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page i
MANAGERIAL
ECONOMICS
Foundations of Business Analysis and
Strategy
1
page ii
MANAGERIAL ECONOMICS: FOUNDATIONS OF BUSINESS

ANALYSIS AND STRATEGY, THIRTEENTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY

10121. Copyright ©2020 by McGraw-Hill Education. All rights
reserved. Printed in the United States of America. Previous editions
©2016, 2013, and 2011. No part of this publication may be reproduced
or distributed in any form or by any means, or stored in a database or
retrieval system, without the prior written consent of McGraw-Hill
Education, including, but not limited to, in any network or other
electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be

available to customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LCR 21 20 19
ISBN 978-1-260-00475-5 (bound edition)

MHID 1-260-00475-9 (bound edition)
ISBN 978-1-260-50633-4 (loose-leaf edition)
MHID 1-260-50633-9 (loose-leaf edition)
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All credits appearing on page or at the end of the book are considered to
be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data
Names: Thomas, Christopher R., author.

Title: Managerial economics : foundations of business analysis and
strategy / Christopher R. Thomas.
Description: Thirteenth edition. | New York, NY : McGraw-Hill
Education, [2020]
Identifiers: LCCN 2019018228 | ISBN 9781260004755 (alk. paper)
Subjects: LCSH: Managerial economics.
Classification: LCC HD30.22 .M39 2020 | DDC 338.5024/658—dc23
LC record available at https://lccn.loc.gov/2019018228
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publication. The inclusion of a website does not indicate an endorsement
by the authors or McGraw-Hill Education, and McGraw-Hill Education
does not guarantee the accuracy of the information presented at these
sites.
mheducation.com/highered
3
page iii
MANAGERIAL
ECONOMICS
Foundations of Business Analysis and
Strategy
THIRTEENTH EDITION
Christopher R. Thomas
University of South Florida
S. Charles Maurice
Texas A&M University
Late Professor Emeritus
4
page iv
The McGraw-Hill Series Economics

ESSENTIALS OF ECONOMICS
Brue, McConnell, and Flynn
Essentials of Economics
Fourth Edition
Mandel
Economics: The Basics
Fourth Edition
Schiller
Essentials of Economics
Eleventh Edition
PRINCIPLES OF ECONOMICS
Asarta and Butters
Principles of Economics
Second Edition
Colander
Economics, Microeconomics, and Macroeconomics
Eleventh Edition
Frank, Bernanke, Antonovics, and Heffetz

Principles of Economics, Principles of Microeconomics, Principles of
Macroeconomics
Seventh Edition
Frank, Bernanke, Antonovics, and Heffetz

Streamlined Editions: Principles of Economics, Principles of
Microeconomics, Principles of Macroeconomics
Fourth Edition
5
Karlan and Morduch
Third Edition
McConnell, Brue, and Flynn

Economics, Microeconomics, Macroeconomics
Twenty-Second Edition
McConnell, Brue, and Flynn

Brief Editions: Microeconomics and Macroeconomics
Third Edition
Samuelson and Nordhaus

Nineteenth Edition
Schiller
The Economy Today, The Micro Economy Today, and The Macro
Economy Today
Fifteenth Edition
Slavin
Twelfth Edition
ECONOMICS OF SOCIAL ISSUES

Guell
Issues in Economics Today
Ninth Edition
Register and Grimes

Economics of Social Issues
Twenty-First Edition
ECONOMETRICS AND DATA ANALYTICS

Hilmer and Hilmer
6
Practical Econometrics
First Edition
Prince
Predictive Analytics for Business Strategy
First Edition
MANAGERIAL ECONOMICS
Baye and Prince
Managerial Economics and Business Strategy
Ninth Edition
Brickley, Smith, and Zimmerman

Managerial Economics and Organizational Architecture
Seventh Edition
Thomas and Maurice

Managerial Economics
Thirteenth Edition
INTERMEDIATE ECONOMICS
Bernheim and Whinston
Microeconomics
Second Edition
Dornbusch, Fischer, and Startz

Macroeconomics
Thirteenth Edition
Frank
Microeconomics and Behavior
Ninth Edition
ADVANCED ECONOMICS
Romer
Advanced Macroeconomics
7
Fifth Edition
MONEY AND BANKING

Cecchetti and Schoenholtz
Money, Banking, and Financial Markets
Sixth Edition
URBAN ECONOMICS
O’Sullivan
Urban Economics
Ninth Edition
LABOR ECONOMICS
Borjas
Labor Economics
Eighth Edition
McConnell, Brue, and Macpherson

Contemporary Labor Economics
Twelfth Edition
PUBLIC FINANCE
Rosen and Gayer
Public Finance
Tenth Edition
ENVIRONMENTAL ECONOMICS
Field and Field
Environmental Economics: An Introduction
Eighth Edition
INTERNATIONAL ECONOMICS
Appleyard and Field
8
International Economics
Ninth Edition
Pugel
International Economics
Seventeenth Edition
9
page v
To Shelly and Brooke
page vi
10
page vii
ABOUT THE AUTHORS

Christopher R. Thomas
Christopher R. Thomas is associate professor of economics at University
of South Florida (USF), where he has spent the past 37 years and held
the Exide Professorship of Sustainable Enterprise from 2004 through
2010. He worked for two years as an energy economist at Oak Ridge
National Laboratory before joining the faculty at USF in 1982. He now
teaches managerial economics to undergraduates and to MBA students in
both traditional and executive formats. Professor Thomas has published
numerous articles on government regulation of industry and antitrust
issues and is coeditor of the Oxford Handbook in Managerial
Economics. Professor Thomas lives with his wife in Brooksville, Florida,
where he enjoys photography and playing golf and tennis.
S. Charles Maurice
Chuck Maurice was professor emeritus of economics at Texas A&M
University. Professor Maurice published numerous articles on
microeconomic theory in the top economic journals. He co-wrote two
scholarly books on natural resource depletion: The Doomsday Myth and
The Economics of Mineral Extraction.
11
page viii
PREFACE
WHY MANAGERIAL ECONOMICS?
The growing influence of microeconomics and industrial organization
economics in every field of business analysis has transformed the role of
managerial economics in business school curricula. Economists have
understood for some time that every modern course in business strategy
and organizational architecture must draw from key areas of
advancement in microeconomics and industrial organization. While
many business schools have been quick to adopt “strategy” as a
fundamental theme in their curricula, this new emphasis on strategy too
often falls on the shoulders of a single, one-semester course in business
strategy. In a single course, it is extremely difficult, if not impossible, to
teach business students managerial economics and cover all of the
valuable topics in business strategy and organization. In any case, a
thorough foundation in managerial economics is required in order to
understand how to use the many new and important developments in
microeconomics and industrial organization.
The objective of Managerial Economics, then, is to teach and apply
the foundation topics in microeconomics and industrial organization
essential for making both the day-to-day business decisions that
maximize profit as well as the strategic decisions designed to create and
protect profit in the long run. In so doing, we believe Managerial
Economics helps business students become architects of business tactics
and strategy instead of middle managers who plod along the beaten path
of others.
PEDAGOGICAL HIGHLIGHTS
The Thirteenth Edition of Managerial Economics maintains all the
pedagogical features that have made previous editions successful. These
features follow.
12
Emphasis on the Economic Way of Thinking
The primary goal of this book has always been, and continues to be, to
teach students the economic way of thinking about business decisions
and strategy. Managerial Economics develops critical thinking skills and
provides students with a logical way of analyzing both the routine
decisions of managing the daily operations of a business as well as the
longer-run strategic plans that seek to manipulate the actions and
reactions of rival firms.
Easy to Learn and Teach From

Managerial Economics is a self-contained textbook that requires no
previous training in economics. While maintaining a rigorous style, this
book is designed to be one of the easiest books in managerial economics
from which to teach and learn. Rather than parading students quickly
through every interesting or new topic in microeconomics and industrial
organization, Managerial Economics instead carefully develops and
applies the most useful concepts for business decision making and
strategic planning.
Dual Sets of End-of-Chapter Questions

To promote the development of analytical and critical thinking skills,
which most students probably do not know how to accomplish on their
own, two different kinds of problem sets are provided for each chapter.
Much like the pedagogy in mathematics textbooks, which employ both
“exercises” and “word problems,” Managerial Economics provides both
Technical Problems and Applied Problems.
Now try Technical Problem 3.
Technical Problems—Each section of a chapter is linked (by an icon

in the margin) to one or more Technical Problems specifically designed
to build and reinforce a particular skill. The Technical page ix
Problems provide a step-by-step guide for students to follow
in developing the analytical skills set forth in each chapter. The
answers to all of the Technical Problems are provided to instructors via
Create or McGraw-Hill Connect®. The narrow focus of each Technical
13
Problem accomplishes two things: (1) It encourages students to master
concepts by taking small “bites” instead of trying to “gulp” the whole
chapter at once, and (2) It allows students to pinpoint any areas of
confusion so that interaction with the instructor—in the classroom or in
the office—will be more productive. When students finish working the
Technical Problems, they will have practiced all of the technical skills
required to tackle the Applied Problems.
Applied Problems—Following the Technical Problems, each chapter
has a set of Applied Problems that serve to build critical thinking skills
as well as business decision-making skills. These problems, much like
the “word problems” in a math textbook, are a mix of stylized business
situations and real-world problems taken from Bloomberg
Businessweek, The Economist, Forbes, The Wall Street Journal, and
other business news publications. Business students frequently find
classroom discussion of the Applied Problems among the most
valuable lessons of their entire business training. Answers to Applied
Problems are available in the Instructor's Manual.
The clarity of exposition, coupled with the integrated, step-by-step

process of the Technical Problems, allows students to learn most of the
technical skills before coming to class. To the extent that technical skills
are indeed mastered before class, instructors can spend more time in
class showing students how to apply the economic way of thinking to
business decision making.
Flexible Mathematical Rigor

