MGT 722: Managerial Economics for EMBA
Owen Graduate School of Management
Vanderbilt University
Fall Semester 2010
Contact Information
Professor:
E-mail:
Office:
Fax:
TAs:
Luke Froeb
(http://ManagerialEcon.com)
luke.froeb@owen.vanderbilt.edu – this is the best and most efficient way to contact me.
(615) 322-9057
(615) 343-7177
Sean Cunningham
(Sean.Cunningham.2011@owen.vanderbilt.edu)
Lane Rau
(Lane.Rau.2011@owen.vanderbilt.edu)
- EMBA leads—contact Sean or Lane to set up tutoring or help sessions.
Course Goals
After completing this class you should be able to:
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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.
Understand the long-run forces that erode profit
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 and division incentives with the goals of the company.
Manage relationships between upstream suppliers or downstream retailers.
Find unconsummated wealth-creating transactions and devise ways to profitably consummate them.
Class Material

Froeb, L. M., Managerial Economics: A Problem-Solving Approach, 2nd Edition (Cincinnati: Southwestern,
2010). (ISBN 0538771240, bundled with the economics module of MBAPrimer.com)
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—especially those without an economics background
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Managerial Economics module of MBA Primer (It comes 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.
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.
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Management R&D, 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.
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James Brickley, Clifford Smith, Jerold Zimmerman, “The Economics of Organizations,” Journal of
Financial Economics, Vol. 8:2 (Summer, 1995) pp. 19-31.
REQUIRED. I want you to be able not only to identify profitable decisions using benefit-cost analysis
(the main thrust of the course as reflected in course goals), but also to 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 5 of 7 on-line quizzes testing the mechanics of benefit-cost analysis.
Final Exam covering readings, lecture notes, MBA Primer
Best 5 of 6 Individual HW’s
5 Groupations (slides and memo) applying class ideas to your companies
My perception of your contribution to the class may also affect grade
25%
25%
25%
25%
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 an issue faced by one of your
companies that is similar to one of the questions at the end of the relevant chapter. Answer it by pretending
that you are a consultant hired to fix a problem within your company. You analysis should implicitly
answer 3 questions:
1. What’s wrong?;
2. How do we fix it?; and
3. How much will the company save by fixing it, compared to either the status quo or another alternative
solution? This answer should have a specific number with back up support.
As professionals, you are all aware of the importance of strong writing skills. Letters, reports, and even short email 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 learn economics until you teach 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
questions you have about the material, please email them directly (copy me on the e mail). Do not expect
them to give you the answers or to verify that you have the right answer. 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.
Course Honor Code Policy
Students are bound by the Honor Code and the following specific guidelines for all work completed in this
course.
By implementing these new guidelines, we hope to make adherence to the principals of the Owen Honor Code
easier and without ambiguity. All work is to be YOUR OWN, CREATED AND COMPLETED BY YOU
ALONE. When in doubt, ask a TA.
Specific Guidelines:
The following describes the guidelines for Managerial Economics homework, quizzes, and tests:
 Quizzes – Do these on your own. Any communication about the Blackboard quizzes between a student
who has taken the quiz, and one who has not, is a violation of the Owen Honor Code. Do not print out
the quizzes, even after you have taken them. I do not want hard copies floating around because I may
use these in other programs and in subsequent years.
 Individual Assignment –
An individual assignment must be completed by the student individually, without input from other
students.
 Generation of Ideas; Discussion of Assignment
Completing an assignment involves several steps. Because the assignments and quizzes are individual,
then the analysis of the problem, the generation of ideas, any needed research and preparation of the
required work product must all be accomplished by the individual student. In general, a student should
assume that all steps of an individual assignment are to be carried out by that student working alone.
 Producing the Final Work
The physical, electronic, or other deliverable (e.g., a problem set) that is provided for assessment is
usually the final step in an assignment. Individual work product must be prepared solely by the
individual student.
 Data Sources and Tools
Each student is responsible for following assignment instructions with respect to what data sources and
tools may be used. If outside sources are used, proper citations are REQUIRED. Materials from prior
courses at Owen or similar courses at other institutions are prohibited unless specifically authorized by
the professor. Again, when outside sources are used, they should be cited appropriately by the student.
Overarching Guidelines
 Plagiarism, which includes the unauthorized use of previous years’ materials (e.g., examinations, case
analyses, homework assignments, quizzes, etc.), is a violation of the Honor Code.
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Written deliverables must use appropriate citations to signify when arguments or analyses rely on the
ideas or insights of others, including any of the readings in the class pack. It is not necessary to
reference the case study you are preparing a written analysis of.
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Quizzes are to be completed individually with no outside help. Quizzes are closed-book, closed-note,
closed-browser assessments. Any deviation from these guidelines is a violation of the Honor Code.
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Any use of analyses or any other material in any format from previous offerings of this course, other
courses taught at Vanderbilt or other universities, or on the Internet, is a violation of the Honor Code.
This includes the use of materials in multiple classes without consent of the instructors.
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Above all, maintain your personal integrity.
If you are in doubt as to the type or amount of collaboration allowed on an assignment, it is always your
responsibility to consult with the professor. Failure to do so is not an acceptable excuse.
Session
Date
Time
Required
(Read text before class)
Highly Recommended
Managerial Economics:
Preface: Teaching Students to
Solve Problems
1. Introduction: What This Book
is About
2. The One Lesson of Business
MBA Primer:
Introduction: What is Managerial
Economics?
Bed-time story:
Doti, Capitalism & Greed
Week in Residence
1
Aug. 12
6:308:00pm 1.
