Management Question

Business Finance

JWI 515 Managerial Economics

Ottawa University

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I'm working on a management writing question and need support to help me study.

Suppose Nike’s managers were considering expanding into producing sports beverages. Why might the company decide to do this under the Nike brand name?

Please answer the question from Organizational Behavior point of view, assignment should be 1.5 - 2 pages APA format. Site all the references used. Atleast one scholarly journal related to organizational behavior should be used along with the text book.

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Froeb McCann Shor Wa r d fif th e ditio n Managerial Economics A PROBLEM SOLVING APPROACH Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Fit your coursework into your hectic life. Make the most of your time by learning your way. Access the resources you need to succeed wherever, whenever. Study with digital flashcards, listen to audio textbooks, and take quizzes. Review your current course grade and compare your progress with your peers. Get the free MindTap Mobile App and learn wherever you are. Break Limitations. Create your own potential, and be unstoppable with MindTap. MINDTAP. POWERED BY YOU. cengage.com/mindtap Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 fifth edition Managerial Economics A PRO B LEM SOLV ING A P P RO ACH Luke M. Froeb Vanderbilt University Mikhael Shor University of Connecticut Brian T. McCann Vanderbilt University Michael R. Ward University of Texas, Arlington Australia • Brazil • Mexico • Singapore • United Kingdom • United States Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Managerial Economics, Fifth Edition © 2018, 2016 Cengage Learning® Luke M. Froeb, Brian T. McCann, Mikhael Shor, Michael R. Ward Unless otherwise noted, all content is © Cengage Senior Vice President: Erin Joyner copyright herein may be reproduced or distributed in any form Product Director: Jason Fremder ALL RIGHTS RESERVED. No part of this work covered by the or by any means, except as permitted by U.S. copyright law, without the prior written permission of the copyright owner. Product Manager: Christopher Rader Content Developer: Molly Umbarger Product Assistant: Denisse Zavala-Rosales Marketing Manager: John Carey Manufacturing Planner: Kevin Kluck For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com Sr. Art Director: Michelle Kunkler Cover Image: Kamira/Shutterstock Library of Congress Control Number: 2017947785 Intellectual Property Analyst: Jennifer Bowes ISBN: 978-1-337-10666-5 Project Manager: Carly Belcher Art and Cover Direction, Production Management, and Composition: Lumina Datamatics, Inc Cengage Learning 20 Channel Center Street Boston, MA 02210 USA Cengage Learning is a leading provider of customized l­earning solutions with employees residing in nearly 40 different ­countries and sales in more than 125 countries around the world. Find your local representative at www.cengage.com. Cengage Learning products are represented in Canada by Nelson Education, Ltd. To learn more about Cengage Learning Solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com Printed in the United States of America Print Number: 01 Print Year: 2017 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 In loving memory of Lisa, and for our families: Donna, David, Jake, Halley, Scott, Chris, Leslie, Jacob, Eliana, Cindy, Alex, and Chris Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 BRIEF CONTENTS Preface: Teaching Students to Solve Problems SECTION I Problem Solving and Decision Making 1   1 Introduction: What This Book Is About 3   2 The One Lesson of Business 15   3 Benefits, Costs, and Decisions 25   4 Extent (How Much) Decisions 37   5 Investment Decisions: Look Ahead and Reason Back SECTION II Pricing, Costs, and Profits xiii 49 65   6 Simple Pricing 67   7 Economies of Scale and Scope 83   8 Understanding Markets and Industry Changes 95   9 Market Structure and Long-Run Equilibrium 113 10 Strategy: The Quest to Keep Profit from Eroding 125 11 Foreign Exchange, Trade, and Bubbles 137 SECTION III Pricing for Greater Profit 151 12 13 14 SECTION IV Strategic Decision Making 183 15 16 SECTION V More Realistic and Complex Pricing 153 Direct Price Discrimination 163 Indirect Price Discrimination 171 Strategic Games 185 Bargaining 205 Uncertainty 215 17 18 19 20 Making Decisions with Uncertainty 217 Auctions 233 The Problem of Adverse Selection 243 The Problem of Moral Hazard 255 v Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 vi BRIEF CONTENTS SECTION VI Organizational Design 21 22 23 SECTION VII Getting