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BRIEF CONTENTS
Preface: Teaching Students to Solve Problems xiii

SECTION I Problem Solving and Decision Making 1
1 Introduction: What This Book Is About 3
2 The One Lesson of Business 15
3 Benefits, Costs, and Decisions 27
4 Extent (How Much) Decisions 39
5 Investment Decisions: Look Ahead and Reason Back 51
SECTION II Pricing, Costs, and Profits 65

6 Simple Pricing 67
7 Economies of Scale and Scope 83
8 Understanding Markets and Industry Changes 95
9 Market Structure and Long-Run Equilibrium 113
10 Strategy: The Quest to Keep Profit from Eroding 125
11 Foreign Exchange, Trade, and Bubbles 137
SECTION III Pricing for Greater Profit 151

12 More Realistic and Complex Pricing 153
13 Direct Price Discrimination 163
14 Indirect Price Discrimination 171
SECTION IV Strategic Decision Making 183

15 Strategic Games 185
16 Bargaining 205
SECTION V Uncertainty 215

17 Making Decisions with Uncertainty 217
18 Auctions 231
19 The Problem of Adverse Selection 241
20 The Problem of Moral Hazard 253
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
vi BRIEF CONTENTS
SECTION VI Organizational Design 265

21 Getting Employees to Work in the Firm’s Best Interests 267
22 Getting Divisions to Work in the Firm’s Best Interests 279
23 Managing Vertical Relationships 293
SECTION VII Wrapping Up 305
24 You Be the Consultant 307
Epilogue: Can Those Who Teach, Do? 313

Glossary 315
Index 321
CONTENTS
Preface: Teaching Students to Solve Problems xiii
SECTION I Problem Solving and Decision Making 1
CHAPTER 1 INTRODUCTION: WHAT THIS BOOK IS ABOUT 3

1.1 Using Economics to Solve Problems 3
1.2 Problem-Solving Principles 4
1.3 Test Yourself 6
1.4 Ethics and Economics 7
1.5 Economics in Job Interviews 9
Summary & Homework Problems 11
End Notes 13
CHAPTER 2 THE ONE LESSON OF BUSINESS 15

2.1 Capitalism and Wealth 16
2.2 Does the Government Create Wealth? 18
2.3 Why Economics Is Useful to Business 18
2.4 Wealth Creation in Organizations 21
End Notes 23
CHAPTER 3 BENEFITS, COSTS, AND DECISIONS 27

3.1 Background: Variable, Fixed, and Total Costs 28
3.2 Background: Accounting Versus Economic Profit 29
3.3 Costs Are What You Give Up 31
3.4 Sunk-Cost Fallacy 32
3.5 Hidden-Cost Fallacy 34
3.6 A Final Warning 35
End Notes 38
CHAPTER 4 EXTENT (HOW MUCH) DECISIONS 39
4.1 Background: Average and Marginal Costs 40
4.2 Marginal Analysis 41
4.3 Incentive Pay 44
4.4 Tie Pay to Performance Measures That Reflect Effort 45
4.5 Is Incentive Pay Unfair? 46
vii
viii CONTENTS

End Notes 50
CHAPTER 5 INVESTMENT DECISIONS: LOOK AHEAD AND REASON BACK 51

5.1 Compounding and Discounting 51
5.2 How to Determine Whether Investments Are Profitable 52
5.3 Break-Even Analysis 54
5.4 Choosing the Right Manufacturing Technology 55
5.5 Shut-Down Decisions and Break-Even Prices 56
5.6 Sunk Costs and Post-Investment Hold-Up 57
5.7 Anticipate Hold-Up 58
End Notes 62
SECTION II Pricing, Costs, and Profits 65
CHAPTER 6 SIMPLE PRICING 67

6.1 Background: Consumer Values and Demand Curves 68
6.2 Marginal Analysis of Pricing 70
6.3 Price Elasticity and Marginal Revenue 72
6.4 What Makes Demand More Elastic? 74
6.5 Forecasting Demand Using Elasticity 76
6.6 Stay-Even Analysis, Pricing, and Elasticity 77
6.7 Cost-Based Pricing 78
End Notes 81
CHAPTER 7 ECONOMIES OF SCALE AND SCOPE 83

7.1 Increasing Marginal Cost 84
7.2 Economies of Scale 86
7.3 Learning Curves 87
7.4 Economies of Scope 89
7.5 Diseconomies of Scope 90
End Notes 93
CHAPTER 8 UNDERSTANDING MARKETS AND INDUSTRY CHANGES 95

8.1 Which Industry or Market? 95
8.2 Shifts in Demand 96
8.3 Shifts in Supply 97
8.4 Market Equilibrium 99
8.5 Predicting Industry Changes Using Supply and Demand 100
8.6 Explaining Industry Changes Using Supply and Demand 103
8.7 Prices Convey Valuable Information 104
8.8 Market Making 106
End Notes 111
CONTENTS ix
CHAPTER 9 MARKET STRUCTURE AND LONG-RUN EQUILIBRIUM 113

9.1 Competitive Industries 114
9.2 The Indifference Principle 116
9.3 Monopoly 120
End Notes 123
CHAPTER 10 STRATEGY: THE QUEST TO KEEP PROFIT FROM ERODING 125

10.1 A Simple View of Strategy 126
10.2 Sources of Economic Profit 127
10.3 The Three Basic Strategies 132
End Notes 135
CHAPTER 11 FOREIGN EXCHANGE, TRADE, AND BUBBLES 137