12:151:45pm
2
2:003:30pm
3
Aug. 13
Videos:
7-minute video: Problem Solving with Economics
7-minute video : The One Lesson of Business
3-minute video : Friedman v. Donohue on Greed
7-minute video : Larry the Liquidator on “other people’s money”
Videos:
Chapter
Problem
Chapter
Problem
1 - Managerial Economics: A
Solving Approach
2 - Managerial Economics: A
Solving Approach
Managerial Economics:
3. Benefits, Costs, and
Decisions
MBA Primer:
1. Using Economics in
Management Decisions
Managerial Economics:
4. Extent (How Much) Decisions
MBA Primer:
2. Understanding the Seller’s
Costs
Videos:
Chapter 3 - Managerial Economics: A
Problem Solving Approach
Managerial Economics:
5. Investment Decisions: Look
Ahead and Reason Back
Interactive Tutorials:
3. Average Cost and the Break-Even Output Rate
Interactive Tutorials:
Total Cost, Variable Cost, and Marginal Cost
Videos:
Chapter 4 - Managerial Economics: A
Problem Solving Approach
Make sure you understand Discounted cash flow and Net
Value, but also why most companies do NOT use it
Videos:
Chapter 5:
Economics:
Chapter 5:
Economics:
6:308:00pm
4
Managerial Economics:
6. Simple Pricing
7. Economies of Scale and
Scope
5
Aug. 14
8:009:30am
9:4511:15am
6
Aug. 26
MBA Primer:
3. Understanding the Buyer’s
Demand
Part 1 - Managerial
A Problem Solving Approach
Part 2 - Managerial
A Problem Solving Approach
Interactive Tutorials:
2. Marginal Cost and the Price-Taking Firm's Optimal Output
Rate
4. Demand
5. Elasticity
6. Elasticity II
Make sure you understand “critical loss” formula in Whole
Foods Merger case—this is how companies do marginal
analysis of pricing.
Group HW 1
(All)
Due Thurs. Aug. 26 by midnight:
You must have completed Quizzes 1 & 2 on Blackboard (Similar to MBA Primer Quizzes 1 & 2)
7
Aug. 28
3:204:50pm
5:006:30pm
8
Sept. 9
9
Sept.
11
7:509:20am
9:3011:00am
10
Sept.
23
11
Sept.
25
7:509:20am
Individual HW 1 due before
start of class on Aug. 28
Managerial Economics:
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
Interactive Tutorials:
7. Supply, Demand, and Equilibrium
8. Monopoly: Marginal Revenue and the Profit-Maximizing
Price and Output Rate
Videos:
Chapter 9 - Managerial Economics: A
Problem Solving Approach
MBA Primer:
4. Understanding Markets and
Profit Maximizing
Group HW 2
(Odds)
Due Thurs. Sept. 9 by midnight:.
You must completed Quizzes 3 & 4 on Blackboard (Similar to MBA Primer Quizzes 3 & 4)
Warning: Quizzes 3&4 are more difficult than Quizzes 1&2
Individual HW 2 due before the
start of class
Managerial Economics:
11. Bubbles, Trade, and Foreign
Exchange
12. More Realistic and Complex
Pricing
13. Direct Price Discrimination
14. Indirect Price Discrimination
Group HW 2
(Evens)
Due Thurs. Sept. 23 by midnight:
You must completed Quiz 5 on Blackboard (Similar to MBA Primer Quiz 5)
Individual HW 3 due before the Simultaneous game self test
start of class
http://www2.owen.vanderbilt.edu/mike.shor/Courses/gametheory/quiz/quiz1.html
Managerial Economics:
15. Strategic Games
Sequential game self test
16. Bargaining
http://www2.owen.vanderbilt.edu/mike.shor/Courses/gametheory/quiz/quiz4.html
Play the repeated prisoners' dilemma
http://www.gametheory.net/Mike/applets/PDilemma/
12
9:3011:00am
13
1:303:00pm
Oct. 9
3:104:40pm
14
15
Oct.23
3:204:50pm
Group HW 3
(Odds)
Managerial Economics:
17. Making Decisions with
Uncertainty
18. Auctions
Group HW 3
(Evens)
Individual HW 4 due before the
start of class
Managerial Economics:
19. The Problem of Adverse
Selection
Interactive Tutorials:
12. Risk
13. Risk Aversion and Insurance
5:006:30pm
16
Nov. 4
17
Nov. 6
7:509:20am
9:3011:00am
18
Nov. 18
19
Nov. 20
20
21
Dec. 4
22
3:204:50pm
5:006:30pm
11:501:20pm
1:303:00pm
Dec. 9
23
Dec. 11
24
11:501:20pm
1:303:00pm
20. The Problem of Moral
Hazard
Group HW 4
(Odds)
Due Thursday Nov. 4 by midnight:
You must completed Quiz 6 on Blackboard (Similar to practice Quiz 6)
Individual HW 5 due before the
start of class
Managerial Economics:
21. Getting Employees to Work
in the Best Interests of the Firm
22. Getting Divisions to Work in
the Best Interests of the Firm
Group HW 4
(Evens)
Due Thursday Nov. 18 by midnight:
You must have completed Quiz 7 on Blackboard (Similar to practice Quiz 7)
Individual HW 6 due before the
start of class
Managerial Economics:
23. Managing Vertical
Relationships
Group HW 5
(Odds)
Review Session for Final
Exam
Group HW 5
(Evens)
Online Final Exam due by midnight Dec. 9
Managerial Economics:
24. You Be the Consultant
EPILOG: Can those who teach,
do?
Group HW 6
(All)
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
EPILOGUE: Can those who teach, do?