Employees to Work in the Firm’s Best Interests 269 Getting Divisions to Work in the Firm’s Best Interests 283 Managing Vertical Relationships 295 Wrapping Up 24 267 Test Yourself 307 309 Epilogue: Can Those Who Teach, Do? Glossary Index 315 317 325 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 CONTENTS Preface: Teaching Students to Solve Problems SECTION I Problem Solving and Decision Making CHAPTER 1 Introduction: What This Book Is About  3 1.1 Using Economics to Solve Problems 1.2 Problem-Solving Principles 4 1.3 Test Yourself 6 1.4 Ethics and Economics 7 1.5 Economics in Job Interviews 9 Summary & Homework Problems 11 End Notes 13 CHAPTER 2 xiii 1 3 The One Lesson of Business  15 2.1 Capitalism and Wealth 16 2.2 Does the Government Create Wealth? 17 2.3 How Economics Is Useful to Business 18 2.4 Wealth Creation in Organizations 21 Summary & Homework Problems 21 End Notes 23 CHAPTER 3 Benefits, Costs, and Decisions 25 3.1 Background: Variable, Fixed, and Total Costs 26 3.2 Background: Accounting versus Economic Profit 27 3.3 Costs Are What You Give Up 29 3.4 Sunk-Cost Fallacy 30 3.5 Hidden-Cost Fallacy 32 3.6 A Final Warning 32 Summary & Homework Problems 33 End Notes 36 CHAPTER 4 Extent (How Much) Decisions 37 4.1 Fixed Costs Are Irrelevant to an Extent Decision 4.2 Marginal Analysis 39 4.3 Deciding between Two Alternatives 40 38 vii Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 viii CONTENTS 4.4 Incentive Pay 43 4.5 Tie Pay to Performance Measures That Reflect Effort 4.6 Is Incentive Pay Unfair? 45 Summary & Homework Problems 46 End Notes 48 CHAPTER 5 Investment Decisions: Look Ahead and Reason Back 49 5.1 Compounding and Discounting 49 5.2 How to Determine Whether Investments Are Profitable 5.3 Break-Even Analysis 53 5.4 Choosing the Right Manufacturing Technology 55 5.5 Shut-Down Decisions and Break-Even Prices 56 5.6 Sunk Costs and Post-Investment Hold-Up 57 Summary & Homework Problems 60 End Notes 62 SECTION II Pricing, Costs, and Profits CHAPTER 6 Simple Pricing 51 65 67 6.1 Background: Consumer Values and Demand Curves 6.2 Marginal Analysis of Pricing 70 6.3 Price Elasticity and Marginal Revenue 72 6.4 What Makes Demand More Elastic? 75 6.5 Forecasting Demand Using Elasticity 76 6.6 Stay-Even Analysis, Pricing, and Elasticity 77 6.7 Cost-Based Pricing 78 Summary & Homework Problems 78 End Notes 81 CHAPTER 7 44 68 Economies of Scale and Scope 83 7.1 Increasing Marginal Cost 84 7.2 Economies of Scale 86 7.3 Learning Curves 87 7.4 Economies of Scope 89 7.5 Diseconomies of Scope 90 Summary & Homework Problems 91 End Notes 94 CHAPTER 8 Understanding Markets and Industry Changes 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 95 Which Industry or Market? 95 Shifts in Demand 96 Shifts in Supply 98 Market Equilibrium 99 Predicting Industry Changes Using Supply and Demand 100 Explaining Industry Changes Using Supply and Demand 103 Prices Convey Valuable Information 104 Market Making 106 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 CONTENTS Summary & Homework Problems End Notes 111 CHAPTER 9 108 Market Structure and Long-Run Equilibrium 113 9.1 Competitive Industries 114 9.2 The Indifference Principle 116 9.3 Monopoly 120 Summary & Homework Problems 121 End Notes 123 CHAPTER 10 Strategy: The Quest to Keep Profit from Eroding 125 10.1 A Simple View of Strategy 126 10.2 Sources of Economic Profit 128 10.3 The Three Basic Strategies 132 Summary & Homework Problems 134 End Notes 136 CHAPTER 11 Foreign Exchange, Trade, and Bubbles 137 11.1 The Market for Foreign Exchange 138 11.2 The Effects of a Currency Devaluation 140 11.3 Bubbles 142 11.4 How Can We Recognize Bubbles? 144 11.5 Purchasing Power Parity 146 Summary & Homework Problems 147 End Notes 149 SECTION III Pricing for Greater Profit 151 CHAPTER 12 More Realistic and Complex Pricing 153 12.1 Pricing Commonly Owned Products 154 12.2 Revenue or Yield Management 155 12.3 Advertising and Promotional Pricing 157 12.4 Psychological Pricing 158 Summary & Homework Problems 160 End Notes 162 CHAPTER 13 Direct Price Discrimination 163 13.1 Why (Price) Discriminate? 