Examination questions

and answer notes

Introduction
The examination questions that follow are actual finals papers from
the Economics course within the B.Sc.Econ. honours degree. Each
paper represents assessment for a one-year course in Managerial
Economics which builds upon a previous course in Microeconomics.
Students are required to answer four questions in three hours.
I am grateful to the University of Wales for permission to
reproduce these papers. They have been included in an attempt to
overcome the artificiality of study questions tacked on to the end of
chapters. The questions are followed by some notes on answers to
guide the student. Remember that in economics examinations there
are no right (or wrong) answers- just answers that gets lots of marks
and those that don't!
Within Cardiff Business School, Managerial Economics is taught
in three courses, two undergraduate as part of the B .Sc.Econ degree
(according to specialism), and one postgraduate (within the M.B.A .
degree) . Papers are taken from the Economics course for conveni-
ence only.

ECONOMICS III 1985

Time allowed - 3 hours

Answer FOUR questions

1. 'The most we can say about the Demand Curve is that it slopes down
unless it slopes up.' Discuss.

332
 Examination questions and answer notes 333

2. Explain the determination of the optimal price and output combina-

tion in a situation of monopolistic competition. Use the resulting
equilibrium to illustrate the statement that 'production inefficiency is
a necessary price to pay for product variety' . Comment on this
statement.
3. Assess the contribution of business games to the study of decision-
making processes, illustrating your answer by reference to one
business game with which you are familiar.
4. 'Given that the future is unknown, the best we can do is to estimate
the likelihood of future events and then use expected profit as the
decision criterion.' Discuss.
5. The senior partner in a local accountancy firm is concerned about the
error rate amongst assessments issued by her office. A careful check
over the past few years enables her to estimate that the error rate has
the following probability distribution:
Error rate Probability
0.05 0.25
0.10 0.35
0.15 0.25
0.20 0.15
Each error costs £40 because of the labour time involved in reassess-
ment. Her firm is just entering the assessment 'season', and is
expected to perform 500 assessments over the next few months.
One way to reduce the error rate is to send all staff to a one-day
training course at the local university- 'Precision in Assessment' . The
university claims this would ensure an error rate of 0.05, but she
considers that an error rate of 0.10 would be equally likely.
The course fee is £700 for all her staff, whilst lost profit from one
day's work missed would be £500. Advise her on whether to send staff
on the course or not.
A careful check of that day's output shows that in ten assessments,
two contained errors. Use this information to update the error rate
probability distribution and hence determine whether your advice
needs amendment.
6. 'The fitting of mathematical trend curves is by far the easiest and
cheapest method of forecasting long-run changes in product demand,
and is likely to be just as reliable as any alternative method. ' Discuss.
7. An engineering firm has applied for patents on two new products and
has just learned that only one application has been successful.
Compare and contrast the optimal pricing and promotional strategies
for each of these new products.
8. Critically examine the view that advertising can be . seen as the
334 Managerial Economics

provision of information valuable to the consumer, for which the

consumer will be prepared to pay extra.
9. (a) Briefly analyse the effect of an increase in interest rates on the
investment portfolio of a profit maximising holding company.
(b) The University is contemplating building a new squash court,
adjacent to its new hall of residence. To secure local support for
its planning application, the University has offered to open the
court to local players at student rates for the first five years.
After five years, the University can charge what it likes for the
courts. Consequently, the University estimates that net revenue
from the court will be £1000 for each of the first five years, rising
by 10% (compounded) in each of the sixth to tenth years. In the
eleventh and twelfth years rising maintenance costs will com-
pletely offset rising fees so that net revenue stays at tenth year
level. At the end of the twelfth year, the site is due for
redevelopment.
The cost of building the squash court is estimated to be £6000.
To finance the court, the University must draw from its re-
serves, currently earning 12% in Local Authority Bonds. Selling
sufficient bonds would involve legal and administrative costs of
£320. Advise the University on the viability of the project. What
other factors should the University take into account?
10. A firm has an annual demand of S units for a good whose purchase
cost is £c per unit. Each order costs £a to place, and the cost of
holding stock is b% of the average value of stock per annum.
Determine the optimal order quantity.
A local firm uses 2000 units of a particular component each year. The
component has a purchase price of £4/unit, while the cost of holding
stock is estimated at 20% of the average stock value. If the cost of
placing each order is £12.50, find the optimal number of orders placed
each year. Suppose the component supplier offers a discount of 2%
on the purchase price if orders are placed in units of 1000. Is the
discount worth accepting?
Suppose that instead of a single figure you had been given a
probability distribution for the number of units used each year.
Indicate the effect on stock policy.

ECONOMICS 1986
Time allowed - 3 hours
Answer FOUR questions
1. Critically assess the view that an understanding of the principles of
'scientific' decision-making is fundamental to the success of a modern
economy.
 Examination questions and answer notes 335

2. (i) Explain the concept of opportunity loss, and show that the
minimum opportunity loss is equal to the Expected Value of
Perfect Information.
(ii) The failure rate in a particular examination is estimated to be
40%. Construct a table showing the probabilities of 0, 1, 2 . . .5
students failing in a sample of five.
(iii) 150 graduate entrants are due to take their first professional
accounting exam at the Institute of Certifiable Accountants.
The probability distribution for the failure rate is estimated in
the following table :
Failure rate Probability
0.1 0.1
0.2 0.2
0.3 0.3
0.4 0.3
0.5 0.1
Each failing student is entitled to a £10 refund on professional
fees. The Institute's senior tutor is confident that she could
ensure a failure rate of 0.1 by holding an intensive revision
course, at a cost to the Institute of £300. Advise the Institute on
whether the revision course should take place.
A tutorial test of five students resulted in no failures. Use this
information to revise the failure rate probability distribution,
and hence reassess the revision course.
3. 'Despite being a small local shopkeeper I can always beat the price
that Woolworths charge for the same product. Woolworths must pay
rent on its store while I own my shop and have no rent to pay.'
Discuss.
4. A firm keeps a record of sales and prices over the past seven months,
resulting in the following table:
Price (£/ton) Sales (tons)
Nov. 1985 7.5 84.5
Dec. 8.0 82.0
Jan. 1986 8.0 84.0
Feb. 7.2 92.0
March 7.0 95 .0
April 8.0 92.0
May 8.5 91.5
Use these observations to estimate demand as a linear function of
both price and time. Utilise this function to estimate demand for the
following month, on the assumption that:
(a) price remains unchanged,
(b) price increases to £9/ton.
336 Managerial Economics

Hence estimate the price elasticity of demand between these prices

and find the price which would maximise sales revenue.
Given the nature of the observations, comment on any difficulties in
interpreting your results for decision-making purposes.
5. Critically assess the methods used to generate empirical estimates of
both short- and long-run cost functions. Do the empirical difficulties
encountered rob the resulting estimates of any general operational
utility?
6. 'About half of all advertising expenditure is wasted. The problem lies
in knowing which half.' Discuss this statement and assess the useful-
ness of managerial models of advertising allocation decisions.
7. Analyse the effects of an increase in interest rates on the investment
activity of a profit maximising firm. Does it matter if inflation
increases in proportion to the increase in interest rates?
8. (a) Show that an increase in the unit value of stock will lead to a less
than proportionate fall in the optimum amount of stock held.
What assumptions underlie your answer?
(b) A firm faces a uniform annual demand of 100 000 units. The
purchase cost of stock is £10 per unit, whilst the cost of ordering
stock is £20, and the cost of holding stock is 14% of the average
stock value. Find the Economic Order Quantity and the Mini-
mum Acquisition Cost.
How are your answers affected by:
(i) the fact it takes two weeks between placing an order and
stock arriving;
(ii) the offer of a 1% discount off the purchase cost if stock is
ordered in lorry loads of 17 000 units.
9. 'The market allocates resources to the firms that best meet the needs
of consumers.' Discuss.
10. 'The force of competition, the desires of managers and the needs of
shareholders combine to ensure that firms maximise profit.' Discuss.

