E303lect3F089 - August 26, 2009 Lecture 3 Reading Baye, Ch....

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August 26, 2009 Reading Baye, Ch. 1 pp 14-19 (Today) Friday, Ch 1. pp. 19-25 Lecture 3 Problems: Problem Set 1 Due FRIDAY. Also look at problems #2 and #5 in your text REVIEW___________________________________________________: I. Chapter 1. The Fundamentals of Managerial Economics B. Components of Effective Decision Making 3. Recognize the Role of Profits (If a firm is earning positive profits, that implies some market imperfection, such as risk-taking behavior, or impediments to entry. Observation: If we see someone earning persistent economic profits, that must imply that there is a market imperfection, such as limited entry, or a proprietary technology. 4. Recognize the Importance of Incentives a. Organizational Incentives for Firms Preview__________________________________________________________ b. Incentives for Motivating Individuals 5. Recognize the Time Value of Money. a. Discounting the Future. b. Calculating Net Present Value of a Project LECTURE______________________________________________ 4. Understanding Incentives. If profits restrict the behavior of firms via incentives, in the market, it is also important to understand the effects of incentives within the firm. b. The way people are rewarded can influence their incentive to work Example : Suppose you pay someone $75,000 to manage your restaurant. Would this person do better than someone paid $50,000? There is no particular reason to suppose that the answer should be in the affirmative. A compensation package that more nearly aligns the interests of the owner and the manager would be one that provided incentives to the manager that paralleled the interests of the owner. (e.g., a profit-sharing arrangement.) This type of problem is called a principle-agent problem. It is a common problem in
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This note was uploaded on 04/12/2010 for the course ECON 303 taught by Professor Shrestha during the Fall '08 term at VCU.

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E303lect3F089 - August 26, 2009 Lecture 3 Reading Baye, Ch....

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