Managerial Economics Study Guide, Baye

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					                                 4924 - Managerial Economics
                            Virginia Tech Department of Economics

Professor Sheryl Ball                                              Phone: (540)231-4349
Office: Pamplin 3031                                               Fax #: (540)231-5097
Office Hours: Tu 3:30-5, W 2-4 and by appt.                        Web page:

                                        Syllabus - Fall 2000

Managerial economics focuses on 1) decision making within a firm and 2) the strategic interaction
of firms in industries.

Objectives for this course include:

• Learning the “language” of economics. This is useful for reading business publications as well
as for dealing with specialists (e.g., consultants, economic forecasters) who speak in the jargon of
economic theory.

• Acquiring new tools. Marginal analysis can help you “fine tune” decisions to improve your
outcomes. This can give your firm the edge in an increasingly competitive world.

• Understanding how physical laws, incentives and constraints translate into outcomes. For
example, you will learn how production information about a good dictates the market structure in
that industry.

• Analyzing strategic interactions. Managers can not make successful decisions without
considering their rival’s responses. Assuming that one’s rivals will react passively is a serious, if
common, mistake.


Everyone should have completed (and remember the material from) a course in Microeconomic
Principles (ECON 2005). You also should have completed MATH 1526 or the equivalent. A
working knowledge of derivatives, exponents, logarithms, algebra, including graphing points and
equations, solving for the intersection of two equations and solving quadratic equations is essential
for this course. If you have trouble with math you can find help at the Math Emporium. We will
be running regressions in this course so quantitative methods and statistics courses will help.

Course Materials

1. Baye, Managerial Economics & Business Strategy, 3rd ed. You will definitely need the diskette
that comes with the book in order to do your homework – if you buy a used copy make sure you
get the diskette. There is a study guide that you may purchase if you think you will need extra
problems to work.

2. Course Packet. Contains cases you will need to do your writing assignments. This is available
from A-1 Copies in University Mall - their number is (540)552-2008 if you want to make certain
that the packets are available before you go over there.

3. Access to a computer with a spreadsheet program, an e-mail address, a connection to the internet
and the world-wide-web and a printer.
4. A calculator that does exponents and logarithms.

Course Requirements

1. Midterm and Final Exams: Exams will be quantitative and short answer (no multiple choice), and
will cover lectures, readings, extra handouts, cases, and homework assignments. In particular, the
exams may cover material that was covered in class but is not in the textbook. Exams do NOT test
your ability to memorize. The midterms will be held on Thursday 9/28 and Thursday 11/2
during class. The comprehensive final will be held on Monday December 11 from 10:05-12:05.
You will be excused from taking an exam at the scheduled time only for official University
approved reasons (death in family, serious illness, or other reasons which are beyond your control.)
If you have an approved excuse on a midterm exam I will increase the weight of the remaining
midterm and final exams. If you have an approved excuse for the final exam you will take it at an
alternative time.

2. Homework: I will assign weekly homework. You are required to turn it in and it will count for
20% of your grade. Late homework will not be accepted. The TA for this course, will score
homework assignments and record scores - see him if you have any questions. Sometimes the
homework will be very difficult and you will be unable to complete all of the questions - always
turn in your best attempt to solve a problem with the solutions to the rest of the assignment. There
will be approximately 12 homework assignments and the best 10 will count towards your grade.

3. Papers: Each student will be required to complete three 5-page papers. Assignments are in the
course packet available at A1 copies.. Due Dates: September 26, October 24 and November
16. Papers will not be accepted late.

One of the reasons for having writing intensive courses is that good writing skills are very
important in today’s business world. We will always be grading your writing assignments partially
on your ability to communicate your ideas clearly, with good grammar, correct spelling, etc.
Presentation counts for 50% of your paper grade since this is a writing intensive class. For help
with your writing you should contact the writing center at Virginia Tech at 231-5436 or see You can e-mail grammar questions to


Final grades will be assigned according to the following weights:

 Midterm Exams        20% (10% each)
  Final Exam*              30%
     Papers           30% (10% each)
   Homework                20%

*All exams will be re-scaled so that the top grade will be an A.

Welcome to the Information Superhighway!

