Managerial Economics

Term 1, 2017-2018
Instructors
1. Bruce Allen
Office telephone: TBA
Location: AC8, Level 1, Room 8120
Email: allen@wharton.upenn.edu
Office hours: Friday, 10 am to 12 noon, or by appointment

2. Tarun Jain
Office telephone: 7267
Location: AC8, Level 1, Room 8119
Email: tarun_jain@isb.edu
Office hours: Friday, 10 am to 12 noon, or by appointment

Academic Associates
Chandra Baid Prashant Kumar
Location: ASA Office Location: ASA Office
Email: Chandra_Baid@isb.edu Email: prashant_gupta@isb.edu
Office hours: TBA Office hours: TBA

I. Overview of the course

The course is divided into two parts.

- Part I, taught by Bruce Allen, April 24 to May 9
- Part II, taught by Tarun Jain, May 10 to May 25.

Learning Goals:
The course is intended to teach you the process of critical and integrative thinking. Assessment
will be through five homeworks, quizzes, a mid-term exam, and a final exam.

Methodology:
Towards meeting the learning goals, the course introduces you to the economist’s way of thinking
about problems and making decisions. Some of you may take to the methodology like ducks to
water; others will find it bitter medicine. In both cases, you will hopefully learn to appreciate the
methodology and likely alter the way you look at the world and what you do. A central
component of economics methodology involves running controlled thought experiments called
models. These are toy versions of real situations in which the less critical aspects of the problem
are stripped away to focus on understanding the primary issue under consideration. Beyond
appreciating this technique, learning economics necessarily entails engagement and arguments
with the logic. Most importantly, we do NOT offer a laundry list of facts to be learnt by rote –
otherwise, there would be no need for a course.

This course in managerial economics will use the above-mentioned methodology to focus on
decision-making in business situations. Managers regularly address issues ranging from pricing,
cost determination, compensation, entry into and exit from markets, and output decisions. At the
end of the course, you will have the basic tools that structure these problems for optimal decision-
making and, more importantly, develop an intuition for analyzing economic problems.

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This is a problem-oriented course. We recognize that as a manager, you will seldom be asked for
your intuition and (almost certainly) never asked for a formal proof, but you will be asked to price
services, determine how much material to produce, make decisions to invest, etc. While the
problems differ from one context to another, intuition and the logic of the proof do not. So, rather
than focusing on a specific scenario, you must instead understand the intuition in solving any
problem. To facilitate this, we provide sample questions and solutions on the course webpage.

It must be clear from above that BASIC (AND WE DO MEAN, BASIC) mathematical and
calculus skills are expected for this course. To refresh your skills in this area, refer to the videos
on LMS titled “Quantitative Tools for Economics”

II. Course Conduct - Contract with Students

Students will be expected to be prepared for all classes. This includes having done the readings
and being prepared to answer questions/participate in discussions. Students should arrive in class
on time, not leave the class during the session, and not perform any other activity that is unrelated
to the course during class-time.

The only way to learn is to be prepared for classes by reading the material before each class. It is
useful to ask questions and actively participate in class. There are numerous opportunities and
options outside the classroom made available for students. Students should make use of instructor
office hours as well as those of academic assistants (AAs) assigned to the course.

Learning is an interactive process. ISB students are admitted partly based on the experiences they
bring to the learning community and what they can add to class discussions. Therefore,
attendance is an important aspect of studying here. You have to be present in all the classes.
Absence is only appropriate in cases of extreme personal illness, injury, or close family
bereavement. Voluntary activities such as job interviews, business school competitions, travel
plans, joyous family occasions, etc. are never valid reasons for missing any class. The faculty
with the assistance of the Academic Associate will keep track of your attendance and decide on
the nature and extent of penalty for any absence from the class. Penalty may include reduction in
grade.

Many professors choose to base part of the course grade on class participation, which may
include an attendance component. If you find it necessary to miss a class or make a late
submission, you must seek permission from the instructor in advance. In case of illness, the
professor may also require a letter of confirmation from a qualified doctor.

Last but not the least, it is IMPERATIVE, that we treat all stakeholders in the classroom (and
possibly those outside the classroom too, though we have little control over that) with respect.
Learning is not about putting others down as much as being attentive to others’ perspectives.

In return for your adherence to the contract, the instructor promises to be on time, well-prepared
and appear well-kept.

III. Course Material

The readings for each class will be available only on the course webpage (on LMS). You are
expected to access that material and be familiar with it prior to the class.

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Handouts, if any, for each lecture will be handed out in class. They will also be available on the
course webpage after the lecture.

In addition, a series of videos titled “Quantitative Tools in Economics” that are useful for
Managerial Economics at ISB are posted on LMS.