11.1 The Market for Foreign Exchange 138
11.2 The Effects of a Currency Devaluation 141
11.3 Bubbles 142
11.4 How Can We Recognize Bubbles? 144
11.5 Purchasing Power Parity 146
End Notes 149
SECTION III Pricing for Greater Profit 151
CHAPTER 12 MORE REALISTIC AND COMPLEX PRICING 153

12.1 Pricing Commonly Owned Products 154
12.2 Revenue or Yield Management 156
12.3 Advertising and Promotional Pricing 157
12.4 Psychological Pricing 158
End Notes 162
CHAPTER 13 DIRECT PRICE DISCRIMINATION 163

13.1 Introduction 163
13.2 Direct Price Discrimination 166
13.3 Robinson-Patman Act 167
13.4 Implementing Price Discrimination Schemes 168
13.5 Only Schmucks Pay Retail 169
End Notes 170
CHAPTER 14 INDIRECT PRICE DISCRIMINATION 171
14.2 Indirect Price Discrimination 172
14.3 Volume Discounts as Discrimination 176
14.4 Bundling Different Goods Together 177
x CONTENTS

End Notes 181
SECTION IV Strategic Decision Making 183
CHAPTER 15 STRATEGIC GAMES 185

15.1 Sequential-Move Games 186
15.2 Simultaneous-Move Games 188
15.3 What Can I Learn from Studying Games Like the Prisoners’ Dilemma? 194
15.4 Other Games 195
End Notes 203
CHAPTER 16 BARGAINING 205

16.1 Strategic View of Bargaining 205
16.2 Nonstrategic View of Bargaining 208
16.3 Conclusion 210
End Notes 214
SECTION V Uncertainty 215
CHAPTER 17 MAKING DECISIONS WITH UNCERTAINTY 217

17.1 Random Variables and Probability 217
17.2 Uncertainty in Pricing 222
17.3 Run Experiments to Reduce Uncertainty 223
17.4 Minimizing Expected Error Costs 224
17.5 Risk Versus Uncertainty 226
End Notes 230
CHAPTER 18 AUCTIONS 231

18.1 Oral Auctions 232
18.2 Second-Price Auctions 233
18.3 First-Price Auctions 234
18.4 Bid Rigging 234
18.5 Common-Value Auctions 236
End Notes 240
CHAPTER 19 THE PROBLEM OF ADVERSE SELECTION 241

19.1 Insurance and Risk 241
19.2 Anticipating Adverse Selection 242
19.3 Screening 244
19.4 Signaling 247
19.5 Adverse Selection and Internet Sales 248
CONTENTS xi

End Notes 251
CHAPTER 20 THE PROBLEM OF MORAL HAZARD 253

20.2 Insurance 254
20.3 Moral Hazard Versus Adverse Selection 255
20.4 Shirking 256
20.5 Moral Hazard in Lending 258
20.6 Moral Hazard and the 2008 Financial Crisis 260
End Notes 263
SECTION VI Organizational Design 265
CHAPTER 21 GETTING EMPLOYEES TO WORK IN THE FIRM’S BEST INTERESTS 267

21.1 Principal-Agent Relationships 268
21.2 Controlling Incentive Conflict 269
21.3 Marketing Versus Sales 271
21.4 Franchising 272
21.5 A Framework for Diagnosing and Solving Problems 273
End Notes 278
CHAPTER 22 GETTING DIVISIONS TO WORK IN THE FIRM’S BEST INTERESTS 279

22.1 Incentive Conflict Between Divisions 279
22.2 Transfer Pricing 281
22.3 Organizational Alternatives 283
22.4 Budget Games: Paying People to Lie 285
End Notes 291
CHAPTER 23 MANAGING VERTICAL RELATIONSHIPS 293

23.1 How Vertical Relationships Increase Profit 294
23.2 Double Marginalization 295
23.3 Incentive Conflicts Between Retailers and Manufacturers 295
23.4 Price Discrimination 297
23.5 Antitrust Risks 298
23.6 Do Not Buy a Customer or Supplier Simply Because It Is Profitable 299
End Notes 302
SECTION VII Wrapping Up 305
CHAPTER 24 YOU BE THE CONSULTANT 307

24.1 Truck Leasing 307
xii CONTENTS
24.2 Manufacturer Hiring 308

24.3 American Airlines 309
24.4 Law Firm Pricing 309
24.5 Cash Flow at a Forklift Dealership 310
24.6 Managing Interest-Rate Risk at Banks 311
24.7 What You Should Have Learned 312
Epilogue: Can Those Who Teach, Do? 313
Glossary 315
Index 321
PREFACE
Teaching Students to Solve Problems1

by Luke Froeb
When I started teaching MBA students, I taught economics as I had learned