All of the handouts for this class (except for exams) will be available to you on my web page
“”. Most students find this to be convenient, especially when something
gets misplaced or you are forced to miss a class. I will also post solutions to exams and course
announcements. I suggest that everyone check the web page at least once a week. Friendly
Warning: Murphy’s Law of Computers states that the server will go down when you need it most.
One semester some students waited until late Sunday night to print out study questions (that had
been on the web site for 3 weeks) for a Monday morning exam. A thunderstorm in the early
evening knocked out power to the University, and the web server went down.

Weather Policy

If the University is officially closed during the time of an exam, the exam will be held during the
next scheduled class. Similarly, if homework or a written assignment is due at a time when the
University is closed it will be due at the next scheduled class. If the University is closed during the
class before an exam the exam (minus any uncovered material) will be given on the scheduled date.

Academic Conduct

You may obtain tutoring for this course, and you may work on homework together. You may not
work on papers or exams together. The purchase or sale of lecture notes is prohibited.

All students are expected to comply with the honor code in the completion of all assignments and
exams. You are further charged with reporting any incidence of impropriety which come to your
attention. I take this very seriously - I am on the Honor Board. For specifics on the honor code
see “”.

Hints for a Successful Semester

Every semester students come to me and say “I understand everything you say in class so I
thought I knew the material but I got a terrible grade on the midterm.” Here’s the problem:
Everyone who is enrolled in this course is smart enough to understand what I say in class. The
goal of the course, however, is to help you analyze new economic. So understanding the material in
class isn’t enough! You have to be able to apply the problem solving technique. If you can’t do
that, then you will not have succeeded in this course and you will be disappointed with your grade.

My suggestions about how to do well in this class are:

1. Ask questions. If a section of the lecture or a reading does not make sense to you, resolve your
uncertainty sooner rather than later. If you find it difficult to ask questions in class then send the
TA or me e-mail. (That is why many politicians make no sense…)

2. Study in groups. Take turns explaining portions of the material to each other. If your
explanation doesn’t makes sense to your group, there is a good chance that you don’t understand
the material. Economics almost always sounds simple when someone who understands it explains
it to you.

3. Always do the reading before class. Come prepared to ask questions on sections which you
found to be unclear. It will not be a productive study strategy to go back over and over the text to
prepare for the exam. Questions will focus on application of concepts and analysis of situations
- and not memorization.

Focus your energy on the assignments. Always try the homework before class - no matter how
bizarre it looks. If you can’t solve a problem the first time correctly, get help working it through,
wait a few days, and then try to solve it on your own without your notes.

The best way to waste your time in this class is look at the homework and solutions at the same
time. This study strategy promotes memorizing the answers and discourages learning to do the sort
of problem solving which is the goal of this course. (I can tell who is memorizing homework - they
are the people who complain that the test questions weren’t “like the homework problems.)
Memorizing economics is like memorizing the answers to one crossword puzzle to help you work
another one – pointless! Hint: resist the temptation to print out the solutions until your assignment
is complete, or seal solutions in an envelope until you have worked the problems.

This is a very hard class to cram for – students who have tried it before have been disappointed with
their grades.

4. If you are having trouble with studying, test anxiety or any other academic problems in this or
any other class or if you are having personal problems that are interfering with your life you should
talk to the people at the University Counseling Center. They can be reached for appointments at
231-6557 from 8 to 5 on M-F or “” for more information. They also
conduct classes which cover subjects such as “Coping with Stress” and “Test Taking Skills” that
many students find very helpful - especially if they have been out of school for a while.

5. Students who have test-taking accommodations from the Dean of Students should contact me
before the first midterm to make arrangements. Once you take an exam without accommodation
there is no remedy for a poor grade.

How to Get Help

The primary TA for the course is Syed (Sa Yed) Islam. He can answer questions about course
material, homework assignments and grading, what grades you have earned. You can e-mail him
questions if you can't make his office hours.

Office Hours: Monday 2:30-4:30 in his office and by appointment
Office Address: Pamplin 3051
Phone Number: (540)231-4549
E-mail Address:

Another TA for the course is Jeff Edwards. He can answer questions about course material, class
assignments, exam grading, class policies and everything else. You can e-mail him questions if you
can't make his office hours in the Tutoring Center.