Recommended (but not required) for the course are the following books:
 “Managerial Economics” 7th edition by Bruce Allen, Neil Doherty, Keith Weigelt and Edwin
Mansfield
 “Microeconomics for Managers” by David Kreps
 “Microeconomics” 7th edition by Robert Pindyck and Daniel Rubenfeld

Several copies of these books are in the library. These books have a number of problems that you
can solve for practice, preferably before you come for class. Even though you may face some
difficulty in solving them prior to the class, it would be extremely useful for you to take a shot
early on. And if all goes well, these problems will be a breeze after the class.

IV. Course Schedule

Here is an approximate outline of what is intended for each class. Additional readings may be
announced in class or by email. You would be expected to familiarize yourself with the readings
before each lecture. (Note that content and dates may change to accommodate the pace of the
class. Such changes will be announced.)

Date Topics/Objects
April 24/April 25: Basic Economic Concepts and applications
Required Readings:
 “Excellence v Equity”, The Economist, March 28, 2015.
 “The Regulators’ Best Friend”, The Economist, March 31, 2005.
 “The Problem with Make in India”, Livemint, November 2,
2015.
 “The Secret Document That Transformed China”, NPR Planet
Money, January 20, 2012.
 “What to Pay the Maid”, WSJ, August 5, 2012.

April 26/April 27: Demand, Elasticity, Consumer Surplus, Aggregate Demand

Required Readings:
 “Croissantonomics”, The Economist, August 29, 2015.
 “Snow Leopard Takes a Page From the App Store Playbook”,
The New York Times, June 11, 2009.
 “Net Benefits”, The Economist, March 9, 2013.

April 27 (Th, 2 pm) Group Homework 1 handed out (on LMS only), by 2 pm

May 1 (M, 8am) Group Homework 1 due (hard copies), by 8 am, AC3 Courtyard

May 1/May 2: Costs; Supply; Cost Dynamics

Required Readings:
 “SoulCycle: You Say ‘Cult.’ I Say ‘Loyal Customer Base.’”, The
New York Times, August 7, 2015.

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  “Coconuts Go Upscale, Boosting Price of Conventional Coconut
Oil”, WSJ, April 7, 2016.
 “How the US Lost Out on iPhone Work”, The New York Times,
January 21, 2012.
 “Why the Price of Quinoa has Fallen”, The Economist, May 24,
2016.

May 3/May 4: Perfect Competition; Monopoly and Price Discrimination

Required Readings:
 “Is Natural Gas too Cheap to Drill?” Bloomberg, April 17, 2012.
 “Why Your Phone can’t Really Replace Your Credit Card”,
WIRED, August 4, 2010.
 “Pay for it”, Forbes, June 19, 2008.
 “The EpiPen, a Case Study in Health System Dysfunction”, The
New York Times, August 23, 2016.
 “The Evolving Economics of the App”, WSJ, March 3, 2013.

May 4 (Th, 2 pm) Group Homework 2 handed out (on LMS only), by 2 pm

May 6 (S) Quiz, Time and location TBD

May 8 (M, 8 am) Group Homework 2 due (hard copies), by 8 am, AC3 Courtyard

May 8/May 9 Market Efficiency, Market Distortions

Required Readings:
 “Do Rent Controls Work?” The Economist, August 30, 2015.
 “Derivatives can End Government Distortion of Agricultural
Prices”, Livemint, November 20, 2012.
 “Britain’s Flat Idea to Tax Soda and Other Sugary Drinks”, The
Washington Post, March 22, 2016.
 “Paying with our Sins”, The New York Times, May 16, 2009.

Date TBA Examination on Part I of the course

May 10/May 11 Individual Behavior, Risk Aversion, Adverse Selection, Signaling, Moral
Hazard
Required Readings:
 “Secrets and Agents”, The Economist, 23 July, 2016.
 “The Case for Neck Tattoos, According to Economists”, The
Atlantic, 13 June, 2016.
 “How Hyundai sells more when everyone else is selling less”
Business Day, 14 June, 2009.
 “Teacher Incentives”, by Kalyani Chaudhuri and Tarun Jain,
Harvard Business Case, 2017.

May 11 (Th) Group Homework 3 handed out on LMS

May 15/May 16: Public Goods, Externalities

Required Readings:
 “A price tag on carbon as a climate rescue plan”, The New York

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 Times, May 30, 2014.
 “Supreme Court nod to green cess on trucks passing through
Delhi”, The Economic Times, October 10, 2015.
 “Soda tax passes; Philadelphia is first big city in nation to enact
one”, The Philadelphia Inquirer, June 16, 2016.
 “In a first, Kerala imposes 14.5% ‘fat tax’ on junk food,” The
Economic Times, July 9, 2016.

