MGT 822: Managerial Economics for MMHC

Owen Graduate School of Management

Vanderbilt University
Fall Semester 2009
Contact Information
Professor: Luke Froeb (http://mba.vanderbilt.edu/luke.froeb/)
E-mail: luke.froeb@owen.vanderbilt.edu – this is the best and most efficient way to contact me.
Office: (615) 322-9057
Fax: (615) 343-7177
TAs:
Burch S. Wood (burch.wood.2010@owen.vanderbilt.edu)
- MMHC lead—contact Burch to set up tutoring or help sessions
Bradford Cayer (bradford.cayer.2010@owen.vanderbilt.edu)
- MMHC TA
Ankit Gupta (ankit.gupta.2010@owen.vanderbilt.edu)
- 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. 20
Final Exam covering readings, lecture notes, MBA Primer 35
Best 2 of 3 Individual HW’s 10
4 Group Presentations (slides and memo) applying class ideas to your companies 35
My 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:

What’s wrong?;
How do we fix it?; and
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 Date Required Recommended

Week
1 Aug. 27 Managerial Economics: Doti, Capitalism & Greed
Preface: Teaching Videos:
 Students to Solve Chapter 1: Problem Solving with Economics
Problems
Chapter 2: The One Lesson of Business
1. Introduction: What
This Book is 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
You must have completed Quizzes 1 & 2 by midnight on Tue. Sept. 1
2 Sept. 3 Managerial Economics: Interactive Tutorials:
4. Extent (How Much) 1. Total Cost, Variable Cost, and Marginal Cost
Decisions
2. Average Cost and the Break-Even Output Rate
5. Investment
Decisions: Look Ahead
and Reason Back
Make sure you understand Discounted cash flow and Net
MBA Primer: Present Value, but also why most companies do NOT use
2. Understanding the it
Seller’s Costs

Group HW1
(Odd’s present)

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: Interactive Tutorials:

6. Simple Pricing 3. Marginal Cost and the Price-Taking Firm's
7. Economies of Scale Optimal Output Rate
and Scope 4. Demand
5. Elasticity
MBA Primer: 6. Elasticity II
3. Understanding the
Buyer’s Demand
Make sure you understand “critical loss” formula in Whole
Group HW1 Foods Merger case—this is how companies do marginal
(Evens present) analysis of pricing.

You must have completed Quiz 5 by midnight on Wed. Sept. 16

4 Sept. 17 Managerial Economics: Interactive Tutorials:

8. Understanding 7. Supply, Demand, and Equilibrium
Markets and Industry
Changes 8. Monopoly: Marginal Revenue and the Profit-
9. Relationships Maximizing Price and Output Rate
 between industries: The
forces moving us Videos:
towards long-run
Chapter 10: How to Keep Profit from Eroding
equilibrium
10. Strategy, the quest
to slow profit erosion

MBA Primer:
4. Understanding
Markets and Profit
Maximizing

Group HW2
(Odds present)

5 Sept. 24 Managerial Economics: Managerial Economics:

13. Direct Price 11. Using supply and demand: Trade, bubbles,
Discrimination market trading.
14. Indirect Price 12. More realistic and complex pricing.
Discrimination

Group HW2
(Evens present)

Individual HW 1 due
in class
6 Oct. 1 Managerial Economics: Simultaneous game self test
15. Strategic Games http://www2.owen.vanderbilt.edu/mike.shor/Courses/game-
16. Bargaining theory/quiz/quiz1.html

Group HW3 Sequential game self test

(Odds present) http://www2.owen.vanderbilt.edu/mike.shor/Courses/game-
theory/quiz/quiz4.html
Individual HW 2 due
in class Play the repeated prisoners' dilemma
http://www.gametheory.net/Mike/applets/PDilemma/
7 Oct. 8 17. Making Decisions Interactive Tutorials:
with Uncertainty 12. Risk
19. The Problem of 13. Risk Aversion and Insurance
Adverse Selection
20. The Problem of Managerial Economics:
Moral Hazard 18. Auctions
Group HW3
(Evens present)

Individual HW 3 due
in class
Online Final Exam: Due Wednesday, Oct. 14 by midnight
8 Oct. 15 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

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?