Starting with only basic algebra and graph-reading skills, all other
analytical tools employed in the book are developed within the text itself.
While calculus is not a part of any chapter, instructors wishing to
teach a calculus-based course can do so by using the Mathematical
Appendices at the end of most chapters. The Mathematical Appendices
employ calculus to analyze the key topics covered in the chapter. Most
appendices have a set of Mathematical Exercises that requires calculus to
solve, and the answers to the Mathematical Exercises are available in the
Instructor's Manual. A short tutorial, titled “Brief Review of Derivatives
and Optimization” is provided via the instructor resource material
available through McGraw-Hill Connect®. This six-page review covers
the concept of a derivative, the rules for taking derivatives,
unconstrained optimization, and constrained optimization.
14
Self-Contained Empirical Analysis
The Thirteenth Edition continues to offer a self-contained treatment of
statistical estimation of demand, production, and cost functions. While
this text avoids advanced topics in econometrics and strives to teach
students only the fundamental statistical concepts needed to estimate
demand, production, and cost, the explanations of statistical procedures
nonetheless maintain the rigor found in the rest of the book. For those
instructors who do not wish to include empirical analysis in their
courses, the empirical content can be skipped with no loss of continuity.
Wide Audience
Managerial Economics is appropriate for undergraduate courses in
managerial economics and introductory business strategy courses. At the
MBA and Executive MBA level, this book works well for “boot camp”
or “toolkit” courses in managerial economics, and can also be used as a
supplemental text for business strategy and organizational architecture
courses. The self-contained nature of the book is especially valuable in
night classes, online courses, and Executive MBA courses where
students typically have a somewhat limited opportunity to meet with
instructors for help outside class.
SUPPLEMENTS
The following ancillaries are available for quick download and
convenient access via the Instructor Resource material available through
McGraw-Hill Connect®.
page x
Online Appendices and Web Chapter

The Online Appendices cover topics that may interest a somewhat
narrower group of students and instructors. The following Online
Appendices are available:
Estimating and Forecasting Industry Demand for Price-Taking Firms

Linear Programming
Pricing Multiple Products Related in Production
15
A Web Chapter is also available, which, like the appendices, covers a
special interest topic. Unlike the appendices, the Web Chapter is more
robust in length and contains all the elements of a chapter, including a
summary, Technical Problems, and Applied Problems. The following
Web Chapter is available:
The Investment Decision
Test Bank
The Test Bank offers well over 1,500 multiple-choice and fill-in-the-
blank questions categorized by level of difficulty, AACSB learning
categories, Bloom’s taxonomy, and topic.
Instructor’s Manual
Written by the author, the Instructor’s Manual contains Answers to the
end-of-chapter Applied Problems and the Mathematical Exercises.
Beginning with this Thirteenth Edition, the Homework Exercises section
moves from the Student Workbook to the Instructor’s Manual. Instructors
can assign any or all of these Homework Exercises to students for extra
practice. Since the students do not have access to the answers, the
Homework Exercises provide an additional set of problems for grading
beyond those already available in the Test Bank. In contrast to the Test
Bank questions, Homework Exercises are not multiple-choice questions
and are designed to look very similar to Technical and Applied Problems
found in the textbook.
Duplicate Technical Problems with Answers

An entire set of duplicate Technical Problems with answers is available
to instructors. This additional set of Technical Problems is designed to
offer matching problems that instructors can choose to use as additional
exercises, as homework assignments, or as exam questions. Students do
not have access to either the questions or the answers, and the decision to
make answers available to students is the instructor’s decision to make.
These additional Technical Problems can be accessed by instructors
through McGraw-Hill Connect®.
PowerPoint Presentations
16
PowerPoint Presentations contain animated figures and tables presented
in each chapter to make presentations flow in a step-by-step fashion. You
can edit, print, or rearrange the slides to fit the needs of your course.
REVISIONS IN THE THIRTEENTH EDITION

I have updated and revised material in a number of places throughout the
book to make improvements in clarity and content. Most of these
changes are minor and do not need to be highlighted here. Several of the
revisions for this edition, however, need to be identified here:
Illustration 1.2 in Chapter 1 has been revised and updated using my

own analysis of data from the top 100 Fortune 500 companies in 2016
to illustrate the sizable distortion between reported accounting profit
and a firm’s real economic profit of doing business caused by current
accounting rules that treat the equity cost of capital as zero.
The treatment of substitution and income effects of price changes on
demand for goods and services has been moved from an online
appendix back into the body of Chapter 5. Section 5.7 expands the
presentation formerly located in the Online Appendix 1. I now
explicitly describe substitution and income effects for both price
increases and decreases for both normal and inferior goods. Two new
graphs summarize these four situations. I have also added new
Technical Problems to Chapter 5 that cover this topic.
The discussion of sunk and avoidable costs in Chapter 8 has been
slightly revised and an additional Technical Problem added to page xi
help students better distinguish between the two types of
costs. This extra effort in Chapter 8 is expected to aid students in
understanding the reason for ignoring sunk costs when making the
short-run decision to shut down in Chapters 11 and 12.
The analytical development of the competitive long-run industry
supply curve in Chapter 11 has been substantially revised. Better
graphs and new Technical Problems are features in this Thirteenth
Edition that should give students a more solid understanding of
industry supply curves in constant- and increasing-cost industries.
In Chapter 13, the presentation of limit pricing has been revised to
improve clarity concerning the strategic requirements for limit pricing
to successfully deter entry even as the incumbent firm continues to earn
positive economic profit.
17
As always, I continue to rely on the valuable suggestions I regularly
receive from both students and instructors for guidance in making
changes and improvements to this book. I strongly encourage you to
contact me directly (crthomas1@usf.edu) with any thoughts and ideas
you might have for improving the textbook or the accompanying
supplements.
A WORD TO STUDENTS
One of the primary objectives in writing this book is to provide you, the
student, with a book that enhances your learning experience in
managerial economics. However, the degree of success you achieve in
your managerial economics course will depend, in large measure, on the
effectiveness of your study techniques. I would like to offer you this one
tip on studying: Emphasize active study techniques rather than passive
study techniques. Passive study techniques are the kinds of study
routines that do not require you to “dig out” the logic for yourself. Some
examples of passive study activities include reading the text, reviewing
class notes, and listening to lectures. These are “passive” in nature
because the authors of your textbook or your instructor are providing the
analytical guidance and logic for you. You are simply following someone
else’s reasoning process, working your mind only hard enough to follow
along with the authors or instructor. Passive techniques do not cause your
brain to “burn” new neural pathways or networks. Generally speaking,
students gravitate toward passive study methods because they are easier
and less exhausting than active study methods.
Active study techniques require you to think and reason for yourself.
For example, when you close your book, put aside your lecture notes,
and try to explain a concept to yourself—perhaps sketching a graph or
developing your own numerical example. Only then are you forcing your
brain to “burn” a logical path of neurons that will make sense to you
later. The better you can explain the “how” and “why” of key concepts
and principles in this book, the more thorough will be your
understanding and the better you will perform on exams. Of course,
some passive study is necessary to become familiar with the material, but
genuine understanding and the ability to use the decision-making skills
of managerial economics require emphasis on active, rather than passive,
study techniques.
18
page xii
FOR INSTRUCTORS
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page xiii
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22
page_xiv
ACKNOWLEDGMENTS
As in past editions, a number of excellent ideas for improving this
textbook have come from colleagues, adopters, and students. This
revision was no exception, and I would like to identify several people
who were especially helpful in this Thirteenth Edition. After making
valuable suggestions for the last edition, Professor Yu Leng at Shanghai
Jiao Tong University has once again contributed numerous corrections
and insightful ideas, as well as overall encouragement to take on this
new edition. I also benefited from conversations and extensive written
comments from my former colleague, coauthor, and friend, John R.
Swinton at Georgia College. While I was unable to incorporate all of
John’s ideas in this edition, I hope to return to his list in a future edition.
A new colleague of mine at USF, Mikael Sandberg, made a convincing
case for moving the presentation of substitution and income effects from
an online appendix into the body of Chapter 5. Mike also offered advice
on the presentation of quasi-fixed costs and the improved section on
derivation of long-run industry supply curves in the chapter on perfect
competition. Lastly, I am pleased to acknowledge one of my
undergraduate economics majors, Justin Taylor, who identified a mistake
in a graph for one of the Technical Problems on substitution and income
effects, and Zain Nensey, one of my Executive MBA students, who
found a mistake in the corporate tax rate in one of the Applied Probems
in Chapter 1. As always, any remaining errors, are all mine.
I would also like to express my gratitude to my editorial and
production team at McGraw-Hill for their considerable assistance in
making this revision possible. Kevin White offered much valuable
guidance and strategic assistance, while Sarah Wood efficiently managed
the flow of manuscript preparation by keeping all the moving parts
moving to the right places at the right times.
Melissa Leick did an outstanding job managing the flow of the entire
project. And I am especially thankful to have had Mithun Kothandath
23
and his team of digital compositors at SPi Global doing a masterful job
making the final pages look perfect.
Finally, I want to thank my wife, Shelly, and my daughter, Brooke,
for all their love and support during this Thirteenth Edition. Shelly and I
both know just how much we all owe Chuck Maurice, my mentor and
missing coauthor, for his lasting inspiration to write a textbook that
students actually want to read. I hope this edition continues to live up to
Chuck’s standards.
Christopher R. Thomas Tampa, Florida
24
page xv
BRIEF CONTENTS
CHAPTER 1 Managers, Profits, and Markets 1
CHAPTER 2 Demand, Supply, and Market Equilibrium 38
CHAPTER 3 Marginal Analysis for Optimal Decisions 88
CHAPTER 4 Basic Estimation Techniques 121
CHAPTER 5 Theory of Consumer Behavior 159
CHAPTER 6 Elasticity and Demand 205
CHAPTER 7 Demand Estimation and Forecasting 244
Online Appendix 1: Estimating and Forecasting Industry Demand for
Price-Taking Firms
CHAPTER 8 Production and Cost in the Short Run 282
CHAPTER 9 Production and Cost in the Long Run 319
CHAPTER 10 Production and Cost Estimation 372
Online Appendix 2: Linear Programming
CHAPTER 11 Managerial Decisions in Competitive Markets 398
CHAPTER 12 Managerial Decisions for Firms with Market Power
456
CHAPTER 13 Strategic Decision Making in Oligopoly Markets 519
CHAPTER 14 Advanced Pricing Techniques 585
Online Appendix 3: Pricing Multiple Products Related in Production
CHAPTER 15 Decisions under Risk and Uncertainty 635
CHAPTER 16 Government Regulation of Business 666
Web Chapter 1: The Investment Decision
25
26
page xvi
CONTENTS
CHAPTER 1 Managers, Profits, and Markets 1
1.1 The Economic Way of Thinking about Business Practices
and Strategy 2
Economic Theory Simplifies Complexity 3
The Roles of Microeconomics and Industrial Organization
3
1.2 Measuring and Maximizing Economic Profit 6
Economic Cost of Using Resources 7
Economic Profit versus Accounting Profit 11
Maximizing the Value of the Firm 14
The Equivalence of Value Maximization and Profit
Maximization 16
Some Common Mistakes Managers Make 16
1.3 Separation of Ownership and Control of the Firm 21
The Principal–Agent Problem 21
Corporate Control Mechanisms 24
1.4 Market Structure and Managerial Decision Making 25
What Is a Market? 26
Different Market Structures 27
1.5 Globalization of Markets 29
1.6 Summary 30
Key Terms 32
27
Technical Problems 32
Applied Problems 33
Mathematical Appendix: Review of Present Value
Calculations 35
Mathematical Exercises 37
CHAPTER 2 Demand, Supply, and Market Equilibrium 38

