BSZ_IM_Ch05_4e - Managerial Economics and Organizational...

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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 5: Page 1 CHAPTER 5 P RODUCTION AND C OST This chapter presents a basic economic analysis of production and cost. Primary topics include production functions, optimal input choice, cost, and profit maximization. The chapter also provides an introduction to cost estimation and factor demand curves. The chapter includes a short case study (Rich Manufacturing). An appendix derives the factor-balance equation. C HAPTER O UTLINE P RODUCTION F UNCTIONS Returns to Scale Returns to a Factor C HOICE OF I NPUTS Production Isoquants Isocost Line Cost Minimization Changes in Input Prices C OSTS Cost Curves Short Run Versus Long Run Minimum Efficient Scale Learning Curves Economies of Scope P ROFIT M AXIMIZATION F ACTOR D EMAND C URVES C OST E STIMATION C ASE S TUDY : R ICH M ANUFACTURING S UMMARY A PPENDIX : T HE F ACTOR -B ALANCE E QUATION T EACHING THE C HAPTER This chapter presents core material that should be covered in detail in an introductory managerial economics course. We do not assign this chapter in our organizations class, since our students have taken a course in managerial economics. Our students, however, are responsible for knowing the basic concepts in the chapter. Concepts such as costs, economies of scale, profit maximization, and factor demand
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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 5: Page 2 curves are used in subsequent chapters (for example, chapters 14 and 19). We sometimes assign Cetus Computer Corporation Sales Force (CASENET) as an applied case for discussing input selection C ASE S TUDY R ICH M ANUFACTURING Gina Picaretto is production manager at the Rich Manufacturing Company. Each year her unit buys up to 100,000 machine parts from Bhagat Incorporated. The contract specifies that Rich will pay Bhagat its production costs plus a $5 markup ( cost-plus pricing ). Currently, Bhagat’s costs per part are $10 for labor and $10 for other costs. Thus the current price is $25 per part. The contract provides an option to Rich to buy up to 100,000 parts at this price. It must purchase a minimum volume of 50,000 parts. Bhagat’s workforce is heavily unionized. During recent contract negotiations, Bhagat agreed to a 30 percent raise for workers. In this labor contract, wages and benefits are specified. However, Bhagat is free to choose the quantity of labor it employs. Bhagat has announced a $3 price increase for its machine parts. This figure represents the projected $3 increase in labor costs due to its new union contract. It is Gina’s responsibility to evaluate this announcement. Discussion Questions:
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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.

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BSZ_IM_Ch05_4e - Managerial Economics and Organizational...

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