Managerial Economics

Case Assignments Instructions: All questions should be answered for each case study. If calculations would enhance your commentary, it is strongly urged that you include these calculations. The length of a case study is determined by how well you include the requested information. 

 Succinct, complete answers that show that you have prepared your writing with thought and reflection are preferable to answers that ramble and are not reflective of the course content. A complete, well-developed response can be given in one paragraph, several paragraphs or a page depending on the question and your ability to articulate your answer. If it requires more than one page that is acceptable as well. The written assignments will be critiqued on the technical part of your answer, the clarity and logical sequence of your response, and grammar and spelling. 

 You are encouraged to use textbook concepts as you attempt to explain in your own words the answers to the assignments. Word choice and sentence structure that is suitable for graduate level work is expected.

ANALYZING MANAGERIAL DECISIONS: Nobel Prize–Winner F. A. Hayek on the “Miracle” of the Price System

It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is significant that it does not matter— which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the entire economic system. This influences not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all things made of tin, and their substitutes, and so on. All this takes place without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members surveys the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (if conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

Some people (e.g., Hayek) argue that decentralization of economic decisions in the economy leads to an efficient resource allocation. What differences exist within the firm that make the link between decentralization and efficiency less clear?

Smith Jr., Clifford W.; Jerold Zimmerman; James Brickley. Managerial Economics & Organizational Architecture (Irwin Economics) (Page 103). McGraw-Hill Higher Education. Kindle Edition.

SAMPLE SOLUTION

Factors Affecting Effectiveness of Differentiation

            Decentralization refers to the delegation of decision-making authority from the top managers to the lower level managers. In a decentralized organization, executives allow more decision making by juniors where a flat organization structure is adopted. Decentralization is associated with employee empowerment, quick decision making, relieving top manager and helping in preparation for emergencies (DeBoer, 2012). Effective of differentiation is affected by various factors discussed below.             One of the factors that hinder a clear understanding of decentralization and efficiency is lack of common organization policy. When a company adopts decentralization, achieving uniformity of decision becomes hard (Schmitt, Sun, Snyder & Shen, 2015). Different individuals who are authorized to make decisions may have conflicting…