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MANAGERIAL ECONOMICS MANAGERIAL ECONOMICS A Mathematical Approach M.J.ALHABEEB L.JOEMOFFITT IsenbergSchoolofManagement UniversityofMassachusetts Amherst,MA,USA AJOHNWILEY&SONS,INC.,PUBLICATION CoverImage:HeikeSchenkArena Copyright(cid:2)C 2013byJohnWiley&Sons,Inc.Allrightsreserved PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey PublishedsimultaneouslyinCanada Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorbyany means,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermittedunder Section107or108ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthe Publisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter, Inc.,222RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)750-4470,oronthewebat www.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothePermissions Department,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011, fax(201)748-6008,oronlineathttp://www.wiley.com/go/permission. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsin preparingthisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyorcompletenessof thecontentsofthisbookandspecificallydisclaimanyimpliedwarrantiesofmerchantabilityorfitnessfora particularpurpose.Nowarrantymaybecreatedorextendedbysalesrepresentativesorwrittensalesmaterials. Theadviceandstrategiescontainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitoranyother commercialdamages,includingbutnotlimitedtospecial,incidental,consequential,orotherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontactourCustomer CareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnitedStatesat(317)572-3993or fax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmaynotbe availableinelectronicformats.FormoreinformationaboutWileyproducts,visitourwebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Alhabeeb,M.J.,1954– Managerialeconomics:amathematicalapproach/M.J.Alhabeeb,L.JoeMoffitt. p.cm. Includesbibliographicalreferencesandindex. ISBN978-1-118-09136-4(cloth) 1.Managerialeconomics.I.Moffitt,L.Joe.II.Title. HD30.22.A392013 338.5024(cid:3)658–dc23 2012023746 PrintedintheUnitedStatesofAmerica ISBN:9781118091364 10 9 8 7 6 5 4 3 2 1 Good management is the art of making problems so interesting and their solutions so constructivethateveryonewantstogettoworkanddealwiththem. PaulHawken Theessenceofmathematicsisnottomakesimplethingscomplicated,buttomakecom- plicatedthingssimple. S.Gudder TherewasayoungmanfromTrinity, Whosolvedthesquarerootofinfinity. Whilecountingthedigits, Hewasseizedbythefidgets, Droppedscience,andtookupdivinity. Anonymous To OurStudents OurFamilies,and Thememoryofourparents. CONTENTS IN BRIEF PREFACE xix UNITI METHODOLOGICALPRELIMINARIES 1 QualitativeFundamentals 3 2 QuantitativeFundamentals 13 UNITII DECISIONSATTHECONSUMERLEVEL 3 TheoryofConsumerChoice 47 4 ConsumerDemand:TheoreticalAnalysis 103 5 ConsumerDemand:EmpiricalEstimation 160 6 ConsumerDemand:EconomicForecasting 200 UNITIII MANAGERIALDECISIONSATTHEFIRMLEVEL 7 ProductionTheory 243 vii viii CONTENTSINBRIEF 8 CostTheory 287 9 ProductionandCost:EstimationandForecasting 349 UNITIV MANAGERIALDECISIONSATTHEMARKETLEVEL 10 MarketStructureandBusinessOrganization 367 11 PricingDecisionsandPractices 414 UNITV MANAGERIALDECISIONSINTHELONGRUN 12 CapitalBudgetingandInvestmentProjectEvaluation 451 13 RiskAnalysisandManagerialDecisionsunderUncertainty 487 14 ManagementConsultantsandInformation 546 APPENDIX 560 FURTHERREADING 569 INDEX 573

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Uncertainty is present in every managerial decision, and Managerial Economics: A Mathematical Approach effectively demonstrates the application of higher-level statistical tools to inform and clarify the logic of problem solving in a managerial environment.While illuminating managerial decision-maki