2.1 Demand 39
The General Demand Function: Qd = f (P, M, PR, 𝒯, PE,
N) 40
Direct Demand Functions: Qd = f (P) 44
Inverse Demand Functions: P = f (Qd) 46
Movements along Demand 47
Shifts in Demand 48
2.2 Supply 52
The General Supply Function: Qs = f (P, PI , Pr , T, Pe , F)
53
Direct Supply Functions: Qs = f (P) 55
Inverse Supply Functions: P = f (Qs) 56
Shifts in Supply 57
2.3 Market Equilibrium 61
2.4 Measuring the Value of Market Exchange 64
Consumer Surplus 65
Producer Surplus 67
Social Surplus 67
2.5 Changes in Market Equilibrium 68
Changes in Demand (Supply Constant) 68
Changes in Supply (Demand Constant) 69
28
Simultaneous Shifts in Both Demand and Supply 70
Predicting the Direction of Change in Airfares: A
Qualitative Analysis 74
Advertising and the Price of Milk: A Quantitative
Analysis 75
2.6 Ceiling and Floor Prices 76
2.7 Summary 78
Key Terms 79
Applied Problems 84
CHAPTER 3 Marginal Analysis for Optimal Decisions 88

3.1 Concepts and Terminology 89
3.2 Unconstrained Maximization 91
The Optimal Level of Activity (A*) 91
Marginal Benefit and Marginal Cost 95
Finding Optimal Activity Levels with Marginal Analysis
97
Maximization with Discrete Choice Variables 99
Sunk Costs, Fixed Costs, and Average Costs Are
Irrelevant 101
3.3 Constrained Optimization 103
Marginal Benefit per Dollar Spent on an Activity 103
Constrained Maximization 104
Optimal Advertising Expenditures: An Example of
Constrained Maximization 106
Constrained Minimization 107
page xvii
3.4 Summary 109
29
Key Terms 110
Applied Problems 114
Mathematical Appendix: A Brief Presentation of
Optimization Theory 117
CHAPTER 4 Basic Estimation Techniques 121

4.1 The Simple Linear Regression Model 122
A Hypothetical Regression Model 123
The Random Error Term 123
4.2 Fitting a Regression Line 125
4.3 Testing for Statistical Significance 129
The Relative Frequency Distribution for 130
The Concept of a t -Ratio 131
Performing a t-Test for Statistical Significance 132
Using p-Values to Determine Statistical Significance 134
4.4 Evaluation of the Regression Equation 135
The Coefficient of Determination (R2) 136
The F-Statistic 137
Controlling Product Quality at SLM: A Regression
Example 138
4.5 Multiple Regression 141
The Multiple Regression Model 141
4.6 Nonlinear Regression Analysis 141
Quadratic Regression Models 142
Log-Linear Regression Models 146
4.7 Summary 149
Key Terms 150
30
Statistical Appendix: Problems Encountered in Regression
Analysis 157
CHAPTER 5 Theory of Consumer Behavior 159

5.1 Basic Assumptions of Consumer Theory 160
The Consumer’s Optimization Problem 160
Properties of Consumer Preferences 160
The Utility Function 162
5.2 Indifference Curves 163
Marginal Rate of Substitution 164
Indifference Maps 166
A Marginal Utility Interpretation of MRS 166
5.3 The Consumer’s Budget Constraint 169
Budget Lines 169
Shifting the Budget Line 172
5.4 Utility Maximization 173
Maximizing Utility Subject to a Limited Income 173
Marginal Utility Interpretation of Consumer Optimization
176
Finding the Optimal Bundle of Hot Dogs and Cokes 179
5.5 Individual Demand and Market Demand Curves 180
An Individual Consumer’s Demand Curve 180
Market Demand and Marginal Benefit 181
5.6 Corner Solutions 184
5.7 Substitution and Income Effects 185
The Substitution Effect 185
The Income Effect 187
31
Why Demand Slopes Downward 191
5.8 Summary 191
Key Terms 192
Mathematical Appendix: A Brief Presentation of Consumer
Theory 202
CHAPTER 6 Elasticity and Demand 205

6.1 The Price Elasticity of Demand 207
Predicting the Percentage Change in Quantity Demanded
208
Predicting the Percentage Change in Price 208
6.2 Price Elasticity and Total Revenue 209
Price Elasticity and Changes in Total Revenue 209
Changing Price at Borderline Video Emporium: A
Numerical Example 211
6.3 Factors Affecting Price Elasticity of Demand 213
Availability of Substitutes 213
Percentage of Consumer’s Budget 214
Time Period of Adjustment 214
6.4 Calculating Price Elasticity of Demand 215
Computation of Elasticity over an Interval 215
Computation of Elasticity at a Point 216
Elasticity (Generally) Varies along a Demand Curve 220
6.5 Marginal Revenue, Demand, and Price Elasticity 222
Marginal Revenue and Demand 222
Marginal Revenue and Price Elasticity 225
32
6.6 Other Demand Elasticities 227
Income Elasticity (EM) 228
Cross-Price Elasticity (EXR) 229
6.7 Summary 233
Key Terms 234
Mathematical Appendix: Demand Elasticity 241
page xviii
CHAPTER 7 Demand Estimation and Forecasting 244

7.1 Direct Methods of Demand Estimation 246
Consumer Interviews 246
Market Studies and Experiments 248
7.2 Specification of the Empirical Demand Function 249
A General Empirical Demand Specification 250
A Linear Empirical Demand Specification 251
A Nonlinear Empirical Demand Specification 252
Choosing a Demand Specification 252
7.3 Estimating Demand for a Price-Setting Firm 254
Estimating the Demand for a Pizza Firm: An Example 255
7.4 Time-Series Forecasts of Sales and Price 259
Linear Trend Forecasting 260
A Sales Forecast for Terminator Pest Control 261
A Price Forecast for Georgia Lumber Products 262
7.5 Seasonal (or Cyclical) Variation 263
33
Correcting for Seasonal Variation by Using Dummy
Variables 264
The Dummy-Variable Technique: An Example 266
7.6 Some Final Warnings 273
7.7 Summary 274
Key Terms 275
Mathematical Appendix: Empirical Elasticities 280
Data Appendix: Data for Checkers Pizza 281
Online Appendix 1: Estimating and Forecasting Industry Demand for