it, using models and public policy applications. My students complained so
much that the dean took me out to the proverbial woodshed and gave me an
ultimatum, “improve customer satisfaction or else.” With the help of some
disgruntled students who later became teaching assistants, I was able to turn
the course around.
The problem I faced can be easily described using the language of eco-
nomics: the supply of business education (professors are trained to provide
abstract theory) is not closely matched to demand (students want practical
knowledge). This mismatch is found throughout academia, but it is perhaps
most acute in a business school. Business students expect a return on a fairly
sizable investment and want to learn material with immediate and obvious
value.
One implication of the mismatch is that teaching economics in the usual
way—with models and public policy applications—is not likely to satisfy stu-
dent demand. In this book, we use what we call a “problem-solving peda-
gogy” to teach microeconomic principles to business students. We begin each
chapter with a business problem, like the fixed-cost fallacy, and then give stu-
dents enough analytic structure to understand the cause of the problem and
how to fix it.
Teaching students to solve real business problems, rather than learn
models, satisfies student demand in an obvious way. The approach also
allows students to absorb the lessons of economics without as much of the
analytical “overhead” as a model-based pedagogy. This is an advantage,
especially in a terminal or stand-alone course, like those typically taught in a
business school. To see this, ask yourself which of the following ideas is more
likely to stay with a student after the class is over: the fixed-cost fallacy or
that the partial derivative of profit with respect to price is independent of
fixed costs.
xiii
xiv PREFACE
ELEMENTS OF A PROBLEM-SOLVING PEDAGOGY

Our problem-solving pedagogy has three elements.
Begin with a Business Problem

Beginning with a real-world business problem puts the particular ahead of the
abstract and motivates the material in a straightforward way. We use narrow,
focused problems whose solutions require students to use the analytical tools
of interest.
Teach Students to View Inefficiency as an Opportunity

The second element of our pedagogy turns the traditional focus of benefit-
cost analysis on its head. Instead of teaching students to spot and then elimi-
nate inefficiency, for example, by changing public policy, we teach them to
view each underemployed asset as a money-making opportunity.
Use Economics to Implement Solutions

Even after you find an underemployed asset, moving it to a higher-valued use
is often hard to do, particularly when the inefficiency occurs within an orga-
nization. The third element of our pedagogy addresses the problem of imple-
mentation: how to design organizations where employees have enough
information to make profitable decisions and the incentive to do so.
Again, we use the tools of economics to address the problem of imple-
mentation. If people act rationally, optimally, and self-interestedly, then mis-
takes have only one of two causes: either people lack the information
necessary to make good decisions or they lack the incentive to do so. This
immediately suggests a problem-solving algorithm; ask:
1. Who is making the bad decision?
2. Do they have enough information to make a good decision?
3. Do they have the incentive to do so?
Answers to these three questions will point to the source of the problem
and suggest one of three potential solutions:
1. Let someone else make the decision, someone with better information or
incentives
2. Give more information to the current decision maker
3. Change the current decision maker’s incentives
The book begins by showing students how to use this algorithm and sub-
sequent chapters illustrate its use in a different context, for example, invest-
ments, pricing, principal-agent relationships, and uncertain environments.
USING THE BOOK

The book is designed to be read cover-to-cover as it is short, concise, and
accessible to anyone who can read and think clearly. The pedagogy is built
around business problems, so the book is most effective for those with some
PREFACE xv
work experience. Its relatively short length makes it reasonably easy to cus-
tomize with ancillary material.
The authors use the text in full-time MBA programs, executive MBA pro-
grams (weekends), healthcare management executive programs (one night a
week), and nondegree executive education. However, some of our biggest
customers use the book in online business classes at both the graduate and
undergraduate levels.
In the degree programs, we supplement the material in the book with online
interactive programs like Cengage’s CourseMate or Samuel Baker’s Economic
Interactive Tutorials.2 Complete Blackboard courses, including syllabi, quizzes,
homework, slides, videos to complement each chapter, and links to supplementary
material, can be downloaded from the Cengage website. Our ManagerialEcon.com
blog is a good source of new business applications for each of the chapters.
In this fourth edition, we have updated and improved the presentation
and pedagogy of the book. The biggest change is in the supplementary mate-
rial: we have added videos to complement each chapter, included worked
video problems, and dramatically increased the size and quality of the test
bank. In addition to the other updates throughout the text, Chapter 24,
“You Be the Consultant,” has all-new content.
We wish to acknowledge numerous classes of MBA, executive MBA,
nondegree executive education, and healthcare management students, without
whom none of this would have been possible—or necessary. Many of our for-
mer students will recognize stories from their companies in the book. Most of
the stories in the book are from students and are for teaching purposes only.
Thanks to everyone who contributed, knowingly or not, to the book.
Professor Froeb owes intellectual debts to former colleagues at the U.S.
Department of Justice (among them, Cindy Alexander, Tim Brennan, Ken
Heyer, Kevin James, Bruce Kobayahsi, and Greg Werden); to former collea-
gues at the Federal Trade Commission (among them James Cooper, Pauline
Ippolito, Tim Muris, Dan O’Brien, Maureen Ohlhausen, Paul Pautler, Mike
Vita, and Steven Tenn); to colleagues at Vanderbilt (among them, Germain
Boer, Jim Bradford, Bill Christie, Mark Cohen, Myeong Chang, Craig Lewis,
Rick Oliver, David Parsley, David Rados, Steven Tschantz, David Scheffman,
and Bart Victor); and to numerous friends and colleagues who offered sugges-
tions, problems, and anecdotes for the book, among them, Lily Alberts,
Olafur Arnarson, Raj Asirvatham, Bert Bailey, Pat Bajari, Molly Bash, Sarah
Berhalter, Roger Brinner, the Honorable Jim Cooper, Matthew Dixon
Cowles, Abie Del Favero, Kelsey Duggan, Vince Durnan, Marjorie Eastman,
Keri Floyd, Josh Gapp, Brock Hardisty, Trent Holbrook, Jeff and Jenny
Hubbard, Brad Jenkins, Dan Kessler, Bev Landstreet (B5), Bert Mathews,
Christine Milner, Jim Overdahl, Rich Peoples, Annaji Pervajie, Jason Rawlins,
Mike Saint, David Shayne, Jon Shayne, Bill Shughart, Doug Tice, Whitney Tilson,
and Susan Woodward. We owe intellectual and pedagogical debts to Armen
Alchian and William Allen,3 Henry Hazlitt,4 Shlomo Maital,5 John MacMillan,6
Steven Landsburg,7 Ivan Png,8 Victor Tabbush,9 Michael Jensen and William
Meckling,10 and James Brickley, Clifford Smith, and Jerold Zimmerman.11
Special thanks to everyone who guided us through the publishing process,
including Daniel Noguera, Steve Scoble, Michael Worls, and Jyotsna Ojha.
xvi PREFACE
END NOTES
1. Much of the material is taken from Froeb, 6. John McMillan, Games, Strategies, and
Luke M. and Ward, James C., “Teaching Managers (Oxford: Oxford University Press,
Managerial Economics with Problems 1992).
Instead of Models” (April 5, 2011). The 7. Steven Landsburg, The Armchair Economist:
International Handbook on Teaching and Economics and Everyday Life (New York:
Learning Economics, ed. Gail Hoyt, Free Press, 1993).
KimMarie McGoldrick, eds. (Edward Elgar 8. Ivan Png, Managerial Economics (Maiden,
Publishing, 2012: Northampton, MA. MA: Blackwell, 1998).
2. http://sambaker.com/econ/ 9. http://www.mbaprimer.com
3. Armen Alchian and William Allen, Exchange 10. Michael Jensen and William Meckling, A
and Production, 3rd ed. (Belmont, CA: Theory of the Firm: Governance, Residual
Wadsworth, 1983). Claims and Organizational Forms (Cambridge,
4. Henry Hazlitt, Economics in One Lesson MA: Harvard University Press, 2000).
(New York: Crown, 1979). 11. James Brickley, Clifford Smith, and Jerold
5. Shlomo Maital, Executive Economics: Ten Zimmerman, Managerial Economics and
Essential Tools for Managers (New York: Organizational Architecture (Chicago: Irwin,
Free Press, 1994). 1997).
MANAGERIAL
ECONOMICS
SECTION 1
Problem Solving and Decision

