Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem -Solving Approach, CY23, 9780357748237; Chapter 1: Solving Pro blems with Economics 1 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part . Instructor Manual Froeb/McCann/Ward/Shor , Managerial Economics: A Problem -Solving Approach, CY23, 9780357748237 ; Chapter 1: Solving Problems with Economics TABLE OF CONTENTS Purpose and Perspective of the Chapter ................................ ................................ ............... 2 Chapter Objectives ................................ ................................ ................................ .................. 2 Cengage Supplements ................................ ................................ ................................ ............ 3 What's New in This Chapter ................................ ................................ ................................ .... 3 Chapter Outline ................................ ................................ ................................ ........................ 3 Teaching Notes ................................ ................................ ................................ ................... 3 Discussion Questions ................................ ................................ ................................ ............. 5 Additional Resources ................................ ................................ ................................ .............. 5 Cengage MindTap Videos ................................ ................................ ................................ ...... 5 Additional Anecdotes ................................ ................................ ................................ .............. 5 Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem -Solving Approach, CY23, 9780357748237; Chapter 1: Solving Problems with Economics 2 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part . PURPOSE AND PERSPECTIVE OF THE CHAPTER Chapter 1 covers : • Problem solving • Ethics and economics • Economics in job interviews Main points in this chapter: • Problem solving requires two steps: First, figure out why mistakes are being made; and then figure out how to make them stop. • The rational -actor paradigm assumes that people act rationally, optimally, and self -
interestedly. To change behavior, you have to change incentives. • Good incentives are created by rewarding good performance. • A well -designed organization is one in which employee incentives are aligned with organizational goals. By this we mean that employees have enough information to make good decis ions, and the incentive to do so. • It follows that you can analyze problems by asking three questions: (1) Who is making the bad decision?; (2) Does the decision maker have enough information to make a good decision?; and (3) the incentive to do so? • Answe rs to these questions will suggest solutions centered on (1) letting someone else make the decision, someone with better information or incentives; (2) giving the decision maker more information; or (3) changing the decision maker’s incentives. CHAPTER OBJECTIVES The following objectives are addressed in this chapter : • 01.01 Identify the steps in problem solving. • 01.02 Explain the rational -actor paradigm. • 01.03 Identify the components of an incentive. • 01.04 Define a well -designed organization. • 01.05 Analyze and solve problems by asking and answering questions. [return to top] Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem -Solving Approach, CY23, 9780357748237; Chapter 1: Solving Problems with Economics 3 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part . CENGAGE SUPPLEMENTS The following product -level supplements provide additional information that may help you in preparing your course. They are available in the Instructor Resource Center. • PowerPoint Slides • Test Bank [return to top] WHAT'S NEW IN THIS CHAPTER See the Transition Guide for information on changes that have been made to this chapter [return to top] CHAPTER OUTLINE The following outline organizes activities and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text. Chapter Introduction (PPT slide 4) 1.1 Using Economics to So lve Problems (PPT slides 5 -14) 1.2 Incentive Misalignment at an Auction House (PPT slides 15 -19) 1.3 Ethics and Economics (PPT slides 20 -25) 1.4 Economics in Job Interviews (PPT slides 26 -27) Summary & Homework Problems • Summary of Main points • Multiple Choice Questions • Individual Problems Teaching Note s You can open with a business problem, like the over -bidding in the introduction, the Kidder -
Peabody anecdote, or any of the anecdotes in the concluding chapter “you be the consultant,” and then ask the students to assume that they are a consultant brought in to the company to figure out what is wrong. Play 20 questions, and make them ask questions that have “yes” or “no” answers until they figure out what is wrong. Students will invariably use the rational actor paradigm to do this. Point this out to the m. Tell them that this class is trying to show them how to use this paradigm more formally. Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem -Solving Approach, CY23, 9780357748237; Chapter 1: Solving Problems with Economics 4 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part . Reinforce their problem solving skills by asking them to solve a specific problem. The trick is to dribble out the information, bit by bit, to engage the students a nd keep them guessing what the problem is. Note that some students will typically define the problem as the lack of a particular solution. When this happens, use the opportunity to point out how this approach locks you into a particular solution. Show th em how not to do this. Formally introduce the rational actor paradigm and show how it can be used to both identify why problems occur and what can be done to change behavior. Tell them that the key step in solving problems is to bring it down to an indi vidual decision level. First, find out who made a bad decision. Under the rational actor paradigm there are only two reasons for making mistakes: not enough information or bad incentives. Find out which it is. Bottom line is that problems can be identif ied by asking three questions: 1. Who made the bad decision? 2. Did they have enough information to make a good decision? 3. Did they have the incentive to make a good decision? Tell them that incentives have two pieces: a performance evaluation met ric and a way to reward good performance, or punish bad performance. The Brickley, Smith, and Zimmerman article is a good reference for this. Various solutions to the problem will likewise center on: 1. Changing decision rights (letting someone else make the decision) 2. Changing information flows; or 3. Changing incentives i. Performance evaluation ii. Compensation linking performance to rewards. The “goal” is to align the incentives of employees with the goals of the organization. After giving students this paradigm, ask them to fix the problem. Solicit suggestions, and ask other students what they like or don’t like about the various proposed solutions. The message is that there are only tradeoffs and no universal solutions, i.e., the answer t o every question is “it depends.” The point of the class is to teach students to recognize and evaluate the tradeoffs. [return to top]