Price-Taking Firms
CHAPTER 8 Production and Cost in the Short Run 282

8.1 Some General Concepts in Production and Cost 283
Production Functions 284
Technical and Economic Efficiency 285
Inputs in Production 286
Short-Run and Long-Run Production Periods 287
Sunk Costs versus Avoidable Costs 288
8.2 Production in the Short Run 290
Total Product 290
Average and Marginal Products 291
Law of Diminishing Marginal Product 293
Changes in Fixed Inputs 294
8.3 Short-Run Costs of Production 298
Short-Run Total Costs 298
Average and Marginal Costs 300
34
General Short-Run Average and Marginal Cost Curves
302
8.4 Relations between Short-Run Costs and Production 304
Total Costs and the Short-Run Production Function 304
Average Variable Cost and Average Product 305
Marginal Cost and Marginal Product 306
The Graphical Relation between AVC, SMC, AP, and MP
307
8.5 Summary 310
Key Terms 310
Mathematical Appendix: Short-Run Production and Cost
Relations 316
CHAPTER 9 Production and Cost in the Long Run 319

9.1 Production Isoquants 321
Characteristics of Isoquants 321
Marginal Rate of Technical Substitution 322
Relation of MRTS to Marginal Products 323
9.2 Isocost Curves 324
Characteristics of Isocost Curves 324
Shifts in Isocost Curves 325
9.3 Finding the Optimal Combination of Inputs 326
Production of a Given Output at Minimum Cost 327
The Marginal Product Approach to Cost Minimization 329
Production of Maximum Output with a Given Level of
Cost 330
9.4 Optimization and Cost 332
35
An Expansion Path 333
The Expansion Path and the Structure of Cost 334
9.5 Long-Run Costs 335
Derivation of Cost Schedules from a Production Function
335
9.6 Forces Affecting Long-Run Costs 340
Economies and Diseconomies of Scale 340
Economies of Scope in Multiproduct Firms 346
Purchasing Economies of Scale 352
Learning or Experience Economies 353
9.7 Relations between Short-Run and Long-Run Costs 355
Long-Run Average Cost as the Planning Horizon 355
Restructuring Short-Run Costs 357
9.8 Summary 359
Key Terms 360
Mathematical Appendix: Production and Cost Relations
with Two Variable Inputs 368
page xix
CHAPTER 10 Production and Cost Estimation 372

10.1 Specification of the Short-Run Production Function 373
10.2 Estimation of a Short-Run Production Function 375
10.3 Short-Run Cost Estimation: Some Problems with Measuring
Cost 379
Correcting Data for the Effects of Inflation 379
Problems Measuring Economic Cost 380
36
10.4 Estimation of a Short-Run Cost Function 381
Estimation of Typical Short-Run Costs 382
Estimation of Short-Run Costs at Rockford Enterprises: An
Example 384
10.5 Summary 387
Key Terms 388
Mathematical Appendix: Empirical Production and Cost
Relations 391
Online Appendix 2: Linear Programming
CHAPTER 11 Managerial Decisions in Competitive Markets 398

11.1 Characteristics of Perfect Competition 400
11.2 Demand Facing a Price-Taking Firm 401
11.3 Profit Maximization in the Short Run 403
The Output Decision: Earning Positive Economic Profit
404
The Output Decision: Operating at a Loss or Shutting
Down 409
The Irrelevance of Sunk Costs, Fixed Costs, and Average
Costs 413
Short-Run Supply for the Firm and Industry 415
Producer Surplus and Profit in Short-Run Competitive
Equilibrium 416
11.4 Profit Maximization in the Long Run 418
Profit-Maximizing Equilibrium for the Firm in the Long
Run 418
Long-Run Competitive Equilibrium for the Industry 419
37
Long-Run Supply for a Perfectly Competitive Industry
421
Economic Rent and Producer Surplus in Long-Run
Equilibrium 426
11.5 Profit-Maximizing Input Usage 429
Marginal Revenue Product and the Hiring Decision 429
Average Revenue Product and the Shutdown Decision 432
11.6 Implementing the Profit-Maximizing Output Decision 433
General Rules for Implementation 433
Profit Maximization at Beau Apparel: An Illustration 435
11.7 Summary 441
Key Terms 442
Mathematical Appendix: Profit Maximization for Price-
Taking Firms 453
CHAPTER 12 Managerial Decisions for Firms with Market Power

456
12.1 Measurement of Market Power 458
Market Definition 459
Elasticity of Demand 460
The Lerner Index 460
Cross-Price Elasticity of Demand 461
12.2 Barriers to Entry 461
Barriers Created by Government 464
Economies of Scale 467
Essential Input Barriers 467
Brand Loyalties 468
Consumer Lock-In 468
38
Network Externalities (or Network Effects) 469
Sunk Costs as a General Barrier to Entry 470
12.3 Profit Maximization under Monopoly: Output and Pricing
Decisions 472
Demand and Marginal Revenue for a Monopolist 473
Maximizing Profit at Southwest Leather Designs: An
Example 474
Short-Run Equilibrium: Profit Maximization or Loss
Minimization 475
Long-Run Equilibrium 481
12.4 Profit-Maximizing Input Usage 482
12.5 Monopolistic Competition 486
Short-Run Equilibrium 487
Long-Run Equilibrium 488
12.6 Implementing the Profit–Maximizing Output and Pricing
Decision 490
General Rules for Implementation 490
Maximizing Profit at Aztec Electronics: An Example 494
12.7 Multiplant Firms 498
Multiplant Production at Mercantile Enterprises 500
12.8 Summary 503
Key Terms 504
Mathematical Appendix: Profit Maximization for a
Monopoly 516
page xx
CHAPTER 13 Strategic Decision Making in Oligopoly Markets 519
39
13.1 Decision Making When Rivals Make Simultaneous
Decisions 521
The Prisoners’ Dilemma 524
Decisions with One Dominant Strategy 526
Successive Elimination of Dominated Strategies 528
Nash Equilibrium: Making Mutually Best Decisions 530
Super Bowl Advertising: An Example of Nash
Equilibrium 532
Best-Response Curves and Continuous Decision Choices
534
13.2 Strategy When Rivals Make Sequential Decisions 541
Making Sequential Decisions 541
First-Mover and Second-Mover Advantages 543
Strategic Moves: Commitments, Threats, and Promises
546
13.3 Cooperation in Repeated Strategic Decisions 548
One-Time Prisoners’ Dilemma Decisions 549
Punishment for Cheating in Repeated Decisions 551
Deciding to Cooperate 552
Trigger Strategies for Punishing Cheating 553
Pricing Practices That Facilitate Cooperation 554
Explicit Price-Fixing Agreements and Cartels 557
Tacit Collusion 562
13.4 Strategic Entry Deterrence 562
Limit Pricing 563
Capacity Expansion as a Barrier to Entry 567
13.5 Summary 570
Key Terms 571
40
Mathematical Appendix: Derivation of Best-Response
Curves for Continuous Simultaneous Decisions 580
CHAPTER 14 Advanced Pricing Techniques 585

14.1 Price Discrimination: Capturing Consumer Surplus 586
The Trouble with Uniform Pricing 586
What Is Price Discrimination? 588
Conditions for Profitable Price Discrimination 589
14.2 First-Degree (or Perfect) Price Discrimination 590
14.3 Second-Degree Price Discrimination Methods 593
Two-Part Pricing 594
Declining Block Pricing 603
14.4 Third-Degree Price Discrimination 604
Allocation of Sales in Two Markets to Maximize Revenue
605
Profit Maximization with Third-Degree Price
Discrimination 608
14.5 Pricing Practices for Multiproduct Firms 613
Pricing Multiple Products Related in Consumption 614
Bundling Multiple Products 617
14.6 Cost-Plus Pricing 620
Practical and Conceptual Shortcomings 621
14.7 Summary 625
Key Terms 626
Mathematical Appendix: Two-Part Pricing with Two
Identical Groups of Buyers 633
41
Online Appendix 3: Pricing Multiple Products Related in Production
CHAPTER 15 Decisions under Risk and Uncertainty 635

15.1 Distinctions between Risk and Uncertainty 636
15.2 Measuring Risk with Probability Distributions 637
Probability Distributions 637
Expected Value of a Probability Distribution 639
Dispersion of a Probability Distribution 639
15.3 Decisions under Risk 642
Maximization of Expected Value 642
Mean–Variance Analysis 644
Coefficient of Variation Analysis 645
Which Rule Is Best? 645
15.4 Expected Utility: A Theory of Decision Making under
Risk 647
A Manager’s Utility Function for Profit 648
Deriving a Utility Function for Profit 649
Maximization of Expected Utility 652
15.5 Decisions under Uncertainty 655
The Maximax Criterion 655
The Maximin Criterion 657
The Minimax Regret Criterion 658
The Equal Probability Criterion 658
15.6 Summary 659
Key Terms 660
Mathematical Appendix: Decisions under Risk 665
42
page xxi
CHAPTER 16 Government Regulation of Business 666