Making
1 Introduction: What This Book Is About
2 The One Lesson of Business
3 Benefits, Costs, and Decisions
4 Extent (How Much) Decisions
5 Investment Decisions: Look Ahead and
Reason Back
1
Introduction: What This
1
Book Is About
In 1992, a junior geologist was preparing a bid recommendation for an oil

tract in the Gulf of Mexico. He suspected that this tract contained a large
accumulation of oil because his company, Oil Ventures International (OVI),
had an adjacent tract with several productive wells. Since no competitors had
neighboring tracts, none of them suspected a large accumulation of oil.
Because of this, he thought that the tract could be won relatively cheaply
and recommended a bid of $5 million. Surprisingly, OVI’s senior manage-
ment ignored the recommendation and submitted a bid of $21 million. OVI
won the tract over the next-highest bid of $750,000.
If the board of directors asked you to review the bidding procedures at
OVI, how would you proceed? What questions would you ask? Where
would you begin your investigation?
You’d find it difficult to gather information from those closest to the bid-
ding. Senior management would be suspicious and uncooperative because no
one likes to be singled out for bidding $20 million more than was necessary.
Likewise, our junior geologist would be reluctant to criticize his superiors.
You might be able to rely on your experience—provided that you had run
into a similar problem. But without experience, or when facing novel
problems, you would have to rely on your analytic ability.
This book is designed to show you how to complete an assignment like this.
1.1 Using Economics to Solve Problems

To solve a problem like OVI’s, first, figure out what’s causing the problem,
and second, how to fix it. In this case, you would want to know whether the
$21 million bid was too high at the time it was made, not just in retrospect. If
the bid was too aggressive, then you’d have to figure out why the senior man-
agers overbid and how to make sure they don’t do it again.
Both steps require that you predict how people behave in different cir-
cumstances, and this is where the economic content of the book comes in.
3
4 SECTION I • Problem Solving and Decision Making
The one thing that unites economists is their use of the rational-actor
paradigm to predict behavior. Simply put, it says that people act rationally,
optimally, and self-interestedly. In other words, they respond to incentives.
The paradigm not only helps you figure out why people behave the way they
do but also suggests ways to motivate them to change. To change behavior,
you have to change self-interest, and you do that by changing incentives.
Incentives are created by rewarding good performance with, for example,
a commission on sales or a bonus based on profitability. The performance
evaluation metric (revenue, cost, profit, or similar outcome) is separate from
the reward structure (commission, bonus, raise, or promotion), but they
work together to create an incentive to behave a certain way.
To illustrate, let’s go back to OVI’s story and try to find the source of the
problem. After his company won the auction, our geologist increased the
company’s oil reserves by the amount of oil estimated to be in the tract. But
when the company drilled a well, they discovered only a small amount of oil,
so the acquisition did little to increase the size of the company’s oil reserves.
Using the information from the well, our geologist updated the reservoir map
and reduced the reserve estimate by two-thirds.
Senior management rejected the lower estimate and directed the geologist
to “do what he could” to increase the size of the estimated reserves. So he
revised the reservoir map again, adding “additional” reserves to the com-
pany’s asset base. The reason behind this behavior became clear when, sev-
eral months later, OVI’s senior managers resigned, collecting bonuses tied to
the increase in oil reserves that had accumulated during their tenure.
The incentive created by the bonus plan explains the behavior of senior
management. Both the overbidding and the effort to inflate the reserve esti-
mate were rational, self-interested responses to the incentive created by the
bonus. Even if you didn’t know about the geologist’s bid recommendation,
you’d still suspect that the senior managers overbid because they had the
incentive to do so. Senior managers’ ability to manipulate the reserve estimate
made it difficult for shareholders and their representatives on the board of
directors to spot the mistake.
To fix this problem, you have to find a way to better align managers’
incentives with the company’s goals. To do this, find a way to reward man-
agement for increasing profitability, not just for acquiring reserves. This is
not as easy as it sounds because it is difficult to measure a manager’s contri-
bution to company profitability. You can do this subjectively, with annual
performance reviews, or objectively, using company earnings or stock price
appreciation as performance metrics. But each of these performance metrics
can create problems, as we’ll see in later chapters.
1.2 Problem-Solving Principles

