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Managerial Economics: Six Steps to Decision Making

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The Six Steps to Decision Making are:
1. Define the Problem
2. Determine the Objective
3. Explore the Alternatives
4. Predict the Consequences
5. Make a Choice
6. Perform Sensitivity Analysis.

The following questions need to be answered:

(a) Mr. and Mrs. A recently bought a house, the very first one they viewed.

(b) Firm B has invested five years and $6 million in developing a new product. Even now, it is not clear whether the product can compete profitably in the market. Nonetheless, top management decides to commercialize it so that the development cost will not be wasted.

(c) You are traveling on a highway with two traffic lanes in each direction. Usually traffic flows smoothly, but tonight traffic moving in your direction is backed up for half a mile. After crawling for 15 minutes, you reach the source of the tie-up: a mattress is lying on the road, blocking one lane. Like other motorists before you, you shrug and drive on.

(d) The sedative thalidomide was withdrawn from drug markets in 1962 only after it was found to be the cause of over 8,000 birth defects worldwide. (An exception was the United States, where the use of thalidomide was severely restricted).

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Solution Preview

a. Explore the Alternatives

Mr. and Mrs. A failed at the third step. They defined the problem, which was that they needed a home, and then determined their objective, which was to make a home purchase. Buying the first home that they viewed completely eliminated step #3.

b. Predict the Consequences

This scenario shows that a proper consequence analysis was not ...

Solution Summary

This solution explains each of the decision-making questions answered. The proper decision-making choice of where each situation went wrong is provided from the list given. All four scenarios are answered and explained in detail.

See Also This Related BrainMass Solution

Bazerman's Six Steps

Think about a recent business decision you have made that was either a success or a failure. Your supervisor asked you to email him/her a self-evaluation of this decision as part of your yearly evaluation. You are to be as objective and open minded as possible. Analyze your decision using Bazerman's six steps as a guide: define the problem, identify the criteria, weigh the criteria, generate alternatives, rate each alternative on each criterion, compute the optimal decision. Make sure your email addresses the following issues:

Were there any discrepancies between the calculated "optimal" decision and your actual (or favored) decision? If so, what might account for the discrepancies?

What problems, if any, did you encounter when completing the steps? (For example, were you able to compute an optimal decision? If not, why not?)

Are there any weaknesses in the "fully rational" model of decision-making? If so, what are they?

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