ECONOMICS 1987

Time allowed - 3 hours

Answer FOUR questions

1. 'Statistically we expect that good decisions will lead to favourable

outcomes more often than will either poor decisions, or decisions
reached by default. In a sense, this is a statement of faith on which all
 Examination questions and answer notes 337

rational approaches to human affairs are based' (Amara and Lipins-

ki). Discuss this statement, and assess the value of the analytical
decision approach as an operational tool of management decision-
making.
2. Critically examine the theoretical and empirical validity of the profit
maximisation hypothesis.
3. The Hot-Bake shop sells only bread made that day. Each loaf
produced has a variable cost of 30p and sells for SOp. Any bread
unsold at the end of each day is thrown away.
At the start of each day, the manager must decide how many loaves
to produce. The table below records sales over the past month:
Daily sales Frequency
1000 6
1200 10
1400 10
1600 4
(a) Fixed costs are estimated at £X per day. Find the breakeven
number of loaves produced and sold, and the number if expected
daily profit was £50.
(b) Find the number of loaves produced to minimise expected
opportunity loss.
(c) Bread is produced by a fully automated machine which mixes the
dough, divides it into 1 lb units, fills each baking tin and passes
them through an oven. Out of each batch, some are rejected for
being underweight or burnt.
The proportion rejected has the probability distribution given
below:
Proportion rejected Probability
0.05 0.25
0.10 0.60
0.15 0.15
(i) Find the number of loaves produced if the expected num-
ber of saleable loaves equals your answer to question (b).
(ii) The services of a maintenance engineer would set the
rejection rate equal to 0.05, but would cost £11 per day.
Advise the manager on whether to engage the engineer or
not, if the desired daily production is 1300.
(d) Comment on the assumptions underlying your answers, and
discuss the relevance of other decision criteria.
4. 'Profit is the maximum value a company can distribute during the
year and still expect to be worth as much at the end of the year as it
was at the beginning.' Discuss this statement, and comment on its
value in measuring profit for decision-making.
338 Managerial Economics

5. Cambrian Railways runs a daily container freight train between

Cardiff and Birmingham. Its two major customers are British Steel
and the Welsh Farming Co-operative. The demand for containers by
each customer is given by the equations:
P 1 = 500- 8Q 1 for British Steel
P2 = 400-5Q2 for Welsh farming.
P; is the price charged by Cambrian per container, and Q; is the
number of containers used by each customer.
Cambrian's total cost function is given by the equation:
TC = 10 000+20Q
where Q is the number of containers per trip.
(a) What are the necessary conditions for profitable price discri-
mination by Cambrian?
(b) What profit-maximising rule will Cambrian use if setting prices as
a discriminator? Determine the profit-maximising quantity of
freight service Cambrian will supply, show how this will be
divided between steel and agriculture and find the prices charged
in each market. Calculate Cambrian's total profit.
(c) Assume that Cambrian is prevented by law from price discri-
mination. Determine Cambrian's price and output combination
to maximise profit, and hence estimate the opportunity cost to
Cambrian of the Anti-Price Discrimination law.
6. Define an optimal inventory policy, and assess the impact on that
optimal inventory policy of:
(i) uncertain demand
(ii) uncertain lead times
(iii) customer reactions to product shortages
(iv) an oligopolistic product market.
7. (a) Compare and contrast the explanatory and extrapolatory
approaches to demand estimation. Illustrate your answer with
reference to the problem of estimating demand for a new luxury
food processor.
(b) The Welsh Kitchen Design Company sells its deluxe food proces-
sor for £150/unit. Company experience suggests that both price
and consumer incomes affect sales, with an estimated price
elasticity of demand of -3.0, whilst income elasticity is estimated
at 4.0. In 1986 the company sold one million units, whilst total
consumer disposable income was £600 billion. Estimated con-
sumer disposable income for 1987 is £650 billion.
(i) Assuming price remains the same in 1987, estimate total
sales revenue.
 Examination questions and answer notes 339

(ii) If 1988 consumer income is expected to remain constant at

£650 billion, whilst price is expected to fall by £25, estimate
sales revenue in 1988.
(iii) Estimate sales revenue in 1988 if consumer income rises by
10% between 1987/88, whilst price falls by 15%.
(iv) Use the information above to estimate demand as a linear
function of price and income.
8. 'Despite the theoretical advantages of the discounting procedure,
capital investment was either justified in terms of some "need to
have" case presented by lower management or on the basis of some
elementary payback period calculations." Discuss this conclusion
from an empirical survey of investment decision-making.
9. Explain the inability of economic theory to find satisfactory solutions
to the theoretical problem of price and output decision-making in
oligopolistic markets.
10. 'Advertising in the modern economy has entered the state of persua-
sion as distinct from proclamation or iteration' (Turner). Discuss this
view of advertising in relation to its role in the modern firm, and
explain the determination of an optimal advertising budget.
11. Analyse the effects of an increase in both wage rates and labour
productivity on the costs of the firm.

ECONOMICS 1988

Time allowed - 3 hours

Answer FOUR questions

1. 'Neither empirical evidence nor theoretical logic offers any justifica-

tion for the persistence of the dominant position of the kinked
demand curve as a model of oligopolistic behaviour.' Discuss this
statement, and consider whether alternative models of oligopoly
represent any advance on the kinked demand model. ·
2. Assess the view that privatisation can have little impact on the
behaviour of previously nationalised industries, since a state monop-
oly is simply replaced by a private one.
3. 'Attempting to learn how to make decisions is an exercise in futility.
All the most important decisions are made by people with little time
and even less information, acting on instinct.' Discuss.
4. Critically assess the relevance of the 'as if' principle used to justify the
reliance on profit maximisation as the working objective of the
modern business corporation.
340 Managerial Economics

5. (a) Evaluate the operational utility of demand elasticity estimates,

and outline any interpretational difficulties in the use of such
estimates.
(b) The annual demand function for a particular motor car is
estimated as:
D = 16000-10P/3+ Y2/1000
where D =annual demand, P =price in £'s and Y =average
disposable income.
(i) Given that the retail price next year will be £12 000, whilst
average disposable income is expected to be £8000, esti-
mate next year's annual demand. If the manufacturer
receives 80% of the retail price for each car sold, estimate
the manufacturer's revenue next year.
(ii) Find the retail price to maximise manufacturer's revenue
next year.
(iii) If the marginal cost per car is estimated to be £6000, find
the price to maximise profit next year.
(iv) In the subsequent year the retail price is expected to rise to
£13 000, whilst incomes should increase by 5%. Estimate
demand and manufacturer's revenue for that year, and use
this information to estimate the price and income demand
elasticities.
6. 'There is a simple relationship between advertising and profitability:
the most profitable firms are the ones that advertise most. Therefore
advertising must increase profitability.' Discuss.
7. Critically examine the proposition that as the contemplated future
volume of output increases, the expected unit cost of output declines.
8. Recommend a price and marketing strategy for the established
automobile manufacturer seeking to enter the market for specialist
competition motorcycles. Compare your recommendations to those
for the automobile firm seeking to enter the volume small car market.
9. An engineering firm about to undertake a production run of 2000
items must decide whether to overhaul the production machinery.
Because the machinery is quite old, the cost of an overhaul is
uncertain. However, after the overhaul the failure rate for the
machinery is certain to be 0.01. Without the overhaul, the machinery
has a failure rate with the probability distribution given below. Each
defective item costs the firm £6 in hand finishing.
Failure rate Probability
0.01 0.5
0.02 0.2
0.03 0.1
0.04 0.1
0.05 0.1
 Examination questions and answer notes 341

