9781118041581

How does one explain these conflicts? What is their economic source? What can the parent

and the franchisee do to promote cooperation? (At the conclusion of the chapter, we will revisit the

franchising setting and offer explanations for these conflicts.)

This chapter introduces the analysis of managerial decision making that will

occupy us for the remainder of the book. The chapter is devoted to two man

topics. The first is a simple economic model (i.e., a description) of the private,

profit-maximizing firm. The second is an introduction to marginal analysis, an

important tool for arriving at optimal decisions. Indeed, it is fair to say that the

subsequent chapters provide extensions or variations on these two themes. The

present chapter employs marginal analysis as a guide to output and pricing

decisions in the case of a single product line under the simplest demand and

cost conditions. In Chapters 3 and 4, we extend marginal analysis to the cases

of complex demand conditions, multiple markets, and price discrimination.

In Chapters 5 and 6, we apply the same approach to settings that involve more

complicated production technologies and cost conditions, multiple produc-

tion facilities, and multiple products. In Chapters 7, 8, and 9, we analyze the key

market environments—competition, oligopoly, and monopoly—in which the

profit-maximizing firm operates. Together, these chapters demonstrate the

great power of marginal analysis as a tool for solving complex decisions.

Consequently, it is important to master the logic of marginal analysis at the out-

set. We start with a simple example before turning to the model of the firm.

SITING A SHOPPING MALL

A real-estate developer is planning the construction of a large shopping mall

in a coastal county. The question is where to locate it. To help her in the deci-

sion, the developer has gathered a wealth of information, including the stylized

“map” of the region in Figure 2.1. The county’s population centers run from

west to east along the coast (these are labeled A to H), with the ocean to the

north. Since available land and permits are not a problem, the developer

28 Chapter 2 Optimal Decisions Using Marginal Analysis

FIGURE 2.1

Locating a Shopping Mall

At what site along the

West-East Coast,

running from towns

A to H, should a

developer locate

a shopping mall?

15

East

Number of Customers per Week (Thousands)

Distance between Towns (Miles)

West

A

3.0

10 10 10 5 20 10 15

BCDEX FG H

3.5 2.0 2.5 4.5 2.0 4.5

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