4 MAKING ECONOMIC DECISIONS
This book is about making decisions.Decision makingis a broad topic, for it is a major
aspect of everyday human existence. This book develops the tools to properly analyze and
solve the economic problems that are commorny faced by engineers. Even very complex
situations can be broken do~. into .c0l!lponents from which sensible solutions are pro-
duced. If one understands the decision-making process and has tools for obtaining realistic
comparisons between alternatives, one can expect to make better decisions.
Although we will focus on solving problems that confront firms in the marketplace,
we will also use examples of how these techniques may be applied to the problems faced in
daily life. Since decision making or problem solving is our objective, let us start by looking
at some problems.ASEA OF PROBLEMS
A careful look at the world around us clearly demonstrates that we are surrounded by a sea
of problems. There does not seem to be any exact way of classifying them, simply because
they are so diverse in complexity and "personality." One approach would be to arrange
problems by theirdifficulty.Simple Problems
On the lowerend of our classificationof problemsare simplesituations.
·Should I pay cash or use my credit card?
· Do I buy a semester parking pass or use the parking meters?
·Shall we replace a burned-out motor?·If we use three crates of an item a week, how many crates should we buy at a time?
These are pretty simple problems, and good solutions do not require much time or effort.
Intermediate Problems
At the middle level of complexity we find problems that are primarily economic.
·Shall I buy or lease my next car?
·Which equipment should be selected for a new assembly line?
·Which materials should be used as roofing, siding, and structural support for a new
building?
·Shall I buy a 1- or 2-semester parking pass?·Which printing press should be purchased? A low-cost press requiring three opera-
tors, or a m9re expensive one needing only two operators?
Complex Problems
At theupperendof ourclassificationsystemwe discoverproblemsthat areindeedcomplex.
Theyrepresenta mixtureofeconomic,political,anqhumanisticelements.·The decision of Mercedes-Benz to build an automobile assembly plant in Thscaloosa,
Alabama, illustrates a complex problem. Beside the economic aspects, Mercedes-
Benz had to consider possible reactions in the American auto industry. Would the