilemma/
7 Oct. 8 17. Making Decisions with Uncertainty19. The Problem of Adverse Selection20. The Problem of Moral HazardGroup HW3(Evens present)
Individual HW 3 due in class
Interactive Tutorials:12. Risk 13. Risk Aversion and Insurance
Managerial Economics:18. Auctions
Online Final Exam: Due Wednesday, Oct. 14 by midnight
8 Oct. 15 21. Getting Employees to Work in the Best Interests of the Firm22. Getting Divisions to Work in the Best Interests of the Firm23. Managing Vertical Relationships24. You Be the Consultant
Group HW4(All groups, both odd and even)
MANAGERIAL ECONOMICS--TABLE OF CONTENTS
1. Introduction: What this book is about
2. The one lesson of business
3. Benefits, costs and decisions
4. Extent (how much) decisions
5. Investment decisions: Look ahead and reason back
6. Simple pricing
7. Economies of scale and scope
8. Understanding markets and industry changes
9. Relationships between industries: The forces moving us towards long-run equilibrium
10. Strategy, the quest to slow profit erosion
11. Using supply and demand: Trade, bubbles, market making
12. More realistic and complex pricing
13. Direct price discrimination
14. Indirect price discrimination
15. Strategic games
16. Bargaining
17. Making decisions with uncertainty
18. Auctions
19. The problem of adverse selection
20. The problem of moral hazard
21. Getting employees to work in the best interests of the firm
22. Getting divisions to work in the best interests of the firm
23. Managing vertical relationships
24. You be the consultant
EPILOG: Can those who teach, do?
