DE PAUL UNIVERSITY

Economics 555 Economics for Decision Making Winter 2001

Professor: Dr. Gary R. Skoog Legal Econometrics, Inc. (847) 729-6154

preferred e-mail: gskoog@alumni.umich.edu

secondary De Paul: gskoog@wppost.depaul.edu

Office Hours: Before class, after class, and by appointment

Also, appointments with a tutor (Angela or Mike)

may be set up through the Department

Secretary (Carla or Lisa) at (312) 362-8781.

Textbook: Managerial Economics, 2nd Ed., by Jeffrey M. Perloff,

Addison Wesley Longman,2000. All references to chapters

and sections below refer to this book.

Also required is the study guide for this text, prepared by

Mason and Whaples.

Course Description and Philosophy:

This course, according to the De Paul Bulletin, "provides students with an

opportunity to apply microeconomic principles to managerial decision-

making. These principles include those underlying theories of consumer

choice, production and cost as they relate to decisions made by firms and

households. Specific topics include consumer demand analysis and estima-

tion; elasticity; production theory; cost structure and estimation; profit

maximization; and the effect of market structure on pricing, output and

profit."

We shall do this, with the exception that the treatment of econometric

estimation will be cursory; it is best left to an econometrics course.

Prerequisites: There are no formal requirements; however it is urged that

the GSB calculus requirement be met in advance of this course. Under-

graduate microeconomics courses will also prove helpful; if you have not

taken such a course, or took one in the past, it would be useful for you to

review this material in the first two weeks. Your homework assignments in

the first two weeks are light, to permit you the time to do this.

Mathematics involving algebra, geometry and differential calculus will be

used. There will be a quick coverage in class of some calculus and some

mathematics of optimization. If you are weak mathematically (you will know

this after the first lecture), you may wish to more extensively "tool up"

and take this course later.

Grading: The course grade will be determined by a mid-term exam (40%) and

the final exam (60%). Homework will not be graded, but each week groups of

problems from the text and the study guide will be assigned. I will on

occasion collect these assignments to ensure that you are participating. We

may discuss selected problems in class. In rare cases these may be con-

sidered in determining a grade,; more likely, they will explain, not cause,

Economics 555 -2- Winter, 2001

the grade as determined by the examinations.

The schedule below represents a goal; we may not be able to proceed as

quickly, depending on classroom interaction. Each class will be divided

into 6:15 to 7:45 and 8:00 to 9:30 halves, with topics in each part indi-

cated below.

MAKE-UP EXAMS: The date of the midterm will be February 13; the final exam

will be March 20. It is your obligation to take these exams when given.

Only rare, valid, prior excuses will be considered for exceptions (e.g.

medical emergencies - elective surgery doesn't cut it, nor do business

trips). There will be no make-up exam for the mid-term. If you miss it with

a valid, prior, excuse your final determines your grade. A make-up final is

even more strongly discouraged. The make-up date for a valid pre-approved

excuse will be during the final exam period next quarter.

CLASS MEETINGS AND PARTICIPATION: The class meets for 10 weeks in 3 hour

sessions once per week. Instructors have found that students missing more

than one class have difficulty passing the course. While lectures generally

follow the material in the text, there will definitely be "value added"

from class attendance. There will be both lecture and discussion in all

meetings.

CHAPTERS NOT COVERED: There is more content in the 20 chapters and 704

pages of this text than can be covered in a one quarter course. You will

note from this syllabus that Chapters 10 (General Equilibrium and Economic

Welfare), 16 (Interest Rates, Investmenta and Capital Markets) and 18

(Externalities, Commons and Public Goods) are not assigned.

NONCHAPTERS COVERED: The 30 Appendix pages contain a succinct mathematical

treatment of the material and/or ideas expressed in a much more leisurely

fashion in the text.

The syllabus below indicates topic headings from the text and the place

during the quarter in which I intend to discuss them. Many are short, so do

not be discouraged by the number appearing for each week. Some headings do

not appear in the text - for these you will need to come to class.

GRADING: You are assured of at least the following grades with the follow-

ing (weighted) averages from your examinations: 90-100 = A; 80-89 = B; 70-

79 = C; 60-69 = D. If the exams prove more difficult than anticipated, I

may adjust the requirements downward. As with homework, I reserve the right

to take class participation into account in determining borderline grades.

Tentative Lecture Schedule and Topics

Date Topic Reading Assignment

January 8 Course Preliminaries

Week 1

Introduction Chapter 1

Microeconomics: The Allocation of pp. 1-12

Scarce Resources

Models

Economics 555 -3- Winter, 2001

Uses of Microeconomic Models

Optimization Techniques and Calculus Primer

(See also Prof. Donley's Notes at his

Web Site, http://economics.depaul.edu/donley/Courses/555

on the left frame, click on Lecture 1 (calculus primer)