(a) Find the expected cost of overhaul that would make the risk-
neutral decision-maker indifferent between overhauling or not.
(b) The decision-maker decides to seek further information. Contact
with the machinery supplier suggests an overhaul is equally likely
to cost either £175 or £225, depending on the problems encoun-
tered. Moreover a sample run of 10 items is produced, resulting
in 2 defectives. Use this new information to re-assess the
overhauling decision.
(c) How would the decision be influenced by:
(i) the firm's precarious financial position;
(ii) the knowledge that the machinery is to be scrapped after
the next production run.
10. 'Opportunity cost is both subjective and speculative. As such the
concept of opportunity cost has no place in the scientific decision-
making process.' Discuss.
11. (a) Briefly explain the significance of the firm's cost of capital. What
are the factors determining that cost of capital, and how can that
cost be estimated?
(b) Given that debt finance is generally cheaper than equity finance,
explain why the firm is unlikely to use solely debt finance to fund
expansion.
(c) A commodity broker is contemplating the acquisition of a new
computer-driven management information system (MIS) . The
hardware for this would cost an initial £4 million, whilst software
and staff training would cost £1 million for each of the first two
years operation, and £200 000 per year thereafter. After six
years, the system would be due for replacement. However
scrapping the current (manual) system would save staff costs of
£1.5 million each year.
To finance the new investment the broker would use a combina-
tion of debt and equity capital in the ratio 1:3. The broker can
borrow at an interest rate of 10%, whilst interest paid can be set
against the corporation tax liability (currently taxed at 30%).
The broker is a listed company with a current share price of
£3 .00, and current dividend of 15 pence. Over the period the
share price is expected to grow at an annual rate of 6%.
Use the above information to evaluate investment in the new
MIS, finding the net present value and internal rate of return on
that investment.
What other factors should the decision-maker take into account?
342 Managerial Economics

Answer notes
The answer notes that follow are a brief guide to the relevant question, and
in no sense represent full or adequate answers to these questions.
The key to examination success is a series of carefully planned and
executed answers that provide the examiner with the information required.
It is essential that the student preparing for examinations practises
answering questions within the defined time limits. It is a sad experience
for an examiner to meet a paper where the student has only answered three
questions because of time, matched only by the experience of a paper
where five questions have been answered. Please read the preamble to the
questions, and understand what is required.

Economics 1985
1. Questions 1 and 2 are a 'spillover' from the previous year's course,
and should only be answered when all else fails.
2. Without attending the course, and participating in a business game, it
would be most unwise to answer this question.
4. This question requires a careful definition of uncertainty and explana-
tion of the techniques used to make decisions under uncertainty. It is
difficult to argue against the need to make probability estimates in the
face of uncertainty, but caution needs to be expressed about the
methods available. Expected profit requires definition and considera-
tion as a decision objective, pointing out the circumstances in which it
is appropriate (small sums of money or linear utility functions and
repetitive decisions) and evaluating alternative criteria. Refer to
Chapter4.
5. Explain the criteria of minimising expected cost, and apply it to this
problem. Calculate the expected cost with and without the revision
course. Note that 'equally likely' implies a probability of 0.5 to each,
so that the expected failure rate after the course is
(0.05 X 0.5) + (0.10 X 0.5) = 0.075.
Then calculate the likelihood of two fails in a sample of 10 using the
Binomial distribution and combine with the prior probabilities using
Bayes Theorem to find posterior probabilities. Use these posterior
probabilities to determine whether the course should run, using
expected cost or opportunity loss as the decision criteria.
List the assumptions made to answer the question, and assess their
relevance in these circumstances. Refer to Chapter 4.
6. Examine the methods available for demand estimation, comparing
and contrasting the explanatory and extrapolatory approaches. Dis-
cuss the decision about resources to be devoted to demand estima-
tion, primarily determined by the use to which forecasts are to be put.
Explain what is meant by forecast reliability, and how this can be
 Examination questions and answer notes 343

estimated prior to forecast use. Refer to Chapter 5 and especially

Application 5.
7. Explain what is meant by a new product, carefully defining the
concept of 'newness' , and examine the cost and demand estimation
problems surrounding new product pricing. Analyse the importance
of the competitive environment, and explain the factors determining
whether a 'skimming' or 'penetration' policy should be used, using
the example given in the question, and its implicit emphasis on the
importance of entry conditions. Refer to Chapters 8 and 9.
8. Examine the role and consequences of advertising, contrasting the
market expansion and redistributional implications of advertising.
Outline the model of advertising as information, and consider the
circumstances in which advertising information reduces the cost of
search to the consumer. Refer to Chapter 10.
9. (a) The model outlined in Chapter 13 can be used to analyse the
effects of an increase in interest rates, but note the qualifications
to the model when compared to the evaluation methods encoun-
tered in practice.
9. (b) First explain the DCF and/or internal rate of return methods of
investment appraisal, and then use discounting to evaluate the
cash flow generated by the squash court. Note the other
considerations the University is likely to take into account.
(N.B. The Net Present Value of the project at 12% is £852.59,
whilst the IRR is 14.6% .) What is assumed about inflation and
the attitude towards risk?
10. The first part of the question requires a simple determination of the
economic order quantity, either by equating the rise in holding costs
to the fall in order costs, or by defining a total cost function and then
minimising it. Note the assumptions made.
The second part of the question requires application of that model,
and the fact that if K x E. 0. Q. is ordered, inventory costs rise by
(K-1?
2K xM.A.C.

Hence compare the rise in inventory costs to the value of the

discount.
A probability distribution of demand requires that inventory be
adjusted according to the costs of running out of stock. The analysis
used will depend on the information available and the cost of making
mistakes (sensitivity analysis) . Refer to Chapter 11.
344 Managerial Economics

Economics 1986
1. A question to be avoided if at all possible! If you must answer it,
explain what is meant by scientific decision-making, by expanding the
framework for decisions encountered in Chapter 1, and then provid-
ing a critique of this, noting the apparent ability of many decision-
makers to 'manage' outside this framework. Refer to Chapters 1
and4.
2. (a) Define opportunity loss (not opportunity cost!) and EVPI. If
opportunity loss is defined as the benefit forgone by not
making the best possible decision, and EVPI is the difference
between the best possible decision and the performance best
achieved without perfect information, it should be easy to show
min EOL = EVPI.
Note a simple example would help.
(b) this is a simple application of the Binomial distribution, with
P(X = x) = 5 Cx(0.4Y(0.6) 5 -x
(c) refer to Chapter 4, pages 85-9. Note the similarity!
3. This question involves the careful definition of implicit and explicit
costs, and is best answered by defining profit as the surplus over
opportunity cost. From an economic view there is little difference
between owning and renting the store, since opportunity costs are
likely to be similar. See Chapter 3.
4. The question involves estimating the parameters of the equation
D, = a+bP+ct
Given lots of time and some computational ability, a, band c can be
estimated by linear regression. In the absence of either, substitution
is an acceptable method if the relevant assumptions are made explicit.
Note that if November is assigned a time value of 1, December 2,
etc., then in April t = 8.
Then estimate elasticity using the arc formula:
!!lD P1 + P2
Ep=-·
!!lP D1 + D2
Sales revenue can be maximised either by finding the total revenue
function (when t = 8) and then differentiating and setting =0, or by
finding the price at which point elasticity = -1.
Note that the method used combines both explanatory and extrapola-
tory approaches and is liable to the problems inherent in each. See
Chapter 5.
5. Explain the short- and long-run cost function C = f(Q), and note the
limitations of each (e.g. dimensions of output). Consider the com-
 Examination questions and answer notes 345

putational and data problems associated with each, referring to

examples. For what decisions are cost functions necessary? Finally,
note that 'it is better to be vaguely right than precisely wrong'. Refer
to Chapter 7.
6. Note that the quotation is reproduced in Chapter 10. Consider the
methods available for determining the advertising budget, ranging
from marginalism through the informational approach to the Dorf-
man-Steiner model. Contrast these with the more pragmatic
approaches encountered in practice. See Chapter 10.
7. Refer to Q9, 1985 and answer notes. Analyse the effects of an
increase in interest rates via the allocation of funds model and the
discounting approach. Explain the effects of inflation on the discount-
ing approach, noting the consistency required.
8. (a) First derive the economic order quantity, and then illustrate the
appropriate sensitivity results, if necessary reproducing the
relevant diagram from Chapter 11. Outline the assumptions
made, and consider their relevance.
(b) Apply the model generated in part (a), and then
(i) show that an order would simply be placed when stock falls
to two weeks worth (since demand is uniform). Briefly
outline the consequences if 'two weeks' is an uncertain
parameter.
(ii) compare the savings from the discount with the increase in
inventory costs as a consequence of ordering beyond the
E.O.Q.
9.} Refers to the first year of the course, and should be avoided, although
10. Chapter 3 may provide a basis for answering Q.lO.