164 13.2 Direct Price Discrimination 166 13.3 Robinson-Patman Act 167 13.4 Implementing Price Discrimination 168 13.5 Only Schmucks Pay Retail 169 Summary & Homework Problems 169 End Notes 170 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 ix x CONTENTS CHAPTER 14 Indirect Price Discrimination 171 14.1 Indirect Price Discrimination 172 14.2 Volume Discounts as Discrimination 176 14.3 Bundling Different Goods Together 177 Summary & Homework Problems 178 End Notes 181 SECTION IV Strategic Decision Making 183 CHAPTER 15 Strategic Games 185 15.1 Sequential-Move Games 186 15.2 Simultaneous-Move Games 188 15.3 Prisoners’ Dilemma 190 15.4 Other Games 195 Summary & Homework Problems 199 End Notes 202 CHAPTER 16 Bargaining 205 16.1 Strategic View of Bargaining 206 16.2 Nonstrategic View of Bargaining 208 16.3 Conclusion 210 Summary & Homework Problems 211 End Note 214 SECTION V Uncertainty 215 CHAPTER 17 Making Decisions with Uncertainty 217 17.1 Random Variables and Probability 218 17.2 Uncertainty in Pricing 222 17.3 Data-Driven Decision Making 223 17.4 Minimizing Expected Error Costs 226 17.5 Risk versus Uncertainty 227 Summary & Homework Problems 228 End Notes 231 CHAPTER 18 Auctions 233 18.1 Oral Auctions 234 18.2 Second-Price Auctions 235 18.3 First-Price Auctions 236 18.4 Bid Rigging 236 18.5 Common-Value Auctions 238 Summary & Homework Problems 240 End Notes 242 CHAPTER 19 The Problem of Adverse Selection 19.1 Insurance and Risk 243 19.2 Anticipating Adverse Selection 243 244 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 CONTENTS 19.3 Screening 246 19.4 Signaling 249 19.5 Adverse Selection and Internet Sales Summary & Homework Problems 251 End Notes 253 CHAPTER 20 250 The Problem of Moral Hazard 255 20.1 Introduction 255 20.2 Insurance 256 20.3 Moral Hazard versus Adverse Selection 257 20.4 Shirking 258 20.5 Moral Hazard in Lending 260 20.6 Moral Hazard and the 2008 Financial Crisis 261 Summary & Homework Problems 262 End Notes 265 SECTION VI Organizational Design 267 CHAPTER 21 Getting Employees to Work in the Firm’s Best Interests 21.1 Principal–Agent Relationships 270 21.2 Controlling Incentive Conflict 271 21.3 Marketing versus Sales 273 21.4 Franchising 274 21.5 A Framework for Diagnosing and Solving Problems Summary & Homework Problems 278 End Notes 281 CHAPTER 22 269 275 Getting Divisions to Work in the Firm’s Best Interests 283 22.1 Incentive Conflict between Divisions 283 22.2 Transfer Pricing 285 22.3 Organizational Alternatives 287 22.4 Budget Games: Paying People to Lie 289 Summary & Homework Problems 291 End Notes 294 CHAPTER 23 Managing Vertical Relationships 295 23.1 How Vertical Relationships Increase Profit 296 23.2 Double Marginalization 297 23.3 Incentive Conflicts between Retailers and Manufacturers 297 23.4 Price Discrimination 299 23.5 Antitrust Risks 300 23.6 Do Buy a Customer or Supplier Simply Because It Is Profitable 301 Summary & Homework Problems 302 End Notes 304 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xi xii CONTENTS SECTION VII Wrapping Up CHAPTER 24 Test Yourself 309 24.1 24.2 24.3 24.4 24.5 24.6 24.7 24.8 307 Should You Keep Frequent Flyer Points for Yourself? 309 Should You Lay Off Employees in Need? 310 Manufacturer Hiring 310 American Airlines 311 Law Firm Pricing 311 Should You Give Rejected Food to Hungry Servers? 312 Managing Interest-Rate Risk at Banks 313 What You Should Have Learned 313 Epilogue: Can Those Who Teach, Do? Glossary Index 315 317 325 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Preface Teaching Students to Solve Problems1 by Luke Froeb When I started teaching MBA students, I taught economics as I had learned it, using models and public policy applications. My students complained so much that the dean took me out to the proverbial woodshed and gave me an ultimatum, “improve customer satisfaction or else.” With the help of some disgruntled students who later became teaching assistants, I was able to turn the course around. The problem I faced can be easily described using the language of economics: the supply of business education (professors are trained to provide abstract theory) is not closely matched to demand (students want practical knowledge). This mismatch is found throughout academia, but it is perhaps most acute in a business school. Business students expect a return on a fairly sizable investment and want to learn material with immediate and obvious value. One implication of the mismatch is that teaching economics in the usual way—with models and public policy applications—is not likely to satisfy student demand. In this book, we use what we call a “problem-solving pedagogy” to teach microeconomic principles to business students. We begin each chapter with a business problem, like the fixed-cost fallacy, and then give students just enough analytic structure to understand the cause of the problem and how to fix it. Teaching students to solve real business problems, rather than learn models, satisfies student demand in an obvious way. Our approach also allows students to absorb the lessons of economics without as much of the analytical “overhead” as a model-based pedagogy. This is an advantage, especially in a terminal or stand-alone course, like those typically taught in a business school. To see this, ask yourself which of the following ideas is more likely to stay with a student after the class is over: the fixed-cost fallacy or that the partial derivative of profit with respect to price is independent of fixed costs. Elements of a Problem-Solving Pedagogy Our problem-solving pedagogy has three elements. xiii Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xiv Preface 1. Begin with a Business Problem Beginning with a real-world business problem puts the particular ahead of the abstract and motivates the material in a straightforward way. We use narrow, focused problems whose solutions require students to use the analytical tools of interest. 