MBA 201a Fall 2009—Prof. WolframMBA201a - Topics Covered in the CourseThis handout outlines the broad topics that we have covered in the course. The final exam is cumulative, so you’re responsible for the material summarized in this memo. This list is not intended to be exhaustive, in the sense that I reserve the right to ask you something that is not explicitly listed here, but it is meant to give you a thoroughguideline.1) Market analysis- What is the role of prices in markets?- How do prices help make markets efficient?- What would happen if the prices of identical commodities in two different cities differed by more than the cost of transportation?- Be able to graph a linear demand and/or supply curve, labeling the axes correctly.- Be able to calculate equilibrium price and quantity given equations for the supply and demand curve.- What does shortage (excess demand) and surplus (excess supply) mean?- Why is the market equilibrium rightly called an “equilibrium?”- Be able to show the effect on the market equilibrium price and quantity of a change in the supply and/or demand curve.- What are the assumptions underlying the perfectly competitive market equilibrium?- What is the difference between demand (supply) and quantity demanded (supplied)?- What shifts the supply curve? How about the demand curve?2) Decision analysis- Be able to construct a decision tree given a verbal description of a decision process. Put decisions in chronological order left to right. Remember to distinguish between choice and chance nodes and to make sure that the probabilities along a chance node sum to 1.- Be able to solve a decision tree for the correct decision.- Be able to calculate expected values.- Understand how to use decision trees to check the robustness of a decision (i.e., what if payoffs were different, what if probabilities were different, etc.)- Know how to assess the value of information.- Understand how getting information before making a decision can be valuable, but only if the information affects your decision. 1MBA 201a Fall 2009—Prof. Wolfram- Understand the difference between expected value maximization (or risk neutrality), risk aversion, and risk loving behavior.3) Economic Costs & Cost Functions- Economic costs = actual expenditures – sunk costs + opportunity costs.- Opportunity costs: ask yourself what else you could be doing with a physical product or with a sum of money. - Sunk costs: this is the difference between what you paid for something and what it’s worth now (i.e. its current opportunity cost).- Total costs (TC) = total economic costs = fixed costs + variable costs- TC, AVC (Average Variable Cost), ATC (Average Total Cost), MC (Marginal Cost).- Relationships between them: ATC = TC/Q, AVC = VC/Q, MC = dTC/dQ = dVC/dQ.- Also: AVC=MC when AVC is at a minimum and ATC=MC when ATC is at a minimum; AVC=MC when MC is constant.4) Demand- What type of economic unit’s behavior is depicted on the demand curve?- What is consumer surplus?- Given an equation for a linear demand curve, be able to calculate consumer surplus at a given price.- Be able to aggregate demand curves from individuals or market segmentsinto a single market demand curve. (Remember to add across quantities, not across prices. If the demand curve is given to you with price written asa function of quantity, you’ll have to rewrite it. Keep track of prices above which the implicit quantity demanded is negative.)5) Elasticity & Revenue Functions- What is elasticity? What does it mean for a demand curve to be elastic? Inelastic?- How is elasticity related to the slope of the demand curve?- Understand why the elasticity of a linear demand curve is not constant (even though the slope is).- Be able to calculate the elasticity of demand at a particular point if given an equation for the demand curve.- Understand the relationship between changes in market revenue and elasticity when a price changes.2MBA 201a Fall 2009—Prof. Wolfram- Demand elasticity (d% Q Q P% P P QD De = =D D). - TR = P·Q, MR = dTR/dQ.- MR=0 (i.e. revenue is maximized) when d1e =-6) Pricing/Output Rules- Never allocate overhead in making pricing decisions.- Produce until MC=P if you’re a price-taker (i.e. if your firm faces a completely elastic demand curve).- Produce until MC=MR if you’re not a price-taker (although note that this is a general rule that includes MC=P for a price-taker).7) Drawing pictures- Know how to draw a MC curve relative to an AC curve.- Know how to represent a monopoly pricing problem with a linear demand curve, including the marginal revenue curve, the monopoly quantity and price, contribution to fixed costs (this is the area of the revenue rectangle minus the area under the MC curve) and monopoly profits (this is the above area minus fixed costs, or equivalently, the area of the revenue rectangle minus the area of the rectangle with base equal to Qmonop and height equal to the point where the ATC curve goes through Qmonop).- Know how to represent consumer surplus graphically.8) Price Discrimination- First-degree PD: charge every consumer his or her willingness to pay. Rare in practice, but a useful benchmark.- Third-degree PD: - You can use third-degree PD if you can separate consumers into groups based on some immutable but identifiable characteristic and the groups have different demand elasticities.- Solve for the optimal prices by applying the monopoly pricing rule (set MR=MC) to each group.- The optimal prices will involve charging the group with the less elastic demand a higher price.- Second-degree PD: - Generally, forcing consumers to sort themselves into groups by offeringthem a menu of (price, quality) combinations.- Figure out your best uniform pricing strategies (at least one selling to everyone and one selling to only one customer type) and compare 3MBA 201a Fall 2009—Prof. Wolframthem to an option where you offer separate prices to the customer types.- To evaluate the option where you offer separate prices, keep in mind that you need to prevent the high-valuation consumers from selecting the low-price, low-quality option.9) Entry and Exit Rules- Enter if highest possible profits (found at the quantity level where MR=MC)will cover your fixed costs.- Once you have entered, operate if your highest possible profits will cover your operating costs.- Exit if avoidable costs are greater than your revenue (at profit maximizing output).- In deciding whether or not to keep a product