Economics 1987
1. A question about the basic philosophy of scientific decision-making,
to be answered only as a last resort! If you must answer the question,
do so analytically, by expounding a scientific framework for deci-
sions, and then examining the circumstances in which that framework
may (or may not) improve the decision process. See Chapters 1 and 4.
2. Explain the profit maximisation hypothesis, and briefly outline the
price/output decision model with profit as the objective. List the
theoretical arguments against this, including informational difficul-
ties, the weakening of competition and the divorce of ownership and
control. Finally explain the empirical evidence: do firms maximise
profits, either by accident (as if) or by design? This question is not an
opportunity to parade a summary of alternative models.
3. This question is a relatively simple application of the 'Newsboy
346 Managerial Economics

Problem', with one or two little twists. Part (a) is answered by using
the formula:

B rea keven -_ p . Fixed

M .
costs
nee - argma1 cost
To answer part (b), find the opportunity loss corresponding to each
combination of act and event (production or demand equal to 1000,
1200, etc.). Then convert the frequency to a probability distribution,
and find the action to minimise opportunity loss.
The answer to part (c) requires the use of the failure rate probability
distribution so that the expected number of saleable loaves is 1200.
The expected failure rate is 0.095, so 1326 must be produced to give
an expected 1200 saleable loaves (1326 x 0.905 = 1200).
Then the expected cost of producing 1300 (saleable) loaves must be
calculated with or without the overhaul, to see if the expected savings
from overhaul exceed the £11 per day the engineer would cost.
Finally , marks would be wasted by omitting part (d).
4. This is a straightforward question, looking at the Hicksian definition
of profit and its relevance for decision-making purposes. Is this
definition useful in practice? See Chapter 3.
5. Profitable price discrimination requires that markets be separable and
have differing price elasticities of demand. Answers to parts (b) and
(c) can be found either graphically or mathematically. Personally I
prefer to use the mathematical approach, since graphs need to be
drawn with considerable precision. In either case, find aggregate
demand and therefore marginal revenue, and set equal to aggregate
marginal cost to find total output (and price in the absence of price
discrimination) . Then set individual marginal revenue equal to mar-
ginal cost to find price in each market. The opportunity cost (to the
firm) of the law is just the difference in profits with and without price
discrimination.
6. An optimal inventory policy is one that minimises the sum of stock
purchase and acquisition (holding, ordering and stock-out) costs. It is
easy to show that under carefully defined circumstances this occurs
when the marginal increase in holding costs equals the marginal fall in
order costs. However each of the specified conditions deviates from
these circumstances, and has implications for an optimal stock policy.
For example uncertain demand introduces the possibility of profitable
sales forgone, and thus increases the average stock level.
7. Outline the explanatory and extrapolatory methods, listing the
benefits/disadvantages of each, and show how each could be used to
estimate demand for the new food processor. Note that past experi-
ence may not be much of a guide if the new processor has special
characteristics.
 Examination questions and answer notes 347

Answering part (b) requires that differing price and income values be
used with the elasticity estimates to estimate sales revenue under
different conditions.
The answers (i) to (iii) generate enough information to set up
simultaneous equations that can be used to answer (iv).
8. Explain what is meant by the discounting approach to investment
appraisal, and contrast this to more ad hoc methods such as payback.
Show that there may be circumstances where information is inade-
quate for discounting, and where other methods more adequately reflect
the firm's objectives. Finally discuss the empirical evidence (which
seems to point to the use of other methods in smaller companies, but
that discounting is increasingly used by large corporations).
9. This question is a spillover from the previous course, although
Chapter 8 might help towards an answer.
10. A difficult question that asks you to judge the effects of advertising in
shifting the demand curve. Whether adverts are persuasive or in-
formative is a matter of psychological judgement: whether advertising
shifts the demand curve is a matter of empirical observation. The
determination of an optimal advertising budget requires a compari-
son of the costs and benefits of advertising that may proceed in a
number of ways, from marginalism through the Dorfman-Steiner
theorem to an informational approach.
11. Another spillover from microeconomics, although Chapter 7 may
help. Basically the answer involves the factors that determine costs,
and the relation of these particular circumstances to the general
theory. The net effects depend on whether the increase in labour
productivity outweighs the increase in wages, together with any
substitution effects.

Economics 1988
1,2. Both ofthese questions reflect the earlier (microeconomics) course, and
should only be answered when all else proves impossible.
3. The evidence that very good decisions are made by some people with
no reference to any decision model is not a refutation of that model.
Bad decisions are also made by not using any decision model, or by
using a model badly. The issue is really whether using a relevant
decision model in a consistent and sensible way leads to decisions that
are, on average, better than the alternatives. In the absence of
reliable data, this remains a matter of belief rather than fact, although
it is interesting that talking through the decision process with
managers often reveals a process that is consistent with the decision
model i.e. objectives are stated, alternatives considered, etc., even
though this process is more implicit than explicit.
348 Managerial Economics

4. The question is really whether firms behave as if they maximised

profit, even though this may not be an explicit process. Arguments in
favour include the efficient markets hypothesis, the force of competi-
tion, and the self-interest of managers. Unfortunately the same
arguments can be used against 'as if', i.e. that efficient markets
requires unreal assumptions, that competition is weak enough to
allow managers discretion, and that it is in the managers' interests to
exercise such discretion. Related arguments include whether actual
objectives are a compliment or substitute for profit. A full answer
would include an outline of the profit maximisation model together
with a summary of alternatives.
5. How useful are elasticity estimates, and how easy are they to make?
Clearly price, output and advertising decisions each require some
assessment of the impact of relevant variables upon demand, which is
precisely what we mean by elasticity.
The numerical parts of the question are the straightforward matter of
substituting numbers into the demand equation, and using the
resulting answers. Note that revenue is maximised either when
marginal revenue equals zero, or when price elasticity equals minus
one.
6. The relationship between advertising and profitability is a complex
matter of sorting out causation. It is equally possible that increasing
profitability leads to increased advertising. Basically a good answer
would look at why advertising may increase profits (by shifting the
demand curve), and note that advertising may be carried on beyond
this point (so that the marginal cost of the last advert exceeds
marginal revenue). Note also that other objectives may be important,
for e.g. the sales maxiiniser advertises more than the profit maxi-
miser. Finally the empirical evidence is less than clear, but should be
outlined.
7. This question relates to Alchian's definition of the dimensions of
output and the impact of each upon costs. A greater contemplated
volume of output may be associated with different technologies,
methods of production, etc., although not without limit. A full
discussion of economies of scale is only tangentially relevant to this
question.
8. These market-entry situations differ in the amount of production and
market knowledge available, and the likely extent of economies of
scale, differing elasticities, etc. Basically the market situation is such
that a skimming price policy is likely in the competition motorcycle
market, whilst a penetration price policy is more likely in the volume
small car market. See Chapter 9.
9. This is a simple 'newboy problem', and is readily answered using the
techniques of Chapter 4. Note that the expected cost of overhaul is
£200. Part (c) is concerned with the attitude towards risk, and its
impact on the decision.
 Examination questions and answer notes 349

10. This is an awful question, where sustained 'waffling' produced few

marks. Clearly opportunity cost is both speculative and subjective,
and occupies a fundamental position in rational decision-making.
Basically the question confuses scientific with precise . A scientific
decision approach requires that the likely consequences of any action
be compared to the next best alternative . Knowing that this calcula-
tion cannot be precise doesn't detract from its validity .
11. The firm's cost of capital is the opportunity cost of investment, and
depends upon the source of funds (equity or debt). Each has implicit
and explicit costs that must be estimated before an investment can be
evaluated.
The numerical part of the question requires the cash flows to be
estimated and then discounted using the estimated cost of capital
obtained by the combined weighting of debt and equity. Note that the
costs of the manual system must be subtracted from the MIS costs to
find net savings to be discounted.
Other factors include attitudes towards risk, the differing attributes of
the two systems and any non-pecuniary considerations.
Notes and References

Chapter 1
1. S. Hull and P. Blyton (1985) 'The Practice of Decision-making- Some
Evidence', Managerial and Decision Economics, December.
2. The same approach appears in the literature in a variety of guises. One
interesting (and often humorous) introduction is J. D. Bransford and
B.S. Stein (1984) The Ideal Problem Solver (New York: W. H.
Freeman).

