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(d) The sedative thalidomide was withdrawn from drug markets in 1962 only after it was found to be the cause of over 8,000 birth defects worldwide.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 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.
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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 ...
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