May 15 (M, 8 am) Group Homework 3 due (hard copies), by 8 am, AC3 Courtyard

May 16 (Tu) Group Homework 4 handed out on LMS

May 17/May 18: Oligopoly Market Structure

Required Readings:
 “In Manhattan pizza war, price of slice keeps dropping”, The
New York Times, March 30 2012.

May 22 (M, 8 am) Group Homework 4 due (hard copies), by 8 am, AC3 Courtyard

May 22/May 23: Game Theory I: Simultaneous Games

Required Readings:
 “Prison Breakthrough,” The Economist, 20 August, 2016.

May 23 (Tu) Group Homework 5 handed out on LMS

May 24/May 25 Game Theory II: Sequential and Repeated Games

Required Readings:
 “Why, for a Class of Bribes, the Act of Giving a Bribe should be
Treated as Legal,” by Kaushik Basu, 2011.
 “Why America refuses to pay ransoms,” The Economist, 25
August, 2014.

May 28 (S, 8 am) Group Homework 5 due (hard copies), by 8 am, AC3 Courtyard

Date TBA Examination on Part II of the course

V. Grading
Each part of the course will carry 50% of the total grade for the course and will be distributed
across the various components as follows:

Part I Part II
Homework 15% 15%
Quiz 5% 5%
Exam 30% 30%

For homework, there will be two group assignments in first part and three in the second part.
Therefore, each homework assignment is worth 7.5% of your grade in the first part, and 5% of
your grade in the second part. All homework submissions must be made in HARD COPIES, not
electronically. The writing must be comprehensible – anything that is not legible will be ignored
and hence penalized. No late submissions will be accepted. Please remember to put the names

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and PGIDs of all your group members. Please note that code 2N-b is applicable for
submission of all homework assignments. This means that you can discuss general concepts
and ideas relevant to the assignment with others and refer to external material but not discuss
specific issues associated with the assignment with others or refer to problem set solutions.

The quiz for Part 1 of the course will be held on the second Saturday of the term. ASA will
provide more details closer to the date. For Part 2, the quiz will be unannounced and held in the
class.

The details of the grading components are as below:

Name of the Date of Take- Group Softcopy / Word Honor

Component Submission/ home or Assignm Hard copy limit/format Code
Deadline in-class ent submission of Scheme
(Y/N) submission
etc.
Homework 1 May 1, 8 am Take-home Yes Hardcopy No 2N-b
Homework 2 May 8, 8 am Take-home Yes Hardcopy No 2N-b
Homework 3 May 15, 8 am Take-home Yes Hardcopy No 2N-b
Homework 4 May 22, 8 am Take-home Yes Hardcopy No 2N-b
Homework 5 May 28, 8 am Take-home Yes Hardcopy No 2N-b
Class Quiz 1 May 6 In-class No - -
Class Quiz 2 Surprise In-class No - -
Mid-term exam As per ASA In-class No - -
schedule
End-term exam As per ASA In-class No - -
schedule

VI. Course Webpage (on LMS)

In the interest of the environment, we expect to use the course webpage extensively for multiple
purposes.

Homework assignments and solutions will be posted on the course webpage. You are expected to
obtain these from the webpage directly rather than expect hard copies in class. There will be no
hard copies of the assignments or solutions. The course website will be the only source for
these.

Material to be read before the class as well as any additional material that we think could be of
interest will also be put on the course webpage.

The webpage will also be used for announcements (e.g., error in Problem Set). It is your
responsibility to check for announcements.

Please use the Discussion Board on the course webpage. This could be a valuable resource for
exchanging ideas and sharing knowledge.

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VII. Honor Code
ISB takes the honor code seriously, and so should you. The student handbook contains details on
the honor code and ethics standards at ISB. Please ensure that you read the relevant section(s) in
the Handbook. Feel free to ask us in case you have any questions.

Attendance & Punctuality

Learning is an interactive process. ISB students are admitted partly based on the experiences
they bring to the learning community and what they can add to class discussions. Therefore
attendance is an important aspect of studying here.

The ISB expects students to attend all class sessions in every module. However, if due to an
extenuating situation a student is forced to miss a class session, the same should be notified to
the respective Academic Associate with a copy to the Faculty and the Academic Services along
with substantiating documentary proof seeking permission.

The following rules will also apply:

• If a student misses three sessions in any course, s/he will obtain a letter grade lower
than that awarded by the faculty for that course.

• With four sessions missed, the student will receive a letter grade that is two levels lower.

• If a student misses 5 sessions or more, the student will receive an ‘F’ grade for that
course.
The faculty may decide on more stringent attendance requirements for their individual
module, and this will be communicated to you by the faculty.

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