certain. Probabilistic models identify a range of possible outcomes with
probabilities attached.- The principal objective of management is to maximize the value of the
firm by maximizing operating profits. Other management goals
sometimes include maximizing sales or taking actions in the interests of
stakeholders (its workers, customers, neighbors). The principal objective
of public managers and government regulators is to maximize social
welfare. According to the criterion of benefit-cost analysis, a public
program should be undertaken if and only if its total dollar benefits
exceed its total dollar costs. - Sensitivity analysis considers how an optimal decision would change if
key economic facts or conditions are altered.
Questions and Problems
- What is managerial economics? What role does it play in shaping
business decisions? - Management sometimes is described as the art and science of making
decisions with too little information. What kinds of additional
information would a manager want in the seven examples cited in the
chapter? - Suppose a soft-drink firm is grappling with the decision about whether
or not to introduce to the market a new carbonated beverage with 25
percent real fruit juice. How might it use the six decision steps to guide
its course of action? - Listed here are several examples of bad, or at least questionable,
decisions. Evaluate the decision maker’s approach or logic. In which of
the six decision steps might the decision maker have gone wrong? How
would you respond in the final decision situation?
a. Mr. and Mrs. A recently bought a house, the very first one they viewed.
b. Firm B has invested five years and $6 million in developing a new
product. Even now, it is not clear whether the product can compete
profitably in the market. Nonetheless, top management decides to
commercialize it so that the development cost will not be wasted.
c. You are traveling on a highway with two traffic lanes in each direction.
Usually traffic flows smoothly, but tonight traffic moving in your
direction is backed up for half a mile. After crawling for 15 minutes,
you reach the source of the tie-up: a mattress is lying on the road,
blocking one lane. Like other motorists before you, you shrug and
drive on.
d. The sedative thalidomide was withdrawn from drug markets in 1962
only after it was found to be the cause of over 8,000 birth defects
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