Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem Solving Approach, 7e, ©2027, 9798214055640; Chapter 1:
Solving Problems with Economics
Instructor Manual
Froeb/McCann/Ward/Shor, Managerial Economics: A Problem Solving Approach, 7e, ©2027,
9798214055640; Chapter 1: Solving Problems with Economics
TABLE OF CONTENTS
Purpose and Perspective of the Chapter......................................................................2
Chapter Objectives........................................................................................................2
Cengage Supplements....................................................................................................2
What's New in This Chapter........................................................................................2
Chapter Outline.............................................................................................................3
Teaching Notes.......................................................................................................................................... 3
Discussion Questions....................................................................................................5
In-Class Problem........................................................................................................................................5
Additional Resources....................................................................................................5
Cengage MindTap Videos.........................................................................................................................5
Additional Anecdotes.................................................................................................................................6
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 1
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem Solving Approach, 7e, ©2027, 9798214055640; Chapter 1:
Solving Problems with Economics
PURPOSE AND PERSPECTIVE OF THE CHAPTER
Chapter 1 introduces a problem-solving strategy based on the rational actor paradigm that facilitates
identifying the causes of economics-based problems and the appropriate corrective actions. The three-step
algorithm focuses on determining who made the bad decision, whether the decision-maker had sufficient
information to make a good one, and whether the decision-maker had the incentive to do so. The chapter
also addresses the complementary roles of ethics and economics.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Use economics as a tool to spot problems and craft solutions.
1.2 Identify the root cause of a problem by asking three key questions.
1.3 Develop solutions that directly address the underlying issues.
1.4 Recognize the distinct roles of ethics and economics in decision-making.
[return to top]
CENGAGE SUPPLEMENTS
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
PowerPoint Slides
Solution and Answer Guide for chapter-end questions
Test Bank
[return to top]
WHAT'S NEW IN THIS CHAPTER
See the Transition Guide for information on changes that have been made to this chapter.
[return to top]
CHAPTER OUTLINE
The following outline organizes activities and assessments by chapter (and therefore by topic), so you can
see how all the content relates to the topics covered in the text.
1. Introduction: The cross-selling example of Wells Fargo gives students the opportunity to apply an
economics-based problem-solving algorithm and indirectly touches on the concept of goal
alignment. (PPT Slides 2-3)
a. Discussion Activity 1 (PPT Slide 5)
2. Problem-Solving Algorithm (PPT Slides 6-9)
a. Three questions to determine cause
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 2
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem Solving Approach, 7e, ©2027, 9798214055640; Chapter 1:
Solving Problems with Economics
b. Wells Fargo example, including generic solutions
c. Knowledge Check Activity 1 (PPT Slides 10-11)
d. Knowledge Check Activity 3 (PPT Slides 12-13)
3. Goal Alignment (PPT Slides 14-17)
a. Uber example of goal alignment
b. Knowledge Check Activity (PPT Slide 18-19)
4. Ethics and Economics (PPT Slides 20-21)
a. Knowledge Check Activity 4 (PPT Slides 22-23)
b. Discussion Activity 2 (PPT Slide 24)
5. Economics in Job Interviews (PPT Slide 25)
a. Role Play Activity (PPT Slide 26)
Summary & Homework Problems
Summary of Main Points
Multiple Choice Questions
Individual Problems
TEACHING NOTES
You can open with a business problem, like the over-bidding in the introduction, the Kidder-Peabody
anecdote, or any of the anecdotes in the concluding chapter, “You Be the Consultant,” and then ask the
students to assume that they are a consultant brought in to the company to figure out what is wrong. Play
20 questions, and make them ask questions that have yes-or-no answers until they figure out what is
wrong. Students will invariably use the rational actor paradigm to do this. Point this out to them. Tell
them this class aims to show them how to use this paradigm more formally.
Reinforce their problem-solving skills by asking them to solve a specific problem. The trick is to dribble
out the information bit by bit to engage the students and keep them guessing about the problem.
Note that some students will typically define the problem as the lack of a particular solution. When this
happens, use the opportunity to point out how this approach locks you into a particular solution. Show
them how not to do this.
Formally introduce the rational actor paradigm and show how it can be used to identify both why
problems occur and what can be done to change behavior. Tell students that the key step in solving
problems is to bring it down to an individual decision level. First, find out who made a bad decision.