Chapter 2
1. This is actually a necessary but not sufficient condition for maximum
profit. Certain conditions about the nature of the cost and revenue
functions must also be satisfied.
2. For the mathematically initiated,
TC
AC = Q so that TC = AC X Q
MC= dTC/dQ
Therefore
MC = AC . dQ/dQ+ Q. dAC/dQ
MC=AC+Q. dAC/dQ
Now dAC/dQ is just the rate of change of average cost. If AC is falling,
Q. dACidQ is negative, and MC<AC.
3. A linear equation is of the form y =ax+ b, and a and bare constants.
This equation describes a straight line when plotted, with intercept b
and slope a.
4. Unless the slope of the constraint coincides with the slope of the
objective function, in which case the appropriate corner solution must
be as profitable as any point along the constraint.
5. Readers with a burning desire to follow the Simplex method can find it
explained in chapter 12 of J. Gough and S. Hill (1979) Fundamentals of
Managerial Economics (London: Macmillan).

350
 Notes and References 351

6. In the expression for y, a is called the co-efficient and b the exponent.

The derivative of y is then the exponent times the co-efficient times x to
the power of the exponent minus 1. This is the golden rule for
differentiation, and needs engraving on your heart.
7. One of the assumptions of classical optimisation is that the relevant
function is differentiable and therefore continuous. The number of
engineers is discrete rather than continuous - it is difficult to envisage
5.85 engineers, for example. Once again, calculus can only be used with
considerable caution!
8. Appendix 2C uses the second order conditions to show that K = 4/3,
L = 5/3 is indeed a maximum for Q.
9. This is generally, but not universally, true. However, this assumption is
necessary to make the constraint an equality condition.

Chapter3
1. Joel Dean (1951) Managerial Economics (Englewood Cliffs, NJ:
Prentice-Hall), p. 3.
2. Ibid., p. 260.
3. The economist usually denotes profit by 1r (Greek pi). This is used in
preference to the more obvious notation P, because Pis reserved for
price.
4. The process of discounting is extended in Chapter 13.
5. The symbol I (capital Greek sigma) is used to denote the sum of an
n
expression. Thus I X; is the sum of all the x values from x 1 to Xn·
i=l
6. J. R. Hicks (1946) Value and Capital, 2nd edn (Oxford: OUP), p. 172.
7. The situation is analogous to student assignments. Students often
claim that their objective is to maximise marks. But maximum marks
would require continuous and concentrated effort over the assignment
period. Hence, a trade-off is made between marks and effort that is
unlikely to result in maximum possible marks.
8. The shape of these functions is examined in later chapters.
9. The profit maximising output was derived in Chapter 2 as the point
where MC =MR. Note that MCIMR are the slopes of TCITR respec-
tively, and that output Q satisfied this condition.
10. W. J . Baumol (1967) Business Behaviour, Value and Growth, revised
edn (New York: Harcourt, Brace and Wold) .
11. See A. Koutsoyiannis (1979) Modern Microeconomics, 2nd ed. (Len-
don: Macmillan), chapter 15.
12. R. L. Marriss (1963) 'A Model of the Managerial Enterprise', Quarter-
ly Journal of Economics, vol. 77, pp. 185-209.
13. 0. Williamson (1963) 'Managerial Discretion and Business Be-
haviour', American Economic Review, December; reprinted in M. Gil-
bert (ed.) (1973) The Modern Business Enterprise (London: Penguin) .
352 Managerial Economics
14. See, for example, G. H. Rice (1980) 'But How Do Managers Make
Decisions?', Management Decisions, vol. 18, part 4.
15. The progenitor of this approach was Herbert Simon. See especially
H. A. Simon (1955) 'A Behaviour Model of Rational Choice',
Quarterly Journal of Economics, February.
16. R. Cyert and J. March (1963) A Behavioural Theory of the Firm
(Englewood Cliffs, NJ: Prentice-Hall).
17. This application is derived from S. P. Neun and R. E . Santerre (1986)
'Dominant Stockownership and Profitability', Managerial and Deci-
sion Economics, vol. 7 (3), pp. 207-10.

Chapter4
1. The source of Figure 4.1 is S. Hill (1986) 'Decision Making Under
Uncertainty - The Divergence Between Theory and Practice', in
S. Jones (ed), Modelling Uncertainty (Fulmer, Hilger).
2. This also assumes that previous stock was always sufficient to meet
demand. The sensible decision-maker would, in addition, use his
experience of any particular circumstances (such as a TV advertising
campaign) to adjust this probability estimate.
3. Given perfect predictive powers, if the probability estimates are cor-
rect, 25 per cent of the time demand of 20 would be predicted, 50 per
cent of the time demand of 30 would be predicted, etc.
4. Ira Horowitz (1972) An Introduction to Quantitative Business Analysis
(Tokyo: McGraw Hill), pp. 57-8.
5. Note also that for individual B, the marginal utility of money (8u/8£) is
decreasing.
6. Derived from D. Bunn and H. Thomas (1977) 'J. Sainsbury and the
Haul of Contraband Butter' , reprinted in G . Kaufman and H. Thomas
(eds) Modern Decision Analysis (Harmondsworth: Penguin), pp. 260-
8.
7. A Poisson distribution is described by the formula
p(X = x) = rre-xlx! where a is the mean and e the natural exponent
(= 2. 718), and is discussed more fully in Chapter 11.
8. Bunn and Thomas, 'J. Sainsbury and the Haul of Contraband Butter',
p. 267.

ChapterS
1. For a more comprehensive explanation, see D. Salvatore (1986) Mic-
roeconomics: Theory and Applications (New York: Macmillan),
pp. 108-23.
 Notes and References 353

2. H. S. Houthaker and L. D. Taylor (1970) Consumer Demand in the

United States (Cambridge, Mass.: Harvard University Press).
3. Ibid.
4. See, for example, S.C. Wheelwright and D . G. Clarke (1976) 'Corpo-
rate Forecasting: Promise and Reality', Harvard Business Review,
vol. 54, December.
5. The classic reference is E. J. Working (1927) 'What Do Statistical
Demand Curves Show?', Quarterly Journal of Economics, vol. 41 ,
February, pp. 212-35 .
6. T . H. Naylor (1981) 'Experience with Corporate Econometric Models:
A Survey' , Business Economics, vol. 16, January, pp. 79-83.
7. Fujii, E. T. (1980) 'The Demand for Cigarettes: Further Empirical
Evidence and Its Implications for Public Policy' , Applied Economics ,
vol. 12, pp. 479-89.
8. It is assumed that the dummy variables each have a value of 1 for 1974.
9. Data were obtained from the CSO Monthly Digest of Statistics, pub-
lished by HMSO.

Chapter6
1. N. Chacholiades (1986) Microeconomics (New York: Macmillan),
p.173.
2. A curve is convex to the origin if the straight line between any two
points on the curve lie above that curve.
3. It is possible that the slope of the isocost may coincide with the slope of
the isoquant. However, even in this case, production at the corner point
will be at least as inexpensive as production anywhere along that
segment of the isoquant.
4. D. J. Pearl and J . L. Enos (1975) 'Engineering Production Functions
and Technological Progress', Journal of Industrial Economics, vol. 24,
September, pp. 55-72.