16.1 Market Competition and Social Economic Efficiency 668
Efficiency Conditions for Society 668
Social Economic Efficiency under Perfect Competition
669
16.2 Market Failure and the Case for Government Intervention
672
16.3 Market Power and Public Policy 674
Market Power and Allocative Inefficiency 674
Market Power and Deadweight Loss 675
Promoting Competition through Antitrust Policy 676
Natural Monopoly and Market Failure 678
Regulating Price under Natural Monopoly 680
16.4 The Problem of Negative Externality 683
Pollution: Market Failure and Regulation 686
16.5 Nonexcludability 693
Common Property Resources 693
Public Goods 695
16.6 Information and Market Failure 696
Imperfect Information about Prices 697
Imperfect Information about Product Quality 698
Information as a Public Good 699
16.7 Summary 701
Key Terms 702
43
Web Chapter 1: The Investment Decision
APPENDIX: STATISTICAL TABLES 710
INDEX 715
44
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some extent free of malarial poison, and certain parts have a climate
which some Europeans, even Englishmen enjoy.
CHAPTER XLVII
BRAZIL: THE CAPITAL, INDIVIDUAL STATES, CITIES
The Capital
Rio de Janeiro, the capital of Brazil, with a population of

1,200,000, the second city in South America and the fifth in the
Western Hemisphere, is generally conceded to have the finest
harbor in the world. It is also the most beautiful city in respect to
natural advantages, while the improvements which have recently
been carried out have made the artificial structure of the city in
harmony with its picturesque surroundings. In the early part of this
century the Government awoke to the disadvantages of the narrow
streets, the poor facilities for commerce, and the notoriously bad
conditions of health. Immense improvements were inaugurated and
speedily executed. Fine drainage canals were installed, mosquitoes
practically exterminated, wide avenues were cut through dense
quarters, and port works constructed, so that in health, beauty, and
commercial convenience, nothing remains to be desired. A new
Central Avenue, now renamed Rio Branco, is counted among the
finest in the world; other splendid avenues are lined with fine
commercial structures or beautiful private residences, perhaps with
royal palms; along the shores are magnificent boulevards unrivaled
in beauty, often thronged with luxurious automobiles, all amid
surroundings of ideal loveliness of sea-shore and of mountain. Hotel
accommodations, hitherto only fair, and inadequate, are improving
with the erection of needed new structures, as increasing travel for
business and pleasure demanded. Living expenses are called high
in all parts of Brazil, but on the whole Rio has seemed no dearer
than New York. The city may boast of a splendid opera house, said
to have cost $5,000,000, of the largest library in South America, and
the finest art gallery, a wonderful botanical garden, museums,
delightful sea and mountain resorts, etc., etc.
EASTERN BRAZIL
States and Cities
As the country of Brazil is so large and of such diversity in its