Under the rational actor paradigm, there are only two reasons for making mistakes: not enough
information or bad incentives. Find out which it is. The bottom line is that problems can be identified by
asking three questions:
1. Who made the bad decision?
2. Did they have enough information to make a good decision?
3. Did they have the incentive to make a good decision?
Tell students that incentives have two pieces: a performance evaluation metric and a way to reward good
performance or punish bad performance. The Brickley, Smith, and Zimmerman article is a good reference
for this. Various solutions to the problem will likewise center on:
1. Changing decision rights (letting someone else make the decision);
2. Changing information flows; or
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 3
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem Solving Approach, 7e, ©2027, 9798214055640; Chapter 1:
Solving Problems with Economics
3. Changing incentives
i. Performance evaluation
ii. Compensation linking performance to rewards
The “goal” is to align the incentives of employees with the goals of the organization. After giving
students this paradigm, ask them to fix the problem. Solicit suggestions and ask other students what they
like or don’t like about the various proposed solutions. The message is that there are only tradeoffs and no
universal solutions, i.e., the answer to every question is “it depends.” The point of the class is to teach
students to recognize and evaluate the tradeoffs.
[return to top]
DISCUSSION QUESTIONS
One of the best ways to engage the class is by posing an in-class problem. Pose the question to the
students, give them five minutes to answer, then ask them to turn to the person next to them and explain
their answer. Tell them that the two best ways to learn economics are doing problems and verbally
explaining the answers to someone else. When enough time has elapsed, and you want to move on, tell
the students to “stop learning.”
IN-CLASS PROBLEM
If you do not assign it, the following question is a good one to motivate problem-solving. Tell students to
put themselves in the role of the newly hired manager. Ask them what the problem is, and then how to
solve it.
Goal Alignment at a Small Manufacturing Concern
The owners of a small manufacturing concern have hired a manager to run the company, with the
expectation that he will buy it after five years. Compensation of the new vice president is a flat salary plus
75% of the first $150,000 of profit, and then 10% of profit over $150,000. The purchase price for the
company is set at 4½ times earnings (profit), calculated as the average annual profitability over the next
five years. Does this contract align the incentives of the new vice president with the owners’ goals?
Answer: No. Both the purchase price and the profit sharing create perverse incentives. The VP keeps
$0.75 of each dollar earned up to $150,000, but only $0.10 of each dollar earned after $150K. Since
earning more requires greater effort (i.e., increasing marginal effort), the VP has little incentive to earn
more than $150,000. And every dollar the VP earns raises the price he will eventually pay for the
company by $4.50, effectively penalizing him for increasing the company’s profitability.
[return to top]
ADDITIONAL RESOURCES
CENGAGE MINDTAP VIDEOS
Chapter 01: Lecture Videos
Chapter 01: Problem Walkthrough
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 4
posted to a publicly accessible website, in whole or in part.
Solving Problems with Economics
Instructor Manual
Froeb/McCann/Ward/Shor, Managerial Economics: A Problem Solving Approach, 7e, ©2027,
9798214055640; Chapter 1: Solving Problems with Economics
TABLE OF CONTENTS
Purpose and Perspective of the Chapter......................................................................2
Chapter Objectives........................................................................................................2
Cengage Supplements....................................................................................................2
What's New in This Chapter........................................................................................2
Chapter Outline.............................................................................................................3
Teaching Notes.......................................................................................................................................... 3
Discussion Questions....................................................................................................5
In-Class Problem........................................................................................................................................5
Additional Resources....................................................................................................5
Cengage MindTap Videos.........................................................................................................................5
Additional Anecdotes.................................................................................................................................6
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 1
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem Solving Approach, 7e, ©2027, 9798214055640; Chapter 1:
Solving Problems with Economics
PURPOSE AND PERSPECTIVE OF THE CHAPTER
Chapter 1 introduces a problem-solving strategy based on the rational actor paradigm that facilitates
identifying the causes of economics-based problems and the appropriate corrective actions. The three-step
algorithm focuses on determining who made the bad decision, whether the decision-maker had sufficient
information to make a good one, and whether the decision-maker had the incentive to do so. The chapter
also addresses the complementary roles of ethics and economics.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Use economics as a tool to spot problems and craft solutions.
1.2 Identify the root cause of a problem by asking three key questions.
1.3 Develop solutions that directly address the underlying issues.
1.4 Recognize the distinct roles of ethics and economics in decision-making.
[return to top]
CENGAGE SUPPLEMENTS
The following product-level supplements provide additional information that may help you in preparing
your course. They are available in the Instructor Resource Center.
PowerPoint Slides
Solution and Answer Guide for chapter-end questions
Test Bank
[return to top]
WHAT'S NEW IN THIS CHAPTER
See the Transition Guide for information on changes that have been made to this chapter.
[return to top]
CHAPTER OUTLINE
The following outline organizes activities and assessments by chapter (and therefore by topic), so you can
see how all the content relates to the topics covered in the text.