Chapter7
1. J. Dean (1951) Managerial Economics (Englewood Cliffs, NJ: Pren-
tice-Hall), p. 271.
2. A. A. Alchian (1973) 'Costs and Outputs', in M. Abramovitz (ed.)
The Allocation of Economic Resources (Stanford: Stanford University
Press, 1959), reprinted in H. Townsend (ed.) Price Theory
(Harmondsworth: Penguin, 1973), pp. 228-49.
3. J. Dean (1951) Managerial Economics, p. 253.
4. U. E. Reinhart (1973) 'Break-Even Analysis for Lockheeds Tri Star:
An Application of Financial Theory', Journal of Finance , vol. 28,
September, pp. 821-38.
354 Managerial Economics

5. J. Dean (1951) Managerial Economics .

6. J. Johnson (1960) Statistical Cost Curves (New York: McGraw-Hill).
7. A . A. Walters (1963) 'Production and Cost Functions: An Eco-
nometric Survey' , Econometrica , vol. 31, January, pp. 42-50.
8. V.Gupta (1968) 'Cost Functions, Concentration and Barriers to Entry
in Twenty-Nine Manufacturing Industries of India' , Journal of Indust-
rial Economics, vol. 17, November, pp. 57-72.
9. C. F. Pratten (1971) Economies of Scale in Manufacturing Industries
(Cambridge: Cambridge University Press).
10. Derived from: S. Hill and :J. Gough (1980) Concentration and Efficien-
cy in the Building Society Industry , UWIST Discussion Papers in
Economics, February.

ChapterS
1. E. A. Robinson, quoted in J. Dean (1951) Managerial Economics
(Englewood Cliffs, NJ: Prentice-Hall), p. 67.
2. G. Stigler (1978) 'The Literature of Economics: The Case of the Kinked
Demand Curve', Economic Inquiry, vol. 16, part 2, April, pp. 185-204.
3. D . Needham (1970) Economic Analysis and Industrial Structure (Lon-
don: Holt), p. 19.
4. Ibid., p. 25.
5. J. S. Bain (1956) Barriers to New Competition (Cambridge, Mass. :
Harvard University Press).
6. Ibid.
7. A. Singh (1975) 'Takeovers, Economic Natural Selection and the
Theory of the Firm: Evidence from UK Post-war Experience', Econo-
mic Journal, vol. 85.
8. This application is based on R. W. Shaw and S. A. Shaw (1984) 'Late
Entry, Market Shares and Competitive Survival: The Case of Synthetic
Fibres', Managerial and Decision Economics , vol. 15, no. 2, June,
pp. 72-9.

Chapter9
1. See F. M. Scherer (1970) Industrial Pricing: Theory and Evidence
(Chicago: Rand McNally), chapter 4.
2. F. Modigliani (1958) 'New Developments on the Oligopoly Front' ,
Journal of Political Economy , vol. 66, pp. 215-32.
3. SeeS. Hill (1982) 'The Multi-product Firm: Demand Relationships and
Decision-making', Managerial and Decision Economics, vol. 3, no. 2.
4. See, for example, J. L. Pappas, E . F.Brigham and B. Shipley (1983)
Managerial Economics, UK edition (London: Holt, Rinehart & Win-
ston), chapter 12:
 Notes and References 355

5. See A. Silberston (1970) 'The Price Behaviour of Firms', Economic

Journal, September.
6. R. L. Hall and C. J. Hitch (1939) Price Theory and Business Behaviour,
Oxford Economic Papers, pp. 12-45.
7. One managing director interviewed by the author had developed a
complex microcomputer simulation model to determine precisely the
average cost of each of the firm's products. A variable profit margin was
then added, according to what the director thought the market could
bear. SeeS. Hill et al. (1984) Decision Making in the S. Wales Engineer-
ing industry, UWIST Discussion Papers, September.
8. R . P. Manes, F. Shoumaker and P. A. Silhan (1984) 'Demand Rela-
tionships and Pricing Decisions for Related Products', MDE, vol. 5,
no. 2, June.

Chapter 10
1. Quoted in N. Piercy (1986) Marketing Budgeting (London: Croom-
Helm), p. 2.
2. Quoted by W. Duncan Reekie (1975) Managerial Economics (Oxford:
Philip Allan), p. 208.
3. See, for example, A. Koutsoyiannis (1982) Non-Price Decisions (Lon-
don: Macmillan), pp. 84-6.
4. N. Piercy (1986) Marketing Budgeting, p. 39.
5. This section, loosely based on Blair and Kenny, may be omitted
without loss of continuity. However, perseverence with the concepts
involved may yield a high return. See R. Blair and L. Kenny (1982)
Microeconomics for Managerial Decision Making (Tokyo: McGraw-
Hill), pp. 347-59.
6. The sum of an infinite series is the first term divided by one minus the
common ratio. In this case, the first term is fN, and the common ratio
is(1 - f)(1-b).
7. See, for example, S. Schoeffler et al. (1974) 'The Impact of Strategic
Planning on Profit Performance', Harvard Business Review, March.
8. N. Piercy (1986) Marketing Budgeting.
9. A. Koutsoyiannis (1982) Non-Price Decisions (London: Macmillan)
provides an excellent survey of advertising evidence.
10. H. M. Mann et al. (1967) 'Advertising and Concentration' , Journal of
Industrial Economics, vol. 15, pp. 81-4.
11. D. F. Greer (1971) 'Advertising and Market Concentration', Southern
Economic Journal, vol. 38, pp. 17-32.
12. This case history is based on actual companies, but their names and the
figures given have been altered to protect commercial confidentiality.
356 Managerial Economics

Chapter 11
1. H . A. Taha (1982) Operations Research , 3rd edn (New York: Macmil-
lan), p. 495.
2. F. Lowenthal (1982) 'Cost of Prediction Error in the Economic Order
Quantity Formula', Managerial and Decision Economics, vol. 3, no. 2,
June.
3. Recall that a rectangular hyperbola describes a downwards sloping
curve of constant area. In this case, the area under the curve (TOCxq)
is always constant at rD.
4. It is evident that the expression on the right-hand side has two roots,
and equally evident that only one makes economic sense.
5. This may be an opportune moment to review pages 73-5.
6. P(D ~ n) reads as the probability demand is greater than or equal ton .
7. A Poisson distribution is described by the formula
P(X = x) = tre-xlx! where a is the mean and e the natural exponent
( =2.718). The Poisson distribution is a useful approximation for
random arrival times.
8. For example, J. E. Freund (1972) Mathematical Statistics, 2nd edn
(Englewood Cliffs, NJ: Prentice-Hall), p. 434.
9. P(D~ 16) = P(D< 17) = 0.899. Then stocking 16 gives a 90 per cent
service level.
.
10. Smce v'2rDhc = 2 . JrDhc
- 2- .

82 TRC 2DS
11. ~ = - 3- >0, so q* is a minimum.
uq q
12. The idea for this application came from R. Martin and B. Moores
(1935) Management Structures and Techniques (Oxford: Philadelphia)
p. 150, and subsequent conversations with Brian Moores.

Chapter 12
1. In Chapter 7, the marginal cost of output was related to the wage rate
and labour productivity by the equation MC = WIMPL, for a fixed
wage rate. To maximise profit, MC =MR. Substituting, MR = WIMPL
or MPL x MR = W, so that MRPL = W .
2. Generally, MFC = W +a W x N, where W is the new wage rate, a W is
the increase in wages necessary to employ an extra worker, and N is the
number previously employed. In the above case,
MPC= 1 =5+(5x10)= 155.
 Notes and References 357

3. F. Brechling (1965) 'The Relationship Between Output and Employ-

ment in British Manufacturing Industries', Review of Economic Studies,
vol. 32, pp. 187-216.
4. See S. Hill (1984) Worksharing: Some Cost and Other Implications
(London: Unemployment Unit).
5. See Chapter 13 for a full explanation of present value.
6. For a full discussion see Thomason, G. (1981) A Textbook of Personnel
Management, 4th edn (London: IPM).
7. See, for example, C. Handy (1985) The Future of Work (Oxford:
Blackwell).
8. SeeS. Hill et al. (1984) Decision-making in the South Wales Engineering
Industry: A Survey, UWIST Discussion Paper, December. See also
P. Blyton and S. Hill (1985) 'Output and Employment', Industrial
Relations Journal, Summer.