This story illustrates two principles that will help you learn to diagnose and
solve problems. Notice that (1) we reduced the problem (overbidding) to a
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Booklist 17:104 D ’20
“All the plays collected here are significant—all have added to the
pleasure of playgoing. This book makes their remembrance the
richer.” W. S. B.
+ Boston Transcript p6 O 13 ’20 390w
“Most decidedly, these are not the measure of American drama.

They are just five American plays. When a man has done what
Professor Baker has done at Harvard, it is disappointing to find him
fathering so trivial a venture as the collecting of these five dramas
into a single volume.” K. M.
+ − Freeman 2:310 D 8 ’20 190w

“All these pieces, probably, profit by being printed in their entirety,
but a somewhat deliberate study of them leads to the conclusion that,
judged by any moderately critical standard, only two of them would
be marked for revival on account of their actual merits. The best of
them, by all odds, is the somewhat awkwardly named ‘As a man
thinks.’ Of the other pieces in the list, ‘The unchastened woman’ is
the only one that has substantial or abiding value.” J. R. Towse
+ − N Y Evening Post p4 O 23 ’20 1150w
“Four out of the five at least have interesting stories, and are
flawless in their adaptation to the theatre; but gayly as they trip on
the stage, they drag a little in the reading.”
+ − Review 3:389 O 27 ’20 350w
“This book is intended to interest both readers and amateur

players. It has, perhaps, no great significance as a compendium of
modern American drama but it should serve its purpose.”
+ Springf’d Republican p6 S 13 ’20 240w

Wis Lib Bul 16:234 D ’20 60w
BAKER, KARLE (WILSON) (MRS THOMAS

ELLIS BAKER) (CHARLOTTE WILSON,
pseud.). Blue smoke. *$1.50 Yale univ. press 811
19–14952
“The poems have been written ‘at intervals since 1901,’ the author
says, and consequently their moods are various.” (Springf’d
Republican) “Love, children, the cause of woman all move her to
song. Among other pieces we have specially noted the well-handled
conceit called ‘Winter secrets’; the happy introspective fancy called
‘The lost one’; the truly heartfelt elegy for ‘The dead fore-runner’ of
the woman’s movement; and the delightful literary reverie called
‘The love of Elia.’” (The Times [London] Lit Sup)
“These poems are not all smoke. There are many glowing embers
and a few blazing coals. Mrs Baker shows something of antique
restraint and not a little of the newer and freer impulse.” C. M.
Greene
+ Bookm 50:634 F ’20 140w
“Not ambitious in manner, Mrs Baker has the soundness and

felicity of art to make her themes poetically alive.” W. S. B.
+ Boston Transcript p5 S 17 ’19 1400w

+ Cleveland p85 S ’20 20w
“Hers is a gentle gracefulness, a light timidity that succeeds most

when it is least emphasized.” L: Untermeyer
+ Dial 68:532 Ap ’20 150w
“Mrs Baker’s metaphors from nature have an almost unexampled

finesse. She draws down trees, birds, stars, prints them on her page
with a diamond delicacy, heats and lights them into a tender, fiery
transparency. Her ideas are often second-hand, and her ardors,
sweet and genuine though some of them, particularly those for her
children, may be, are not perhaps distinguished enough to wear well.
The solid core of her work, however, though small, is fine.” M. V. D.
+ − Nation 110:76 Ja 17 ’20 220w
“‘Blue smoke’ is a book of happiness and hope. It is unpretentious,

modest, and sincere. The poems read as though publication had been
an afterthought; they were not written to catch an exclusive or
‘appreciative’ audience.”
+ Springf’d Republican p10 Ja 23 ’20

260w
“Mrs Baker, an American writer, is a craftswoman of much skill,

who is never at a loss for ideas, various and fruitful, and can fit them
to apt expression. Hence her book is always interesting, though it
does not succeed in giving us the thrill of beautiful utterance.”
+ − The Times [London] Lit Sup p174 Mr 11