1. Introduction: The cross-selling example of Wells Fargo gives students the opportunity to apply an
economics-based problem-solving algorithm and indirectly touches on the concept of goal
alignment. (PPT Slides 2-3)
a. Discussion Activity 1 (PPT Slide 5)
2. Problem-Solving Algorithm (PPT Slides 6-9)
a. Three questions to determine cause
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 2
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem Solving Approach, 7e, ©2027, 9798214055640; Chapter 1:
Solving Problems with Economics
b. Wells Fargo example, including generic solutions
c. Knowledge Check Activity 1 (PPT Slides 10-11)
d. Knowledge Check Activity 3 (PPT Slides 12-13)
3. Goal Alignment (PPT Slides 14-17)
a. Uber example of goal alignment
b. Knowledge Check Activity (PPT Slide 18-19)
4. Ethics and Economics (PPT Slides 20-21)
a. Knowledge Check Activity 4 (PPT Slides 22-23)
b. Discussion Activity 2 (PPT Slide 24)
5. Economics in Job Interviews (PPT Slide 25)
a. Role Play Activity (PPT Slide 26)
Summary & Homework Problems
Summary of Main Points
Multiple Choice Questions
Individual Problems
TEACHING NOTES
You can open with a business problem, like the over-bidding in the introduction, the Kidder-Peabody
anecdote, or any of the anecdotes in the concluding chapter, “You Be the Consultant,” and then ask the
students to assume that they are a consultant brought in to the company to figure out what is wrong. Play
20 questions, and make them ask questions that have yes-or-no answers until they figure out what is
wrong. Students will invariably use the rational actor paradigm to do this. Point this out to them. Tell
them this class aims to show them how to use this paradigm more formally.
Reinforce their problem-solving skills by asking them to solve a specific problem. The trick is to dribble
out the information bit by bit to engage the students and keep them guessing about the problem.
Note that some students will typically define the problem as the lack of a particular solution. When this
happens, use the opportunity to point out how this approach locks you into a particular solution. Show
them how not to do this.
Formally introduce the rational actor paradigm and show how it can be used to identify both why
problems occur and what can be done to change behavior. Tell students that the key step in solving
problems is to bring it down to an individual decision level. First, find out who made a bad decision.
Under the rational actor paradigm, there are only two reasons for making mistakes: not enough
information or bad incentives. Find out which it is. The bottom line is that problems can be identified by
asking three questions:
1. Who made the bad decision?
2. Did they have enough information to make a good decision?
3. Did they have the incentive to make a good decision?
Tell students that incentives have two pieces: a performance evaluation metric and a way to reward good
performance or punish bad performance. The Brickley, Smith, and Zimmerman article is a good reference
for this. Various solutions to the problem will likewise center on:
1. Changing decision rights (letting someone else make the decision);
2. Changing information flows; or
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 3
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Froeb/McCann/Ward/Shor, Managerial Economics: A Problem Solving Approach, 7e, ©2027, 9798214055640; Chapter 1:
Solving Problems with Economics
3. Changing incentives
i. Performance evaluation
ii. Compensation linking performance to rewards
The “goal” is to align the incentives of employees with the goals of the organization. After giving
students this paradigm, ask them to fix the problem. Solicit suggestions and ask other students what they
like or don’t like about the various proposed solutions. The message is that there are only tradeoffs and no
universal solutions, i.e., the answer to every question is “it depends.” The point of the class is to teach
students to recognize and evaluate the tradeoffs.
[return to top]
DISCUSSION QUESTIONS
One of the best ways to engage the class is by posing an in-class problem. Pose the question to the
students, give them five minutes to answer, then ask them to turn to the person next to them and explain
their answer. Tell them that the two best ways to learn economics are doing problems and verbally
explaining the answers to someone else. When enough time has elapsed, and you want to move on, tell
the students to “stop learning.”
IN-CLASS PROBLEM
If you do not assign it, the following question is a good one to motivate problem-solving. Tell students to
put themselves in the role of the newly hired manager. Ask them what the problem is, and then how to
solve it.
Goal Alignment at a Small Manufacturing Concern
The owners of a small manufacturing concern have hired a manager to run the company, with the
expectation that he will buy it after five years. Compensation of the new vice president is a flat salary plus
75% of the first $150,000 of profit, and then 10% of profit over $150,000. The purchase price for the
company is set at 4½ times earnings (profit), calculated as the average annual profitability over the next
five years. Does this contract align the incentives of the new vice president with the owners’ goals?
Answer: No. Both the purchase price and the profit sharing create perverse incentives. The VP keeps
$0.75 of each dollar earned up to $150,000, but only $0.10 of each dollar earned after $150K. Since
earning more requires greater effort (i.e., increasing marginal effort), the VP has little incentive to earn
more than $150,000. And every dollar the VP earns raises the price he will eventually pay for the
company by $4.50, effectively penalizing him for increasing the company’s profitability.
[return to top]
ADDITIONAL RESOURCES
CENGAGE MINDTAP VIDEOS
Chapter 01: Lecture Videos
Chapter 01: Problem Walkthrough
© 2027 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 4
posted to a publicly accessible website, in whole or in part.
