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Unformatted text preview: Managerial Economics and Organizational Architecture Instructors Manual Part 1: Chapter Overview and Solutions Chapter 2: Page 1 CHAPTER 2 E CONOMISTS V IEW OF B EHAVIOR This chapter uses the cheating scandal at Merrill Lynch to illustrate how a managers view of behavior can affect decision making. It summarizes the economic view of behavior and contrasts it with other views. The chapter presents a graphical analysis of utility maximization and decision making under uncertainty. The concepts in this chapter are an important foundation for subsequent material in the book. A short case is provided (Interwest Healthcare Corporation). C HAPTER O UTLINE E CONOMIC B EHAVIOR : A N O VERVIEW Economic Choice Marginal Analysis Opportunity Costs Creativity of Individuals G RAPHIC T OOLS Individual Objectives Indifference Curves Constraints Individual Choice Changes in Choice M OTIVATING H ONESTY AT M ERRILL L YNCH M ANAGERIAL I MPLICATIONS A LTERNATIVE M ODELS OF B EHAVIOR Only-Money-Matters Model Happy-Is-Productive Model Good-Citizen Model Product-of-the-Environment Model W HICH M ODEL S HOULD M ANAGERS U SE ? D ECISION M AKING UNDER U NCERTAINTY Risk Aversion Certainty Equivalent and Risk Premium Risk Aversion and Compensation C ASE S TUDY : I NTERWEST H EALTHCARE C ORP . S UMMARY A PPENDIX : CONSUMER CHOICE Managerial Economics and Organizational Architecture Instructors Manual Part 1: Chapter Overview and Solutions Chapter 2: Page 2 T EACHING THE C HAPTER Our students have taken a basic course in managerial economics. 1 We use class time to focus on five objectives. First, we stress why a managers underlying view of behavior is important. Second, we review the economic view of behavior. Third, we strive to increase student awareness that the economic model can be applied in many contexts. Fourth, we highlight the managerial implications of this model. Fifth, we briefly discuss other behavioral models that managers use. If this course were the first economics course that the students had taken, we would spend more time discussing the basic concepts and graphs associated with optimization and decision making under uncertainty. We begin the class by discussing how managerial decisions are affected by behavioral assumptions. Managers deal with people, for example, customers, employees, union officials, and suppliers. Good managers have a framework that allows them to predict how their actions will affect behavior. Next we summarize the economic view of behavior. We give particular emphasis to self-interested behavior, optimization, and the clever and creative nature of individuals. After this brief overview of the economic model, we focus on managerial implications and stress the following four points. First, while individual choice is a function of both preferences and constraints, it is often difficult for managers to affect preferences. Second, managers can influence behavior by affecting the marginal costs and benefits that individuals face in their decision making. For example, they can lower and benefits that individuals face in their decision making....
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This note was uploaded on 04/27/2010 for the course FIN 320f taught by Professor Toprac during the Spring '08 term at University of Texas at Austin.
- Spring '08