’20 120w
“Possibly given overmuch to introspection, at times a little over-

wistful, this poet gives only her best. Her style is simple, vivid, never
précieuse; there is perfect ease in all the beauty of these songs.” E: B.
Reed
+ Yale R n s 10:204 O ’20 170w

BAKER, RAY PALMER, ed. Engineering
education. *$1.25 Wiley 620.7
19–14693
“These fourteen selected articles, written during the past decade by

eminent engineers and scientists, are designed not only to inform
engineering undergraduates concerning the broad aspects of their
profession, but to serve as examples of good English. Simon
Newcomb and Sir J. J. Thomson discuss the origins of engineering
education; J. B. Johnson and Howard McClenahan deal with the
types of engineering education; the relation of language to the
profession is considered by J. J. L. Harrington and C. P. Steinmetz.
The place of mathematics is discussed by Sir W. H. White and Arthur
Ranum; physics by M. A. Hunter and R. A. Millikan; chemistry by J.
B. C. Kershaw and Alfred Senier; and the role of the imagination in
engineering by Isham Randolph and J. C. Smallwood. The editor is
professor of English in the Rensselaer Polytechnic institute.”—N Y P
L New Tech Bks
Booklist 16:76 D ’19
“Each is not only well chosen for its primary purpose of use in
engineering schools but might also be read, or read anew, by
engineers in practice.”
+ Engin-News Rec 83:891 N 13 ’19 240w

“It strikes a reader that these addresses, each advocating the claim
of some one branch of science, interesting as they are, would have
been more useful if there had been a recognition of the distinction
between what should be included in the school course preceding the
technical course, in the technical course itself necessarily restricted,
and what extra academic self-education should be expected to
accompany and follow it.” W. C. U.
+ − Nature 105:258 Ap 29 ’20 700w

N Y P L New Tech Bks p15 O ’19 150w
Pratt p18 Ja ’20 30w
BAKER, RAY STANNARD (DAVID

GRAYSON, pseud.). New industrial unrest; reasons
and remedies. *$2 (4c) Doubleday 331
20–8811
“The battle is on” between employers and employees, says the

author in explaining the raison d’etre of the present volume whose
object it is to “present a survey, for the general reader, of the present
industrial crisis, and the various reconstructive experiments now
under way to meet it.” It is the author’s conviction that the problems
are very pressing, very real and intensely human and that, if the
American people can only be made to see and know and understand
where truly reconstructive experimentation is going on and who are
the thoughtful leaders on both sides, they will decide aright
regarding them. Some of the contents are: The industrial crisis as it
appears from above to the capitalist-employer; The industrial crisis
as it appears from below to the worker; The imputed causes of the
unrest; The real causes of the unrest; Awakening of the public to the
industrial crisis; Approaches to a solution of the problem—by
political action, as suggested by the workers—the new labor party;
The new shop-council system as applied in a typical small industry—
the Dutchess bleachery at Wappingers Falls, New York; Development
of the shop-council system in America—method of organization—the
movement in England and Germany; Foundations of the new co-
operative movement in industry: the new profession of management,
and the labor manager.
+ Booklist 16:327 Jl ’20
“As a trained journalist, he sees the problem clearly, without that

hard definiteness such as an economist who is more reliable but less
readable, usually believes essential to correct understanding.”
+ Boston Transcript p7 O 9 ’20 280w
“Combining the lucidity of the trained writer, the quick eye of the
reporter and the orderly reflectiveness of the born philosopher, Mr
Baker’s birdseye view of what is wrong with American industry is the
best book of its kind which has yet appeared.”
+ Ind 103:319 S 11 ’20 200w
“There is nothing the matter with Mr Baker’s observation, as far as

it penetrates, but it does not penetrate to the causes which maintain
the struggle in spite of anyone’s reasonableness or good intentions.”
G: Soule
+ − Nation 111:534 N 10 ’20 190w
“He is always the reporter standing outside, trying to understand a

technical problem and to help his audience to understand.” Ordway
Tead
+ − New Repub 25:208 Ja 12 ’21 410w
Reviewed by J. E. Le Rossignol
Review 3:504 N 24 ’20 350w

R of Rs 62:110 Jl ’20 30w
“An outlook free from confusing prejudices and a well disciplined

ability to obtain facts were carried to the inquiry. Mr Baker’s
principal prepossession seems to have been a desire to learn those
things which are favorable to the public well being. That, I take it, is
not an insuperable handicap. On the whole there is perhaps no other
single book which tells so well and so truthfully the story of a large
and important part of ‘the new industrial unrest.’”
+ Survey 44:316 My 29 ’20 300w
“Mr Baker’s writings are in more or less popular style which makes
them decidedly readable without detracting in the least from the
accuracy of the facts which he presents.”
+ Textile World 57:30 My 15 ’20 220w

“Mr Baker’s honesty and fair-mindedness verge upon genius—
though they are plainly aided by his refusal to break through the
surface where he is unable to see clearly.” W: E. Walling
+ − Yale R n s 10:217 O ’20 480w
BAKEWELL, CHARLES MONTAGUE. Story

of the American Red cross in Italy. il *$2 (4c)
Macmillan 940.477
20–15731
The story tells of the material aid that the American Red cross gave
to Italy: at the front, in canteens, in assistance to hospitals, and in
helping refugees and the needy families of soldiers, but the emphasis
is put less on its achievements than on its contribution to a better
understanding between our two people and on the finer and more
discriminating appreciation of Italian character that our workers in
the field have invariably gained. Some of the topics are: The
American relief clearing house; The Baker commission, Red cross
emergency commission; Organization; Civilian relief and the “inner
front”; Cash distribution to soldiers’ families; Station canteens;
Rolling canteens; Surgical dressings; Hospital supplies; Hospitals;
Work with American troops in Italy. There are numerous
illustrations and statistical appendices.
“A readable book not overloaded with statistics.”