Chapter 13
1. SeeS. Hill and J. Gough (1981) 'Discounting Inflation', Managerial
and Decision Economics, vol. 2 (2), pp. 121-3.
2. Alternatively, a cursory glance at Table 13.1 reveals that £10 000 in
fifty years time (your life expectancy from now) will have a present
value approaching zero, especially when inflation is also taken into
account.
3. Generalising, the present value of a perpetuity offering a uniform £A
per year is Air, where r is the interest rate expressed as a decimal.
4. This section is loosely based on J. Gough and S. Hill (1979) Fun-
damentals of Managerial Economics (London: Macmillan) , pp. 21(}.-
14.
5. Although the implicit cost may be higher; seep. 316.
6. H. M. Markowitz (1952) 'Portfolio Selection', Journal of Finance,
vol. vii (1), March, pp. 72-91.
7. For a full explanation of CAPM, see A. Koutsoyiannis (1982) Non
Price Decisions (London, Macmillan), pp. 609-30.
8. See Koutsoyiannis (1982) Non Price Decisions, pp. 626-30 and Rosen-
berg, B. and Guy, J. (1976) 'Prediction of Beta Co-efficients from
Investment Fundamentals' , Financial Analysts Journal, 32, July.
9. Koutsoyiannis, Non Price Decisions, p . 621.
10. K. Alam and L. Stafford (1985) 'Tax Incentives and Investment
Policy', Managerial and Decision Economics, vol. 6 (1), March,
pp. 27-32.
11. S. Hill et al. (1984) Decision-making in the South Wales Engineering
Industry: A Survey, UWIST, Cardiff, December.
12. E. Miller (1985) 'Decision-making Under Uncertainty for Capital
Budgeting and Hiring', Managerial and Decision Economics, vol. 6
(1), March, pp. 11- 18.
358 Managerial Economics

13. Ibid., p. 14.

14. For a review of evidence, see Koutsoyiannis, Non Price Decisions,
pp. 256-62.
15. This application is based on G . Luffman, S. Witt and S. Lister (1982)
'A Quantitative Approach to Stakeholder Interests', Managerial and
Decision Economics, vol. 3, no. 2, June, pp. 70-8.
16. Ibid., p. 76.
17. Ibid., p. 78.
Further reading

Chapter 1
Baumol, W. J. (1961) 'What Can Economic Theory Contribute to Manage-
rial Economics', American Economic Review, 51, pp. 142-6.
Bransford, J. D. and Stein, B. S. (1984) The Ideal Problem Solver (New
York: W. H. Freeman).
Call, S. T. and Holahan, W. L. (1984) Managerial Economics (Belmont,
CA: Wadsworth) chapter 1, 'Studying Managerial Economics', pp. 1-16.

Chapter 2
Chiang, A. C. (1974) Fundamental Methods of Mathematical Economics,
2nd edn (Tokyo: McGraw Hill), chapters 2, 6, 9 and 18.
Gough, J. and Hill, S. (1979) Fundamentals of Managerial Economics
(London: Macmillan), chapters 2 and 12 ('Marginal Analysis' and
'Linear Programming').
Pappas, J. L., Brigham, E. F. and Shipley, B. (1983) Managerial Econo-
mics, UK edn (London: Holt Rhinehart & Winston), chapters 3 and 8.

Chapter 3
Dean, J. (1951) Managerial Economics (Englewood Cliffs, NJ: Prentice-
Hall), chapter 1.
Kay, J. A. (1977) 'Inflation Accounting - A Review Article', Economic
Journal, 87, 346, pp. 300-11.
Koutsoyiannis, A. (1979) Modern microeconomics (London: Macmillan),
chapters 15-18.
Lee, T. A. (1980) Income and Value Measurement, 2nd edn (Walton-on-
Thames: Nelson), chapters 1 to 3.

359
360 Managerial Economics
Rice, G. H. (1986) 'But How Do Managers Make Decisions?', Management
Decisions, 18, 4.
Silberston, A. (1970) 'Price Behaviour of Firms', Economic Journal, 80,
319, pp. 511-82.

Chapter4
Call, S. T . and Holahan, W. L. (1984) Managerial Economics (Belmont,
CA: Wadsworth), chapter 8.
Gough, T. J. and Hill, S. (1979) Fundamentals of Managerial Economics
(London: Macmillan), chapter 3.
Horowitz, I. (1972) An Introduction to Quantitative Business Analysis, 2nd
edn (Tokyo: McGraw Hill), chapters 1 to 4.
Raiffa, H. (1968) Decision Theory (Reading, Mass: Addison Wesley) .

ChapterS
Davies, J. R. and Chang, S. (1986) Principles of Managerial Economics
(Englewood Cliffs, NJ: Prentice-Hall), chapters 4 to 7.
Heineke, J. M. (1976) Microeconomics for Business Decisions (Englewood
Cliffs, NJ: Prentice-Hall).
Salvatore, D. (1986) Microeconomics: Theory and Application (New York:
Macmillan), chapters 3 to 6.

Chapter6
Baird, C. W. (1982) Prices and Markets , 2nd edn (St Paul: West),
chapter 4.
Davies, J. R and Chang, S. (1986) Principles of Managerial Economics
(Englewood Cliffs, NJ: Prentice-Hall), chapter 8.
Heineke, J. M. (1976) Microeconomics for Business Decisions (Englewood
Cliffs, NJ: Prentice-Hall), chapters 3, 4 and 5.
Salvatore, D. (1986) Microeconomics: Theory and Applications (New
York: Macmillan), chapter 9.

Chapter7
Dean, J. (1951) Managerial Economics (Englewood Cliffs, NJ: Prentice-
Hall) , chapter 5.
 Further reading 361

Salvatore, D. (1986) Microeconomics: Theory and Applications (New

York: Macmillan), chapter 8.
Wagner, L. (1981) Readings in Applied Microeconomics, 2nd edn (Oxford:
Oxford University Press), Reading 9.
There are a number of case studies in cost estimation. One of the most
interesting is: L. Cookenboo (1971) 'Cost of Operation of Crude Oil
Trunk Lines', reprinted in H. Townsend (ed.) Price Theory (Harmond-
sworth: Penguin).

ChapterS
Dean, J. (1951) Managerial Economics (Englewood Cliffs, NJ: Prentice-
Hall), chapter 2.
Griffiths, A. and Wall, S. (1984) Applied Economics (London: Longman),
chapters 5 and 6.
Monopolies Commission (1981) Competition in the Wholesale Supply of
Petrol, reprinted as Reading 3 in L. Wagner (ed.) Readings in Applied
Microeconomics (Oxford: Oxford University Press).
Needham, D. (1978). Economic Analysis and Industrial Structure, 2nd edn
(New York: Holt), chapter 3.
Pappas, J . L., Brigham, E. F. and Shipley, B. (1983) Managerial Econo-
mics, UK edn (London: Holt, Rhinehart & Winston).

Chapter9
Dean, J. (1951) Managerial Economics (Englewood Cliffs, NJ: Prentice-
Hall), chapters 7, 8 and 9.
Kotler, P. (1986) Principles of Marketing, 3rd edn (Englewood Cliffs, NJ:
Prentice-Hall), chapters 13 and 14.
Pappas, J. L., Brigham, E . F. and Shipley, B. (1983) Managerial Econo-
mics, UK edn (London: Holt, Rhinehart & Winston), chapters 11
and 12.
Silberston, A. (1970) 'The Price Behaviour of Firms', Economic Journal,
September.

Chapter 10
Kotler, P. (1986) Principles of Marketing, 3rd edn (Englewood Cliffs, NJ:
Prentice-Hall), <;hapters 17 to 19.
362 Managerial Economics
Koutsoyiannis, A. (1982) Non-Price Decisions (London: Macmillan),
chapter2.
Piercy, N. (1986) Marketing Budgeting (London: Croom Helm), chapters 2
and3.

Chapter 11
Horowitz, I. (1972) An Introduction to Quantitative Business Analysis
(Tokyo: McGraw-Hill), chapter 11.
Martin, R. and Moores, B. (1985) Management Structures and Techniques
(Oxford: Philip Alan), chapter 8.
Taha, H. A . (1982) Operations Research, 3rd edn (New York: Macmillan),
chapter 13.