2. Teach Students to View Inefficiency as an Opportunity The second element of our pedagogy turns the traditional focus of benefit– cost analysis on its head. Instead of teaching students to spot and eliminate inefficiency, for example, by changing public policy, we teach them to view each underemployed asset as a money-making opportunity. 3. Use Economics to Implement Solutions After you find an underemployed asset, moving it to a higher-valued use is often hard to do, particularly when the inefficiency occurs within an organization. The third element of our pedagogy addresses the problem of incentive alignment: how to design organizations where employees have enough information to make profitable decisions and the incentive to do so. Again, we use the tools of economics to address the problem of implementation. If people act rationally, optimally, and self-interestedly, then mistakes have only one of two causes: either people lack the information necessary to make good decisions or they lack the incentive to do so. This immediately suggests a problem-solving algorithm; ask: 1. Who is making the bad decision? 2. Do they have enough information to make a good decision? 3. Do they have the incentive to do so? Answers to these three questions will point to the source of the problem and suggest one of three potential solutions: 1. Let someone else make the decision, someone with better information or incentives 2. Give more information to the current decision maker 3. Change the current decision maker’s incentives The book begins by showing students how to use this algorithm, and subsequent chapters illustrate its use in a variety of contexts, for example, extent decisions, investments, pricing, bargaining, principal–agent relationships, and uncertain environments. Using the Book The book is designed to be read cover-to-cover as it is short, concise, and accessible to anyone who can read and think clearly. The pedagogy is built around business problems, so the book is most effective for those with some work experience. Its relatively short length makes it reasonably easy to customize with ancillary material. The authors use the text in full-time MBA programs, executive MBA programs (weekends), healthcare management executive programs (one night Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 preface xv a week), and nondegree executive education. However, some of our biggest customers use the book in online business classes at both the graduate and undergraduate levels. In the degree programs, we supplement the material in the book with online interactive programs like Cengage’s MindTap. Complete Blackboard courses, including syllabi, quizzes, homework, slides, videos to complement each chapter, and links to supplementary material, can be downloaded from the Cengage website. Our ManagerialEcon.com blog is a good source of new business applications for each of the chapters. In this fifth edition, we have updated and improved the presentation and pedagogy of the book. The biggest substantive change is to Chapter 17, where we present the decomposition of an observed difference between two groups into a treatment effect + selection bias. Michael Ward has been using this in his classes at University of Texas at Arlington, and rewrote the chapter to include it. We are also beginning work to add interactive “activities” to the electronic text in MindTap, Cengage’s new learning platform. These activities help comprehension, especially for weaker students. In addition, we continue to rewrite and update the supplementary material: videos, worked video problems, and the test bank. In addition to the other updates throughout the text, Chapter 24 has two new sections. We wish to acknowledge numerous classes of MBA, executive MBA, nondegree executive education, and healthcare management students, without whom none of this would have been possible—or necessary. Many of our former students will ...
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