+ R of Rs 62:671 D ’20 50w
BALDWIN, CHARLES SEARS. God unknown.
*$1 Morehouse 231
20–8877
A study of the address of St Paul at Athens, based on lectures

delivered at Columbia and Indiana universities. There are five
chapters: Religion in the open; Greek and Jew; Philosophy and
religion; Personality; Symbol and reality. The author is professor of
rhetoric and English composition in Columbia university and has
written a book on “The Bible as a guide to writing.”
“One feels grateful for such an intellectual and scholarly work as

that of the author of this small volume, who has made real one of the
most famous events of ancient times.”
+ Boston Transcript p6 S 8 ’20 520w

The Times [London] Lit Sup p623 S 23
’20 50w
BALDWIN, JAMES, and LIVENGOOD,

[2]
WILLIAM WINFRED. Sailing the seas; introd.
by E: N. Hurley. il *$1 Am bk. 656
20–5112
“A sailor’s imaginary log, full of interest for boys and written at the
request of the U.S. Shipping board to promote in the younger
generation an understanding of the development of types of
American boats of commerce, of the interdependence of peoples and
of the importance of the merchant marine. Includes whalers, tramp
steamers and ocean liners.”—Booklist
+ Booklist 17:120 D ’20

+ Springf’d Republican p8 O 5 ’20 240w
[2]
BALDWIN, MARIAN. Canteening overseas;
1917–1919. *$2 Macmillan 940.48
20–15730
“What one Y. M. C. A. worker saw in France is told in a collection

of letters written by Marian Baldwin and published under the title of
‘Canteening overseas.’ The dates on the letters run from June 30,
1917, to June 19, 1919. The first one was written on board the ship
that took Miss Baldwin to France and the last one from Coblenz.
Between the two are letters from Paris, Bordeaux, Aix-les-Bains, the
Lorraine sector, the Argonne, the St Mihiel front, from Verdun and
from Germany. All the letters are reprinted as they were originally
written, except for the insertion of names of places, persons, and a
few other indications, which, because of the censorship, had perforce
to be omitted from the letters as mailed from Europe.”—N Y Times
“There is a gay spontaneity in parts of the book, a sincerity running

through it, and more than all else it serves to reveal the effect of these
dark days of service, of endurance, often of hardship upon the writer
herself.”

N Y Times p30 Ja 9 ’21 170w
“These letters are made vivid by a natural descriptive touch, by an

ever-present sense of humor, and by an admirable spirit.”
+ Outlook 126:378 O 27 ’20 130w
BALDWIN, SIMEON EBEN. Young man and

the law. (Vocational ser.) *$1.50 Macmillan 340
20–2658
“Professor Baldwin, ex-chief justice and ex-governor of

Connecticut, bears a leading name in the history of the legal
profession. He discusses the majesty of the law and the lawyer as its
minister, the cultivation of mind and heart incident to the legal
profession, the lawyer’s various opportunities, the personal and
educational qualities requisite of success, and the ideals of the
profession.”—Boston Transcript
+ Boston Transcript p4 My 5 ’20 120w
“The dominant note of the book is its idealism. Judge Baldwin has
the fortunate faculty of seeing things at their best.”
+ Nation 110:524 Ap 17 ’20 280w

“Eminently worth while for any young man who is thinking of the
law as his profession.”
+ Outlook 124:657 Ap 14 ’20 50w

The Times [London] Lit Sup p242 Ap
15 ’20 50w
BAMBER, MRS L. KELWAY, ed. Claude’s

second book. *$1.60 (7½c) Holt 134
(Eng ed 20–8723)
“This book records a continuation of the ‘talks’ already published

in ‘Claude’s book,’ which described a young airman’s first
impressions and experiences of life after death in the spirit-world in
which he suddenly and unwillingly found himself when he was
killed.” (Preface) The present volume is furnished with an
introduction by Ellis Thomas Powell and some of Claude’s “talks”
are: Some difficulties of mediumship; The circle of power; Ideal
sitters; Spiritualism and occultism; Man’s reincarnation; Dreams;
The power of mind; Spirit helpers; God—the war—the Christ-spirit;
Development of personality; The prerogative of spirit; Prayer.
“In this second book of Claude’s talks with his mother, we find a
considerable advance in thought. Certain chapters, such as that on
prayer, would be recognized for their worth, even if they were
entirely disassociated with this type of book.”

“The explanations themselves are as unconvincing and improbable
as usual.”
− N Y Times p16 N 14 ’20 310w
BANGS, JOHN KENDRICK. Cheery way. *$2

Harper 811
20–13319
“A bit of verse for every day” says the subtitle, and, indeed, the
verses contain a cheery message for every day in the year, full of
courage, humor, sympathetic understanding of all human moods,
and good advice. The page decorations by J. R. Flanagan are in four
designs, one for each season.
“These little stanzas are full of the philosophy of good humor with
some real gospel messages.”
+ Boston Transcript p4 D 31 ’20 340w
BANGS, MARY ROGERS. Old Cape Cod; the

land, the men, the sea. il *$3.50 (4c) Houghton 974.4
20–19426
The table of contents indicates the scope of this book about Cape
Cod. The chapter headings are: The land; The old colony; The towns;
The French wars; The English wars; Theology and whaling; Storms
and pirates; Old sea ways; The captains; The county; Genius loci.
There are eight full-page halftone illustrations from photographs and
two end maps, one a modern map of Cape Cod and the other a
facsimile of a part of Captain Cyprian Southack’s map, made in 1717.
There is no index.
“One of the best Cape Cod books.”