various sections and even in single States, with many independent
systems of railways connected with its numerous harbors, it may be
desirable to speak of its ports and to some extent of its railways in
connection with a review of the different States. In this we may begin
with the Coastal States, coming up from the south, and conclude
with those of the interior.
Rio Grande do Sul, eleventh in area among the States of Brazil,
and equal in size to Indiana and Illinois together, borders on Uruguay
at the south. The Uruguay River separates it from Argentina on the
west and most of the way from the State of Santa Catharina on the
north. Its population is about the same as that of the State of South
Carolina, which is one-third of its size. It is called a pastoral State as
its chief source of wealth at present is cattle; 45 of the 70 million
acres are cattle ranges, 6¹⁄₄ million, farms, and 13³⁄₄ forests. The
nearly 9,000,000 head of cattle are called the best in Brazil. Blooded
stock is being introduced and packing houses are taking the place of
saladeros for charque or dried meat, which formerly were the
destination of most of the cattle. High class poultry is extensively and
profitably raised, $4,500,000 being invested in the industry.
With a temperate climate and well watered, the country is by no
means confined to stock raising, for its agricultural products are
more diverse than those of any other state. Not only cereals like
wheat and oats, but cotton, rice, sugar cane, tobacco, manioc,
alfalfa, etc., even tea are successfully raised, as well as temperate
zone fruits and vegetables. It has important coal mines, with some of
copper, gold, and wolfram also being operated, and a wide
distribution of these and other minerals. With 13,000 industrial
establishments its important factories include nine textile mills.
The capital, Porto Alegre, is the chief manufacturing centre, and
the State is third in such industries. The capital is the largest city in
southern Brazil, with a cosmopolitan population one fourth of
German descent. An important commercial and industrial centre, it
has fine public buildings, colleges, theatres, clubs, good shops,
parks, and hotels. The population is nearly all white with a large
percentage of Italians as well as of Germans.
Rio Grande is the chief port, 1000 miles south of Rio de Janeiro,
and 180 by sea north of Montevideo. The city lies just inside the
entrance of the Lagôa dos Patos at its south end. Unfortunately, the
entrance has been obstructed by a sand bar with a varying depth of
water above. Vessels drawing more than 11 feet could not pass;
uncertainty, often a few days’ waiting was the fate of others. An
attempt to dredge a passage was unsuccessful, but with building of
jetties improvement is manifest. Port works in the city, including a
mile of quays, have been established, and a rapid development of
the region is expected to follow. The city, population 40,000, has an
active commerce by rail and water. By rail it is connected at Cacequy
with the through line from São Paulo to Montevideo, and beyond this
line at Uruguayana (population 20,000), on the Uruguay River, with
the Argentine railways on the other side. There is regular steam
navigation to the port of Pelotas, three hours, population 32,000,
noted for its dried meat products, and to Porto Alegre at the north
end of the lagoon, 150 miles and 12 hours distant.
Santa Catharina, north of Rio Grande, less than one third of its
size, has rather similar characteristics. Bordering on the Atlantic, it
has Argentina on the west; on the north is the State of Paraná, from
which it is separated for half the distance by the Iguassú River. The
State is notable for wheat growing and other grains, for cattle and
dairy products, for its exports of fruits, for its coal mines, and for the
timber from its forests, especially the Paraná pines. It ranks second
in Brazil as a producer of yerba mate, in Portuguese herva matte,
14,000,000 pounds being its annual output. Its manufacturing
establishments (174) are of small size.
The capital and chief port is Florianopolis on an island of that
name. Improvements in the way of good port works are in hand, and
though without rail connection a tonnage of about 300,000 has
entered and cleared in a year. The port of São Francisco, a smaller
town in the State, is called the best port south of Santos. This
advantage will give the city future importance. Already it has rail
connection by way of the town Rio Negro with Curityba and
Paranaguá, and so with Ponta Grossa on the São Paulo-Uruguay
Railway which of course crosses the State, a distance of 225 miles.
The city is expected to be the terminus of a road which will pass
through União da Victoria to the Iguassú Falls and across Paraguay
to Asunción.
Paraná, about the size of Rio Grande, is between Santa Catharina
and São Paulo, having Argentina also on its southwest corner
beyond the Iguassú River and its great Falls. Along the western
border flows the larger river, the Alto Paraná (with the tremendous
La Guayra Falls) separating the State from Paraguay, and farther
north from Matto Grosso. Besides these boundary rivers the
Paranapanema, affluent of the Paraná, flows between this State and
São Paulo, while the Rio Negro and Iguassú are between it and
Santa Catharina. Many more tributaries of the Paraná are entirely
within the State. Matte is the chief industry at present, 100,000,000
pounds being annually exported; but with the best wheat land of
Brazil, its forests of Paraná pine, and other varieties of timber it may
have another leader before long. Paranaguá, the State’s chief port,
with a deep anchorage and improvements planned, is now visited by
650 vessels a year and has a total annual trade of $6,000,000. A
smaller port, Antonina, is on the north side of the same bay.
The capital, Curityba, has rail connection with the two ports and
with Ponta Grossa on the line to Uruguay traversing these three
States. In the delightful four hours’ journey of 70 miles from
Paranaguá to the capital, the climb of the Serra do Mar up a steep
tropical valley is made without cogs or cables by means of high
trestles, bridges, and 17 tunnels; the ride rivaling if not surpassing in
beauty the more famous one from Santos to São Paulo.
São Paulo, a great and justly famous State, about the size of
Arizona, more than twice that of New York, has Minas Geraes on the
north, also east with a small extent of the State of Rio de Janeiro; the
ocean is southeast, Paraná south, and Matto Grosso west. This
enterprising State is the leader in agriculture, producing 60 per cent
of the world’s coffee supply, besides cotton, sugar, tobacco, cereals,
etc., in large quantities; it is second to Rio in manufacturing
industries, contains large mineral riches, is advanced in stock
raising, leads in educational advantages, and has the best railway
service of 4300 miles. The wealth of this State is estimated as at
$1,100,000,000 in agriculture, $500,000,000 in manufactures,
$170,000,000 in railways, and $2,230,000,000 miscellaneous. While
most of it is in the torrid zone, the altitude of the State averaging over
2000 feet gives it (except for the narrow coastal strip) a fine healthful
climate, a blessing enjoyed too by the States previously mentioned.
In the Falls of its rivers the State possesses 3,000,000 horse power
of which only 250,000 is employed.
The port of Santos, population 80,000, is regularly visited by the
large Transatlantic and North American steamers. It is called one of
the best and most important ports of the world, receiving 1600 ships
annually besides coasting vessels. The largest ocean steamers, 20-
40 foot draft, come up to the quay which extends for three miles
along the harbor front; fine granite walls rise five feet above high
water mark on a base 10-20 feet thick. Modern machinery is
provided, making it the best equipped port in Brazil, and nothing is
allowed to interfere with the efficiency of the service. It is a very busy
city though warm. The heat does not prevent people from rushing
about. A Brazilian writer has said, “People do not run, they fly.” The
reason for this unusual haste, by no means manifest in Rio, is that
many prominent business men come daily, others occasionally, from
São Paulo by morning train, returning at four p.m. A splendid railway
which will be referred to later, leads to that important city, a two
hours’ ride.
The capital city, São Paulo, 310 miles from Rio and 50 from
Santos, while lacking the charm of Rio’s scenic beauty, is preferred
by many as a place of residence on account of its cooler climate, the
greater business activity apparent, and the cosmopolitan society,
more than one third of the population being of foreign birth and
another one third direct descendants of Europeans. The city has
many splendid buildings, both public and private, including an opera
house superior to any in the United States, a large number of
excellent schools of various kinds, and all the attractions and
facilities, except good and adequate hotels, of a city of half a million
inhabitants.
The Federal District of Brazil, the capital, Rio de Janeiro, has
been sufficiently described except as a port city. From a commercial
point of view the harbor and port works are the chief interest. The
Guanabara Bay is a wonderful harbor, not merely on account of its
size, depth of water, absolutely safe anchorage, and the beauty of its
surroundings, but it is extraordinary from the fact that it is hardly a
mile from the ocean to the landing docks. Here a granite quay
extends for 2¹⁄₄ miles along the water front with a depth of water
alongside of 31 feet. The deep channel entrance is narrowed to a
mile in width by long narrow peninsulas extending on either side and
further by a small island blocking the waves. The docks have the
additional protection of a projecting point of the city, on the other side
of which, on rare occasions, the waves do break over upon the
splendid boulevard. The larger inner harbor is hardly noticeable,
being cut off by peninsulas and islands, of which last the bay
contains nearly a hundred. The entire bay is 18 miles long, and the
inner section is 15 miles wide. At the docks the most modern
machinery is provided for hoisting, loading and unloading ships, with
electric power for the work and for lighting. A width of 80 feet was left
for railway tracks; back of these are storage ware-houses,
administration offices, and customs, for which a space of 110 feet
was allowed. Behind these buildings is an avenue 125 feet wide,
with double tracks on which run electric cars. Two million dollars are
now (1921) to be expended for additional port works, an extension of
the granite quay or dock wall about 2000 feet and two breakwaters
of 800,000 cubic feet.
Rio de Janeiro. This State, though containing or surrounding the
capital, is distinct from it, with a capital of its own on the opposite
shore of the bay. As the direction of the coast line changes here, the
State has the ocean east and south; São Paulo is west, Minas
Geraes north, and Espirito Santo at the northeast. The State is
comparatively small, being only about one sixth the size of its
western neighbor, and less than one twelfth of its northern; it is even
a trifle smaller than Espirito Santo, its next coastal neighbor.
Nictheroy, the capital, is a comparatively small, quiet town of
65,000 population, which has some important manufactories. The
State has other smaller towns, as Petropolis, the so-called summer
capital, population 30,000, at an elevation of 3000 feet. The
Parahyba Rio do Sul, which flows northeast, back of the mountain
range, is navigable to the city of Campos, population 30,000, 60
miles from its mouth. The agricultural products are important, the
State ranking third in coffee and second in sugar. Large quantities of
corn and rice are raised, the coast lands with lakes and lagoons
being well suited to the latter. Valuable forests and minerals exist,
and in manufacturing industries of great variety the State stands first.
Besides the harbor of Rio there are a number of good though small
ports.
Espirito Santo. Little Espirito Santo, northeast of Rio State, has
Minas at the west and Bahia north. The principal products of the
State are coffee, rice, and other cereals, sugar, cotton, and
mandioca; while the export of fine timber, rosewood, satin and brazil
wood, is increasing. Gold and precious stones are its chief minerals.
Its factories are few, but the town of Itaperim on a navigable river has
cheap electric power, which makes it a fine centre for industry in the
future.
The capital and chief city, Victoria, population 20,000, is the first
port of importance north of Rio. On a fine bay 2¹⁄₂ miles wide with a
narrow entrance of less than ¹⁄₂ a mile, it is the outlet of the eastern
part of the State of Minas, which contains the richest mineral
deposits so far exploited in Brazil. A railway connects the port with
interior cities. Works of importance have been planned, a quay ⁵⁄₈ of
a mile long with 28 feet of water and with suitable equipment; the
widening and deepening of the channel entrance, and the building of
a steel bridge to the main land from the island on which the city
stands. Over 500 steamers and 200 sailing vessels clear yearly.
Bahia, an important and well known State, the largest yet
considered, exceeding California in area, touches three smaller
States on the north, Piauhy, Pernambuco, and Sergipe; it has
Espirito Santo and Minas on the south and Goyaz west. All kinds of
tropical and subtropical products are found here, cacao, sugar, and
coffee in large quantities, rubber of the maniçoba and mangabeira
varieties, cotton, vanilla, the finest kind of oranges and pine apples,
and other fruits. Bahia has the principal whale fisheries of the
country and the best grounds for table fish. Its mineral wealth
includes even the sand, monazite, the most important supply in the
world.
The capital and chief port, 720 miles northeast of Rio, about 60
hours sail, is generally called by the name of the State, though its
proper title is São Salvador. It has an excellent and beautiful harbor,
though over-shadowed by the more remarkable picturesqueness of
Rio. The bay, Bahia de Todos os Santos, about 25 miles wide (three
at the entrance), and 20 miles deep, provides good anchorage for
large steamers, 40 feet close in shore. It is a port of call for Trans-
Atlantic liners and for steamers from North America, the only one
north of Rio for some of the Lines. A company has undertaken port
works which will greatly advance the prosperity of City and State, the
works to include three breakwaters and two quay walls, the levelling
of a large wharf space, erection of store-houses, laying railway lines,
installing electric cranes, and constructing a floating dock and a
lighthouse. Over 1000 large steamers with 2,300,000 tonnage enter
the port annually. The imports are $13,000,000, the exports
$20,000,000. The city is connected by rail with various cities in the
interior of the State, and with the São Francisco River at a point
above the Falls, from which there is navigation upstream a distance
of 990 miles. The river has a length in the State of 850 miles. Bahia
is a great cocoa port, shipping about one-fifth of the world’s supply;
the State produces about as much tobacco as Cuba.
Sergipe, the smallest of all the States, is larger than nine of ours,
a trifle bigger than Maryland and Delaware together. The São
Francisco River separates it from Alagôas on the north, it has Bahia
on the west and south. Its chief products are cotton, sugar, and rice;
the cattle industry is important; the State has profitable
manufacturing industries; cotton mills, sugar, shoes, soap, and other
factories, and unworked mineral deposits.
The capital, Aracajú, population 40,000, is a small port with 95,000
tons of shipping yearly; but it suffers the disadvantage of receiving
ships of no more than 8 feet draft, and needs the improvements now
planned.
Alagôas, of triangular shape, has Sergipe on one side and
Pernambuco on the other, the ocean on the third. Its main products
are sugar and cotton; the cattle industry is prosperous; it has copper,
lead and iron deposits, not operated, and very important milling
industries, particularly of cotton. The São Francisco River is regularly
navigated 175 miles to the Paulo Affonso Falls, around which there
is a railway 52 miles long to navigation above.
The capital, Maceió, is a modern city; its suburb, the port, Jaraguá,
with a tonnage of 600,000. The State is the most thickly populated
next to Rio de Janeiro.
Pernambuco, the twelfth State in size, with area equal to that of
New York, extends well into the interior, though with a coast line of
112 miles only. Ceará and Parahyba are on the north, Alagôas and
Bahia on the south, and Piauhy on the west. The State leads in the
production of cotton and sugar, sometimes exporting 150,000 tons of
the latter, and raw cotton worth $5,000,000. Other agricultural
products are secondary, but cattle and dairying are important, still
more the milling industry. Minerals, coal, iron, saltpetre, kaolin, and
manganese exist in paying quantities. There are two good ports
besides the capital; railways connect Recife with Maceió and with
cities inland.
Recife (often called Pernambuco), capital of the State, is a port
protected by a coral reef parallel to the shore, where fine works are
being constructed: these include a breakwater three-fourths of a mile
long, a stone jetty one-half a mile; quays, one with 33 feet of water,
one with 28-30, together three-fourths of a mile long, also other
equipment. One thousand steamers are its annual quota, with
tonnage of 1,750,000; the city has obviously great commercial
importance, exporting especially cotton and sugar, also rum, hides,
and cereals. Its imports surpass those of any other Brazilian city
except Rio. The cost of living is high.
Parahyba has on the north Rio Grande do Norte, Pernambuco
south, Ceará west, and 72 miles of coast east. Cotton is the chief
product, and mandioca is important. Vast coconut groves of trees,
growing wild, should be taken advantage of. The pastoral industry is
important, with goats a specialty as with its neighbors.
A little below the capital, Parahyba, at the mouth of the Rio
Parahyba do Norte, is the seaport Cabedello, where port works are
planned.
Rio Grande do Norte is the first of several States which have the
Atlantic Ocean on the north. It is on the east also, forming a coast
line of 290 miles. Parahyba is south and Ceará west. Here, too,
cotton and sugar are the chief products, though 180 tons of rubber
annually, from the maniçoba trees, are of value; the cattle and goats
are important; carnaüba wax and vegetable oils come from the
forests; the State, from natural salines, supplies much of the salt
used in Brazil. Dried and salt fish are supplied to the rest of the
northern States, and much cotton cloth and thread are exported.
Natal, the capital, is near the mouth of the Rio Grande. A great
reservoir with a dam 160 feet high and a capacity of 2,200,000,000
cubic metres of water is to be constructed, the irrigation of 250,000
acres thereby transforming a large district; others here and in Ceará.
Ceará, smaller than Pernambuco, is nearly twice the size of Rio
Grande do Norte, which with Parahyba is on the east; Pernambuco
is south and Piauhy west. Cotton is the chief product though coffee,
sugar, cacao and cereals are also raised. Cultivated rubber is
exported as from Bahia; the cattle industry is important, though
affected by occasional severe droughts. However there are
approximately 2,000,000 head of cattle. Minerals and precious
stones are found in variety.
The capital and port, Fortaleza, is one of the worst on the coast.
Three powerful dredges are maintained by the Government for the
continual dredging of the channel into which sand from the dunes is
ever drifting. Two smaller ports require similar dredging.
Piauhy, eighth of the States in size, with a deep interior has the
smallest coast line, only 43 miles. It has Ceará and Pernambuco
east, Bahia south, and Maranhão west, from which it is separated by
the Parnahyba River. The State has the expected agricultural
products, vast herds of cattle and large flocks of goats; important
forest wealth of rubber, timber, wax, and medicinal plants, and a
variety of minerals. It has one seaport, Amarraçao, but a good deal
goes out from a port of the next State, Tutoya, on the other side of
the river Parnahyba. Therezina, the capital, is of some importance.
Maranhão, a little larger, has Piauhy east and south, Goyaz south
and west, almost touching Bahia between these two; it has Pará also
on the west. Its coast line is 100 miles more than Piauhy’s. Cotton is
the chief agricultural product, but others exist; the cattle industry is
important, much live stock going to Amazonas; there is good forest
wealth, various minerals, and important cotton factories.
São Luis do Maranhão, the capital, population 50,000, is called the
chief port though troubled by sand, while Tutoya is excellent.
Pará, a name at last familiar to all, is third of the States in area,
equal to Texas and California, with West Virginia thrown in. It has
Guiana on the north, with the Atlantic northeast; east are Maranhão
and Goyaz. Matto Grosso is south, and Amazonas west. Its chief
products are of the forest, particularly rubber, also Brazil nuts,
medicinal plants, oils and timber. Little is done in agriculture though
many plants grow freely such as cotton, rice, tobacco, and especially
cacao, of which 3500 tons a year have been exported. There are
large herds of cattle, perhaps 2,000,000 head, and various minerals
are found. One railway, with branches, leads from Pará to Bragança,
near the ocean, and to other towns; and one is open for a short
distance in the valley of the Tocantins, the beginning of an ambitious
project.
The capital, Belém, usually called by foreigners Pará is a fine city
of 200,000 and the only considerable seaport, if so it may be termed,
as it is on a bay of the Pará River 80 miles from the ocean. Mean
temperature 78°. Harbor works, begun in 1906, and costing over
$60,000,000, have been of immense value. They include a fine quay
a mile and a half long with a depth of water part of the way of 30
feet, docks and storehouses, two floating docks, a Custom House,
oil storage tanks, etc. One thousand steamers formerly entered
yearly with tonnage of 1,500,000; imports at one time were valued at
$15,000,000 and exports at $30,000,000. A channel from the outer
river, 30 feet in depth, is marked by 26 buoys lighted by acetylene
gas. The city is notable with attractive plazas, a unique forest park, a
museum, a white marble theatre, and a good hotel. The various
cities or villages are coast or river ports, some on the Amazon,
others on the Tapajós, Xingú, Tocantins, Araguary, or smaller
streams.
Amazonas, first of the inland States, and the largest of all, has
Colombia and Venezuela north, Pará east, Matto Grosso, Bolivia,
and Acre south, and Peru and Colombia west. Its area is equal to
that of our three Pacific Coast States with Idaho, Montana, Nevada,
and Colorado. In this great space the population, estimated at
435,000, is about one person to 1¹⁄₂ square miles. Manaos, the
capital, and the various other centres of population by the river side
mean rubber. There are no roads except of water, no paths save
those made by rubber gatherers, with a few by Indians, the number
of whom is a mere guess. All tropical products thrive but their
production is negligible save that of rubber. Various minerals are
unexploited. Manaos, 924 miles from Pará, 1030 from the ocean,
and 2000 from Rio, is the first real city in the wilderness, though
Obidos, still in the State of Pará, is a port where 300 vessels call in a
year, and a number of smaller places claim that title.
Manaos, a city of 60,000 population, is located just off the Amazon
seven miles up the Rio Negro, on a large quiet bay. Port works have
been constructed, a fine stone wall over 1500 feet long, with floating
docks to fit the 50-foot rise and fall of the river, and 16 electrically
equipped warehouses conveniently arranged. Considering its
location, it is a wonderful city, well lighted, with a splendid opera
house, expensive of course, a fine cathedral, schools, a public
library, museum, and good sanitation. One thousand four hundred
miles farther is the Peruvian city of Iquitos, near the limit of
navigation for ocean vessels on the main stream. Some distance
below Manaos the Amazon is entered by the Madeira River which
gives access to the State of Matto Grosso and to Bolivia.
Matto Grosso is second in size, equal to the States mentioned
above without Nevada and Colorado. Estimated population 275,000.
This State has Amazonas and Pará on the north, Goyaz, Minas
Geraes, São Paulo, and Paraná on the east, Paraguay and Bolivia
are on the south, and Paraguay and Bolivia west. The State is much
more open than Amazonas; its chief industry is cattle. Forest
products however abound, with all kinds of rubber and magnificent
timber. There are large agricultural possibilities and considerable
matte is exported. Diamonds and auriferous sands are exploited
though their origin is uncertain. The river systems north and south
meet in the highlands, and connection might be made by a short
canal, opening a way from Pará or Manaos to Buenos Aires.
Cuyabá, the capital, on a river of the same name, an affluent of
the Paraguay, is quite a city, population 32,000, although 1045 miles
above Asunción, while Corumbá, lower down, on the Paraguay, is of
nearly equal size. The river at Corumbá is 1000 feet wide, and 6 feet
deep at the docks at low water. Corumbá is regularly visited by
steamers, though 1800 miles by river from Montevideo. Its export
and import trade amounts to at least $4,000,000 annually.
Goyaz, the fourth State in size, following Pará, has Maranhão on
the north, Maranhão, Bahia, and Minas Geraes are on the east,
Minas and Matto Grosso are south, and Matto Grosso and Pará
west. Three hundred thousand is the estimated population with a
guess at the number of Indians of many tribes. The principal industry
is stock raising and many cattle are exported to neighboring States.
The forests have the maniçoba and the mangabeira rubber, also a
vegetable silk, paina. There are great mineral riches, placer gold in
many streams, and veins in the hills; many diamonds and rock
crystal are also produced. Other metals as iron and copper exist.
Navigable rivers are the means of communication as in the
neighboring States, but a railroad is coming and more rapid
development will follow.
The capital, Goyaz, is not much of a place, though of late evincing
progress. Several other cities have from 5000 to 10,000 inhabitants.
Minas Geraes, the fourth inland State and the fifth in size, has
Bahia on the north, Bahia and Espirito Santo east, Rio de Janeiro
southeast, São Paulo southwest, and Goyaz west, a small southwest
corner about reaching Matto Grosso below. Although without a
seaport and with no large city, Minas is the most populous of the
States, with an active industrious population. The State leads in
mineral riches of almost every kind; it is one of the foremost in
agriculture of all varieties, being second to São Paulo in coffee; it
has vast pasture lands, exporting 300,000 head of cattle a year, a
sugar refinery, flour mills, and a great dairy industry. It has increasing
railway service as well as river transportation. It is believed to have a
mineral future rivaling that of the best region in the world. Its
factories are important and there is a great store of water power.
Bello Horizonte, the present capital, was made to order in 1897,
and is well laid out with broad streets, water supply, sewerage,
everything of the best type: a Government Palace, the finest State
building of Brazil, and a fine Agricultural School. Ouro Preto, the old
capital, has a free Mining School, said to be one of the best in the
world.
The Acre Territory, triangular in shape, has Amazonas north,
Bolivia south, and Peru west. It is naturally similar to the neighboring
sections. There are three Districts: Juruá, of which the capital is
Cruzeiro do Sul, population 2000, 1351 miles from Manaos; Purús,
capital, Senna Madureira, population 4000, 1320 miles from
Manaos; and Acre, capital Rio Branco, population 2000, 1351 miles
from Manaos.
CHAPTER XLVIII
BRAZIL: TRANSPORTATION—OCEAN, RIVER, AND RAILWAY
Ocean and River Traffic
Brazil has a considerable navy, several warships; and a merchant