Derivatives

Rules for Differentiation

First and Second Order Conditions for Optimization

Constrained Optimization

Substitution Approach

La Grange Multiplier Approach

January 15 Supply and Demand Chapter 2

Week 2 Market Demand Curve pp. 13 - 45

Supply

Market Equilibrium

Shocking the Equilibrium

Effects of Government Intervention

Chapter 3

pp. 46 - 72

Applying the Supply and Demand Model

How Shapes of the Quantity Demanded and

Supply Curves Matter

Sensitivity of Quantity Demanded to Price

Sensitivity of Quantity Supplied to Price

Long Run Versus Short Run

Effects of a Sales Tax

January 22 Theory and Measurement of Demand

Theory: Consumer Behavior and Rational Choice Chapter 4

Indifference Curves pp. 112-133

Marginal Rate of Substitution

Concept of Utility

Budget Line

Equilibrium Market Basket

Utility Maximization

Corner Solutions

Rational Choice

Deriving Individual Demand Functions

Market Demand As the Summation of Individual Demands

Week 3

Measurement: Estimating Demand Functions Chapter 5

Identification Problem pp. 134-177

Consumer Interviews

Market Experiments

Regression Analysis

Simple Regression Model

Sample Regression Line

Method of Least Squares

Multiple Regression

Diagnostics/Problems: Serial Correlation,

Multicollinearity and Residual Analysis

January 29 Production Theory Chapter 7

Production Function With One Variable Input pp. 215-263

Economics 555 -4- Winter, 2001

Law of Diminishing Returns

Optimal Level of Input Use

Isoquants

Marginal Rate of Technical Substitution

Optimal Combination of Inputs

Week 4 Examples

Returns to Scale

Output Elasticity

Measurement of Production Functions

Examples

February 6 Technical Change and Industrial Innovation Chapter 8

Technological Change pp. 264-294

Labor Productivity

Total Factor Productivity

Week 5 Innovation

Time-Cost Tradeoffs

The Learning Curve

February 13 Catch-Up, As Necessary

Review

Week 6

Midterm - 2 Hours

February 20 Analysis of Costs Chapter 9

Introduction pp. 295-342

Opportunity Costs

Short Run Cost Functions

Average and Marginal Costs

Long Run Cost Functions

Example: Crosby Corporation

Application: Predatory Pricing As

Setting Price (a) Below SRMC (b) Below AVC

Measurement of Short-Run Cost Functions

Estimation

Long Run Statistical Cost Estimation

Example: Electric Power

Week 7

Economies of Scope

Break-Even Analysis

Algebraic Break Even Analysis

Profit Contribution Analysis

February 27 Perfect Competition, Monopoly & Chapter 11

Monopolistic Competition pp. 385-432

Market Structure

Market Price Under Perfect Competition

Shifts In Supply & Demand Curves

The Output Decision of a Perfectly

Competitive Firm

Setting Marginal Cost Equal to Price

Long Run Equilibrium of the Firm

Economics 555 -5- Winter, 2001

Long Run Adjustment In a Constant Cost Industry

Long Run Adjustment In an Increasing Cost Industry

How a Perfectly Competitive Economy Allocates Resources

Week 8

Price and Output Decisions Under Monopoly

Measurement of Market Power - the Lerner Index

Example

A Disneyland Dilemma: Two Part Tariffs

for a Mickey Mouse Monopoly

Bundling/Tying

Monopolistic Competition

Price and Output Under Monopolostic Competition

Advertising Expenditures

March 6 Oligopoly Chapter 12

The Emergence of Oligopolistic Industries pp. 433-451

Maturity and Decline of Oligopolistic Industries

Collusive Agreements

The Breakdown of Collusive Agreements

Dissension in the OPEC Oil Cartel

Price Leadership

What Strategies Seem to Pay Off Best?

Conscious Parralelism

Week 9

The Thrust and Parry of Oligopolistic Chapter 13

Rivalry pp. 463-468

The Importance of Committment

When Is a Threat Credible?

The Importance of Entry

Pricing Tactics Chapter 14

Cost Plus Pricing pp. 478-492

Cost Plus Pricing Case Studies

Does Cost Plus PricingMaximize Profit?

Pricing of Joint Products: Fixed Proportions

Output of Joint Products: Variable Proportions

March 13 Pricing Tactics, Continued

Price Discrimination

Airline Travel: A Case Study

Price Discrimination in Pharmaceuticals

Price Discrimination Via Coupons

Tying at IBM and Xerox

Per Se Illegality of Tying: Jefferson Parish

Transfer Pricing

Week 10

Government & Business Chapter 17

Competition and Monopoly pp. 593-612

Regulation of Monopoly

Examples

Effects of Regulation on Efficiency

Concentration of Economic Power

Structure, Conduct, Performance

The Sherman Act (1890)

Economics 555 -6- Winter, 2001

The Clayton Act (1914), Robinson-Patman (1936),

and the Federal Trade Commission Act (1914)

The Interpretation of the Antitrust Laws

Antitrust Policy During the 1960's and 1970's

Antitrust Policy During the 1980's and 1990's

Case Study: Du Pont's Titanium Dioxide Pigments

--------- As Time Permits ----------------------

March 20 FINAL EXAM

If anyone requests by e-mail, I will be in the

classroom 45 minutes before the final examination

time to answer any questions you may have.