+ Ind 104:242 N 13 ’20 60w
+ N Y Evening Post p18 N 13 ’20 220w
Reviewed by B. R. Redman
+ N Y Times p9 Ja 9 ’21 260w
“Good stories of pirates, Indians, and sea captains make the book
lively reading.”
+ Outlook 126:470 N 10 ’20 40w
Reviewed by E: L. Pearson
+ Review 3:531 D 1 ’20 70w

+ R of Rs 63:111 Ja ’21 20w
+ Springf’d Republican p9a D 5 ’20 290w
[2]
BANKS, LOUIS ALBERT. Winds of God.
*$1.75 Funk 252
A volume containing thirty of the author’s sermons, among them:

The east wind; The north wind; The whirlwinds of life; The need of a
red-blooded Christianity; The banishment of anxiety; The sorrows of
a tangled soul; The freedom of the city of God; Abraham Lincoln;
The blessings that come from prayer; The romance and joy of the
pioneer; Keeping the soul alive; The Bible ideal of a noble
womanhood.
BANNERJEA, D. N. India’s nation builders.

*$3.50 Brentano’s
“Fifteen biographies and character sketches of eminent Indians

whom the author regards as pioneers of modern India. The leaders
include Sir Rabindranath Tagore, Keshab Chandra, Sen., Dadabhoy
Naoroji, Gopala Krishna Gokhale, Bal Gangadhar Tilak, and others.”
(Brooklyn) “The writer would urge, by constitutional means, the
immediate grant to India, subject to the stability of the empire as a
whole, of a substantial measure of self-government.” (The Times
[London] Lit Sup Jl 10 ’19)
Ath p684 Ag 1 ’19 340w

Brooklyn 12:134 My ’20 40w

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Preface: Teaching Students to Solve Problems xiii

SECTION II Pricing, Costs, and Profits 65

SECTION III Pricing for Greater Profit 151

SECTION IV Strategic Decision Making 183

SECTION V Uncertainty 215

SECTION VI Organizational Design 265

Epilogue: Can Those Who Teach, Do? 313

Preface: Teaching Students to Solve Problems xiii

SECTION I Problem Solving and Decision Making 1

CHAPTER 1 INTRODUCTION: WHAT THIS BOOK IS ABOUT 3

CHAPTER 2 THE ONE LESSON OF BUSINESS 15

CHAPTER 3 BENEFITS, COSTS, AND DECISIONS 27

Summary & Homework Problems 47

CHAPTER 5 INVESTMENT DECISIONS: LOOK AHEAD AND REASON BACK 51

SECTION II Pricing, Costs, and Profits 65

CHAPTER 6 SIMPLE PRICING 67

CHAPTER 7 ECONOMIES OF SCALE AND SCOPE 83

CHAPTER 8 UNDERSTANDING MARKETS AND INDUSTRY CHANGES 95

CHAPTER 9 MARKET STRUCTURE AND LONG-RUN EQUILIBRIUM 113

CHAPTER 10 STRATEGY: THE QUEST TO KEEP PROFIT FROM ERODING 125

CHAPTER 11 FOREIGN EXCHANGE, TRADE, AND BUBBLES 137

SECTION III Pricing for Greater Profit 151

CHAPTER 12 MORE REALISTIC AND COMPLEX PRICING 153

CHAPTER 13 DIRECT PRICE DISCRIMINATION 163

Summary & Homework Problems 178

SECTION IV Strategic Decision Making 183

CHAPTER 15 STRATEGIC GAMES 185

CHAPTER 16 BARGAINING 205

SECTION V Uncertainty 215

CHAPTER 17 MAKING DECISIONS WITH UNCERTAINTY 217

CHAPTER 18 AUCTIONS 231

CHAPTER 19 THE PROBLEM OF ADVERSE SELECTION 241

Summary & Homework Problems 249

CHAPTER 20 THE PROBLEM OF MORAL HAZARD 253

SECTION VI Organizational Design 265

CHAPTER 21 GETTING EMPLOYEES TO WORK IN THE FIRM’S BEST INTERESTS 267

CHAPTER 22 GETTING DIVISIONS TO WORK IN THE FIRM’S BEST INTERESTS 279

CHAPTER 23 MANAGING VERTICAL RELATIONSHIPS 293

SECTION VII Wrapping Up 305

CHAPTER 24 YOU BE THE CONSULTANT 307

24.2 Manufacturer Hiring 308

Teaching Students to Solve Problems1

When I started teaching MBA students, I taught economics as I had learned

ELEMENTS OF A PROBLEM-SOLVING PEDAGOGY

Begin with a Business Problem

Teach Students to View Inefficiency as an Opportunity

Use Economics to Implement Solutions

USING THE BOOK

Problem Solving and Decision

In 1992, a junior geologist was preparing a bid recommendation for an oil