marine of 450,000 gross tonnage. The leading national line is the
Brazilian Lloyd which with 62 ships has a service to the United
States as well as a coastwise, the latter shared by the Navegaçao
Costeira and other companies. Rio de Janeiro has three dry docks,
one with a capacity for the largest battleships, and a yard where
ships are constructed. The country has 30,000 miles of navigable
rivers, with boats for these having a tonnage of 75,000.
Coastwise and river steamers have service in the Amazon Basin,
the most important as follows: Pará-Obidos-Manaos, 975 miles;
Pará-Santarem-Itaituba (Rio Tapajós) 729 miles; Pará-Maués, Pará
Tocantins, 1544 miles; Tabatinga (Frontier) Remate dos Males, 1743
miles; Pará-Santo Antonio (Madeira) 1617 miles; Pará-Rio, Peru-
Senna-Madureira, 1934 miles; Pará-Chaves (Marajos Island),
Oyapock River; Manaos and Rio Negro to Santa Isabel, 423 miles;
Manaos to the Yapurá River—to the Juruá River, Cruzeiro do Sul,
1090 miles.
Other companies have service, Maranhão north to Pará, 599
miles, south to Pernambuco 884 miles; Recife north to Maranhão
803 miles, south to Bahia 385 miles, east to Fernando do Noronha
Island, 239 miles. On the São Francisco River, Januaria to Pirapora.
Other Lines serve from Rio de Janeiro to ports south to Laguna and
Ribeira de Iguapé, São Paulo; also on the Paraná and the Rio
Grande, and on the Lakes Patos and Mirím. Service from Rio de
Janeiro to Corumbá, 765 miles above Asunción, and 280 miles
farther to Cuyabá on the Cuyabá River, in time of high water is
continued on the Paraguay 250 miles beyond to São Luiz de
Caceres.
Railway Transportation
While the great rivers of Brazil with their 27,000 miles of navigable
waters have been a large factor in the development of the country, of
equal importance for the future is transportation by rail. The total
present mileage, second to that of Argentina, exceeds 16,500, these
having developed from 9¹⁄₂ miles in 1854 and about 10,000, 50 years
later. About 90 per cent are of metre gauge. For the economic unity
of the great Republic, the Government policy is favorable to a rapid
extension of the present railway systems, a matter as important as
was the creation of our railways to the Pacific 50 years ago. The
development in Brazil has been retarded by the difficult topography
of the country, in striking contrast to the Argentine plains. Along the
greater and better part of the coast is the high steep wall of the
plateau region, which must be climbed to enter the interior. Once at
the top the way in some sections is easier, but in others there are
additional mountain ranges. The wall, obviously low in comparison
with the mighty rampart of the Andes, presents difficulties, but none
to compare with those experienced in Peru.
The first railway, built and operated in 1854, was from Mauá on the
north shore of the Rio harbor to Fragosa. Soon after carried to
Petropolis, it is now a part of the Leopoldina Railway system. Only
two South American railways antedate this, the Demarara of British
Guiana and the Caldera-Copiapó in Chile.
The Central of Brazil Railway was the first of much importance,
its first section, 32 miles, opened in 1858. For this road leading out of
Rio expenses were heavy. Many were the difficulties of construction,
tunnels, bridges, etc., the boring of one tunnel, only 1¹⁄₂ miles long,
requiring seven years. The system, now in Government ownership,
has a network of lines extending from Rio to the city of São Paulo, to
Bello Horizonte in Minas, and to other points. It has express trains
with sleeping cars (state rooms), and a heavy suburban traffic. It is
intended to carry this system northward to the city of Pará, with
branches to new territory. Twenty-five million passengers are carried
annually with much freight of coffee, lumber, iron, manganese, etc.
The railway is to be electrified near the capital with a Government
appropriation of $32,760,000.
The São Paulo Railway. The most successful, financially and
otherwise, of the railways of Brazil is no doubt the São Paulo,
operating a double track, broad gauge line (5 feet 6 inches) from
Santos to the town and junction, Jundiahy (population 20,000), 86
miles; it passes through the city, São Paulo, and has a branch to
Bragança, 65 miles. This road has a granted monopoly of trade
between the two cities, Santos and São Paulo, 50 miles apart. This,
in spite of the great expense of the railway construction, has insured
them large profits, dividends in 1912-13 being 14 per cent. The train
mile earnings are the largest in South America and normally are
greater than any reported in the United States. With the construction
of more and more lines in this State and beyond, a steady increase
in the traffic seems assured, as nearly all must pass in and out by
way of Santos. The road now carries annually more than half of the
world’s coffee supply.
ENVIRONS OF SÃO PAULO AND RIO DE JANEIRO