Office Hours: Wednesdays 5:30-7:30 in the Economics Tutoring Center and by appointment
Office Address: Pamplin 3051
Phone Number: (540)231-4549
E-mail Address: (note - last character is the number one)

The Economics Department also maintains a Tutoring Center. It is mostly staffed by more
advanced Ph.D. students. They will be able to answer questions about economics, but will not have
information about grades, course policies, etc. The exception is that Jeff Edwards works in the
tutoring center on Wednesday nights so that is probably the best night to call or stop by.

Office Hours:          M-Th 5:30-7:30
Office Address:        Pamplin Hall 3029
Phone Number:          TBA
E-mail Address:

If need be you can turn in papers in my mailbox in Pamplin 3129 during business hours.
This is an outline of the topics we will cover in class. You may find it useful in studying for exams.
Week of Important Topics                          Reading - see assignment on web page for date
                                                  when it will be covered in class
8/22        Fundamentals                          Chapter 1 – include appendix
            - Economic vs. Accounting
            - Porter’s 5 Forces
            - Time Value of Money
            - Marginal Analysis
8/29        Demand and Supply                     Chapter 2
            - What shifts curves
            - Consumer and Producer               Chapter 3 pp. 69-93
            - Price ceilings and floors
            - Market Equilibrium
            - Comparative Statics
            Demand Analysis
            - Elasticity
            - Obtaining elasticity from
                linear demand functions
            - Obtaining elasticity from
                non-linear demand functions
9/5         Continue Demand Analysis              Chapter 3 pp. 93-105
            - Regression Analysis
                                                  Chapter 5 pp.152-170
            - Production basics                   Skip section on isocost curves
9/12       Continue Production                  Chapter 5 pp.171-192 Skip appendix
           - Cost minimization
           - Multi-product models
           - Economies of Scale/Scope
9/19       Continue Production                  Chapter 5 continued.
           - Cost Complementarities
           The Organization of the Firm
                                                Chapter 6 pp. 201-288
           - Transaction Costs
           - Hold-up
9/26       - Principals and Agents              pp. 218-229 skip appendix
           Paper #1 Due Today
9/28       Midterm #1                           Covers chapters 1, 2, 3, 5
10/3       The Nature of Industry               Chapter 7 – Include appendix
           - Industry Concentration
           - Market Structure
           - Conduct
           - Performance                        Chapter 8 pp. 268-300
           Optimization in Markets
           - Competitive markets
          -    Monopoly (includes
               multiplant monopoly)
10/10      Optimization continued             Chapter 8 – 301-309 Include appendix 316-318.
           - Monopolistic competition
           - Advertising                      Chapter 9 pp. 319-336
           Oligopoly Models
           - Sweezy
           - Cournot
10/17      Continue Oligopoly Models          Chapter 9 pp. 336-351 – Include appendix 356-7
           - Stackelburg                      Skip isoprofit curves wherever you see them
           - Bertrand
           - Differentiated Products
           - Contestable Markets
10/24      Game Theory                        Chapter 10 pp. 358-386
           - One shot games
           - Infinitely repeated games
           Paper #2 Due Today
10/31      Continue Game Theory               Chapter 10 pp. 386-395
           - Multistage games
11/2       Midterm #2                         Covers chapters 6, 7, 8, 9 and 10
11/7       Pricing Strategies                 Chapter 11
           - Markup Pricing
           - Price Discrimination
           - Two Part Tariffs
           - Bundling
           - Transfer Pricing
           - Price Matching
11/14      Economics of Information           Chapter 12 pp. 439-443
           - Expected Value
           - Decision Trees (not in book)
11/16      Paper #3 Due Today
11/21      Thanksgiving Break - No Class
11/28      Continue Information               Chapter 12 pp. 443-462
           - Risk Aversion
           - Consumer and Producer
           - Asymmetric Information
           - Moral Hazard
           - Screening and Signalling
12/5       Continue Information               Chapter 12 pp. 462-475
           - Auctions
           - Optimal Bidding
****Final exam will be given on Monday, December 11 from 10:05-12:05 a.m. ***
Changes to the syllabus may be made in the event of unforeseen circumstances.

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