Chapter 12
Blair, R. D. and Kenny, L. W. (1982) Microeconomics for Managerial
Decision Making (Tokyo: McGraw-Hill).
DeSerpa, A. C. (1981) Microeconomic Theory: Issues and Applications
(Boston: Allyn & Bacon).
Thomason, G . (1981) A Textbook of Personnel Management, 4th edn
(London: IPM).

Chapter 13
Pappas, J. L., Brigham, E. F. and Shipley, B. (1983) Managerial Econo-
mics , UK edn (London: Holt, Rhinehart & Winston), chapter 14.
Koutsoyiannis, A. (1982) Non-Price Decisions (London: Macmillan).

Chapter 14
Bodily, S. E . (1985) Modern Decision Making (New York: McGraw-Hill).
Dennis, L. B. and Dennis, T. L. (1986) Microcomputer Models for
Management Decision Making (New York: West).
 Index

Abramovitz, M. 164n Cobb-Douglas production

advertising 105 function 153
economic analysis 235-45 application 158--61
Alam,K. 317 coefficient of determination 122
Alchian, A. 164 Cookenboo, L. 352
Amstrad 215 collusion 192
autocorrelation 123 competition 183
average cost pricing 225-7 competition policy 201
average product 137 concentration ratio 197
consumer surplus 325
backwards induction 91 contestable markets 194
Bain, J . 197,200 cost 162
Baird, C. 351 cost plus pricing 225-7
barriers to entry 197-8 current cost accounting 49
Baumol, W. 54, 350 Cyert, R. 60,246
Bayes theorem 88
beta coefficients 316
binomial distribution 87 Davies, J. 351
Blair, R. 241n, 353 De Serpa, A . 353
Blyton, P. 2n, 298n Dean,J.42n,44n, 163, 165 , 179, 187n,
Bodily, S. 353 350,351,352
Bransford, J . 2n, 350 decision framework 1
Brechling, F. 289 analysis 2
Brigham, E. 223n, 252, 253, 350 model 3
Bunn, D. 95-9 and stocks 267-73
trees 90-3
calculus 19 Delphi method 128
Call, S. 350, 351 demand 100
capital asset pricing model 315 curve 102
capital formation 317 elasticity 106--14
capital valuation 48 estimation 115-30
cartel 192 function 101
certainty equivalent 80 Dennis, L. 353
Chacholiades, N. 136n, 200 Dennis, T. 353
Chang, S. 351 depreciation 49
change of sign rule 310 derivatives 19--36
Chiang, A. 350 partial 29
Clarke, D. 116n diminishing returns 149

363
364 Index

discounting 47, 303-20 Hitch, C. 225

discount factors 305 Holahan, W. 350,351
problems 309-11 Horowitz, I. 80n, 351, 353
diversification 187, 320 Houthaker, H . 113n, 114
Dorfman-Steiner theorem 238-40
identification 3
econometric models 130 problem 125-7
economic rent 326 implementation 6
economic order quantity 259 income effect 102
sensitivity 263-5 input substitution 136
economies of scale 174 integration 187
efficient markets hypothesis 194 internal rate of return 305-6
efficient production 143 calculation 311
an example 146--7 inventories 253
elasticity of demand 106--14 investment 301
employment decisions 284 in human capital 291-2
legislation 295 isocost 144
Enos, J. 158-61 isoquant 140
equal-likelihood principle 78
equity capital 312 Johnson, J. 179n
evaluating alternatives 5 Jones, S. 68n
examination questions 332
expansion path 166 Kaufman, G . 95n
expected value 71 Kay, J. 350
of perfect information 76 Kenny, L. 241n, 353
extrapolation 118 kinked demand curve 192
Kotler, P. 317
factor prices 173 Koutsoyiannis, A. 56n, 240n, 315n,
fixed interval order level system 257 316,316n, 322n,350, 353
fixed order level system 257
flow receipts model 277-80 labour management 284
forecasting 127 Lagrange multipliers 33-6
Freund, J. 271n leading indicators 128
Fujii, E . 132 learning coefficient 174
Lee, T. 350
gearing ratio 313 leverage ratio 57
Gilbert, M. 58n Leverhume, Lord 235
Gough,J. 18n, 181-2,304n,307n,350 limit pricing 212
Greer, D. 247 linear programming 15-18
Griffiths, A. 199, 200, 352 application 39-41
growth maximisation 56--8 and production 155-7
Gupta, V. 180 liquidity ratio 57
Guy, J . 316n Lister, S. 324-8
Lowenthal, F. 259
Hall, R. 225 Luffman, G . 324-8
Handy, C. 296n
hedging 315 managerial earnings 49
Reineke, J. 351 managerial utility maximisation 58-9
Hicks, J . 48 Manes, R. 229
Hill, S. 2n, 18n, 68n, 181- 2, 222n, Mann, H. 247
226n, 291n,298n,304n,307n,318, March, J. 60, 246
350, 351 marketing 233
 Index 365

Martin, R. 347n, 353 Pratten, C. 180

marginal analysis 11-14 present value 303
marginal product 137 price discrimination 219-21
marginal rate of substitution 142 price elasticity 107
marginal revenue 111 pricing 208
Markowitz, H. 315 probability 68-71
Marriss, R. 56 product life cycle 204
maximax 78 and pricing 217
maximin 78 production 136
Miller, E . 319-20 profit 42
minimax regret 79 maximisation 50-3
minimum efficient scale 176 measurement of 44-6
Modigliani, F. 212 nature of 43-4
Monopolies Commission 202, 252 payoff matrix 74
monopolistic competition 190-1 related objectives 53-4
monopoly 192-5, 210 pure competition 190
Moores, B. 40, 347n, 353
Moroney, J. 155 Raiffa, H. 351
multicollinearity 123 Reekie, W. D. 235n
multi-product pricing 221-3 regression 121
application 181-2
natural monopoly 176, 194 Reinhart, U. 174n
Naylor, T. 130n retention ratio 57
Needham, D. 195, 196n, 352 returns to scale 152
newsboy problem 73 Rice, G. 60n, 350
non-maximising behaviour 59 risk 68
Nuen,S. 64 attitudes towards 79-85
Robinson, E. A. 187
objectives 42 Rodgers, L. 233
oligopoly 191-2 Rosenberg, B. 316n
pricing 216-17
opportunity cost 43 Sainsbury, J. 94
opportunity loss 75 sales revenue maximisation 54
optimisation 6, 10 Salvatore, D . 102n, 179,351, 352
constrained 31 Santerre, R. 64
function of one variable 25,28 satisficing 60
mathematical 14 Scherer,F. 212n
more than one variable 29, 37 Schoeffler, S. 246n
rules of 21 service levels 268, 272-3
output elasticity 137 share-ownership and profitability 64-6
Shaw, R. 204-7
Pappas, J. 223n, 350, 352, 353 Shaw, S. 204-7
Patrick, C. 132 Sheperd, W. 199
payback method 318 Shipley, B. 223n, 350,352,353
Pearl, D. 158--61 Silberston, A. 346, 351, 352
penetration policy 214 Silhan, P. 229
perfect competition 188-90 Simon, H. 60n
Piercy, N. 233n, 234,240, 246n, simulation 4
250-2,353 Singh, A. 201
PIMS 246 skimming policy 214
Poisson distribution 99, 271 social returns 324
posterior probability 85-9 specifying alternatives 4
366 Index

Stafford, L. 317 transfer pricing 223-5

standard deviation 72
Standard Industrial Classification 196 uncertainty 67
Stein, B. 2n, 350 and investment 314-16
Stigler, G. 192 utility functions 79-84
stocks 253
Stone, R. 124 VVagner,L. 176,352
stubstitution effect 102 VVall, S. 199, 200, 352
VValters, A. 179
Taha, H. 259,353 VVheelwright, S. 116n
Taylor, L. 113n, 114 VVilliamson, 0. 58
Thomas, H. 95-9 VVilson lot size formula 261
Thomason, G. 295n, 353 VVitt, S. 324-8
Townsend, H. 164n, 352 workable competition 194
transactions cost 184 VVorking, E. 125n