One of many engineering triumphs in South America, the railway
is ranked among the greater achievements of the world. An ascent of
2600 feet is made within seven miles. Beginning 15 feet above the
sea not far from Santos five inclined planes with 8 per cent grade,
each 1¹⁄₂ miles long, serve for the rapid climb. A stationary engine at
the top of each plane runs the cables; to grip these a small engine is
attached to each car. The tracks seem unique. The double track on
the inclines has but three rails for up and down cars, which therefore
cannot meet there, but may on the intermediate levels of which there
are four, each 600 feet long. On each side between the middle and
the outside rails are the pulleys which carry the cable, an endless
steel wire of enormous strength run by a 1000 horse power engine,
capable of carrying six freight or three passenger cars at the same
time. In this short section are 16 viaducts, 15 tunnels, and two miles
of retaining wall. One viaduct is 334 feet long, and nearly 150 feet
high in the centre. There are now two of these double roads, one just
above the other, as I have seen, and not on a different route as
stated elsewhere. The first soon proving insufficient to accommodate
the freight, the second was built with a few technical improvements.
It is a wonderful ride through tropical forests, with scenes of
picturesque beauty.
The Sorocabana Railway, 864 miles, which traverses a rich and
progressive part of Brazil opening up new territory, has important
connections with other lines. This Company has several lines
running west and northwest from São Paulo. One of the most
important is to Baurú, a city also on the Paulista Railway. From this
point the North Western Railway has continued the line to Itapura on
the Paraná River and across the State of Matto Grosso to Porto
Esperança on the Paraguay, about 40 miles by land from Corumbá
on the west side of the River, and 80 by water. Probably a train-car
ferry will later be provided at Esperança and the road continued on
the other side to Corumbá. By the present road connection is made
with Bolivia opposite, and by water with Paraguay farther down, the
capital Asunción being about 700 miles distant, Montevideo nearly
1800. Previously to the completion of this railway Corumbá and that
section of Brazil was reached from Rio only by a long, long sail,

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MANAGERIAL ECONOMICS: FOUNDATIONS OF BUSINESS

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY

Some ancillaries, including electronic and print components, may not be

This book is printed on acid-free paper.

ISBN 978-1-260-00475-5 (bound edition)

Portfolio Manager: Andy Weekes

Library of Congress Cataloging-in-Publication Data

Names: Thomas, Christopher R., author.

The McGraw-Hill Series Economics

Frank, Bernanke, Antonovics, and Heffetz

Frank, Bernanke, Antonovics, and Heffetz

McConnell, Brue, and Flynn

McConnell, Brue, and Flynn

Samuelson and Nordhaus

ECONOMICS OF SOCIAL ISSUES

Register and Grimes

ECONOMETRICS AND DATA ANALYTICS

Brickley, Smith, and Zimmerman

Thomas and Maurice

Dornbusch, Fischer, and Startz

MONEY AND BANKING

McConnell, Brue, and Macpherson

To Shelly and Brooke

ABOUT THE AUTHORS

Easy to Learn and Teach From

Dual Sets of End-of-Chapter Questions

Now try Technical Problem 3.

Technical Problems—Each section of a chapter is linked (by an icon

The clarity of exposition, coupled with the integrated, step-by-step

Flexible Mathematical Rigor

Online Appendices and Web Chapter

Estimating and Forecasting Industry Demand for Price-Taking Firms

The Investment Decision

Duplicate Technical Problems with Answers

REVISIONS IN THE THIRTEENTH EDITION

Illustration 1.2 in Chapter 1 has been revised and updated using my

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CHAPTER 2 Demand, Supply, and Market Equilibrium 38

CHAPTER 3 Marginal Analysis for Optimal Decisions 88

3.4 Summary 109

CHAPTER 4 Basic Estimation Techniques 121

CHAPTER 5 Theory of Consumer Behavior 159

CHAPTER 6 Elasticity and Demand 205

CHAPTER 7 Demand Estimation and Forecasting 244

Online Appendix 1: Estimating and Forecasting Industry Demand for

CHAPTER 8 Production and Cost in the Short Run 282

CHAPTER 9 Production and Cost in the Long Run 319

CHAPTER 10 Production and Cost Estimation 372

Online Appendix 2: Linear Programming

CHAPTER 11 Managerial Decisions in Competitive Markets 398

CHAPTER 12 Managerial Decisions for Firms with Market Power

CHAPTER 13 Strategic Decision Making in Oligopoly Markets 519