Managerial Economics Discussion Question 1 – Summary & Critical Thinking – Week/Course Learning Outcomes In this discussion question you can be creat

Managerial Economics
Discussion Question 1 – Summary & Critical Thinking – Week/Course Learning Outcomes
In this discussion question you can be creative and to relate what you have learned to your professional lives. Please explore and critically think about some of the learning outcomes and concepts presented in this course. Please effectively communicate how you would lead an organization (or a group of people within the organization) by applying the knowledge you have learned ethically and responsibly. Your discussion should also include innovative thinking, and information-technology aspects (such as the Internet, social media, computers, and so forth) that may assist you in decision-making. You may frame your discussion around any functional component of business, and in any context; problem-solving, management, leadership, organizational behavior, and so forth.
*Note: I have uploaded the Book for the referencing and the PP slides too for the above questions.

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Managerial Economics
andBusiness Strategy

NINTH EDITION

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The McGraw-Hill Series Economics

ESSENTIALS OF ECONOMICS

Brue, McConnell, and Flynn
Essentials of Economics
Third Edition

Mandel
M: Economics: The Basics
Third Edition

Schiller and Gebhardt
Essentials of Economics
Tenth Edition

PRINCIPLES OF ECONOMICS

Asarta and Butters
Connect Master: Principles of Economics
First Edition

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Economics, Microeconomics, and
Macroeconomics
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of Microeconomics, Principles of
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Economics, Principles of Microeconomics,
Principles of Macroeconomics
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Managerial Economics and Business
Strategy
Ninth Edition

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Managerial Economics
and Organizational Architecture
Sixth Edition

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Managerial Economics
Twelfth Edition

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Managerial Economics
andBusiness Strategy

Michael R. Baye
Bert Elwert Professor of Business Economics & Public Policy
Kelley School of Business
Indiana University

Jeffrey T. Prince
Associate Professor of Business Economics & Public Policy
Harold A. Poling Chair in Strategic Management
Kelley School of Business
Indiana University

NINTH EDITION

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MANAGERIAL ECONOMICS AND BUSINESS STRATEGY, NINTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright 2017 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. Previous editions 2014, 2010, 2008
and 2006. 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 LWI 21 20 19 18 17 16

ISBN 978-1-259-29061-9
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mheducation.com/highered

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DEDICATION

To my former students.
Michael R. Baye

To Annie, Kate, and Elise.
Jeffrey T. Prince

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vi

Michael R. Baye is the Bert Elwert Professor of Business Economics & Public Policy at
Indiana Universitys Kelley School of Business, and served as the Director of the Bureau of
Economics at the Federal Trade Commission from July 2007 to December 2008. He received
his BS in economics from Texas A&M University in 1980 and earned a PhD in economics
from Purdue University in 1983. Prior to joining Indiana University, he taught graduate
and undergraduate courses at The Pennsylvania State University, Texas A&M University,
and the University of Kentucky. He has held a variety of editorial posts in economics, mar-
keting, and business, and currently serves as a co-editor for the Journal of Economics and
Management Strategy.

Professor Baye has won numerous awards for his outstanding teaching and research,
and teaches courses in managerial economics and industrial organization at the undergrad-
uate, MBA, and PhD levels. His research has been published in the American Economic
Review, Journal of Political Economy, Econometrica, Review of Economic Studies, Economic
Journal, and Management Science. It has also been featured in The Wall Street Journal, Forbes,
the New York Times, and numerous other outlets. When he is not teaching or engaged in research,
Mike enjoys activities ranging from camping to shopping for electronic gadgets.

Jeffrey T. Prince is Associate Professor of Business Economics & Public Policy at Indiana
Universitys Kelley School of Business. He is also the Harold A. Poling Chair in Strategic
Management. He received his BA in economics and BS in mathematics and statistics from
Miami University in 1998 and earned a PhD in economics from Northwestern University in
2004. Prior to joining Indiana University, he taught graduate and undergraduate courses at
Cornell University.

Professor Prince has won top teaching honors as a faculty member at both Indiana
University and Cornell, and as a graduate student at Northwestern. He has a broad research
agenda within applied economics, having written and published on topics that include demand
in technology markets, Internet diffusion, regulation in health care, risk aversion in insurance
markets, and quality competition among airlines. He is one of a small number of economists
to have published in both the top journal in economics (American Economic Review) and
the top journal in management (Academy of Management Journal). He currently serves as a
co-editor for the Journal of Economics and Management Strategy and on the editorial board
for Information Economics and Policy. In his free time, Jeff enjoys activities ranging from
poker and bridge to running and racquetball.

About the Authors

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vii

Thanks to feedback from users around the world, Managerial Economics and Business
Strategy remains the best-selling managerial text in the market. We are grateful to all of you
for allowing us to provide this updated and improved edition. Before highlighting some of
the new features of the ninth edition, we would like to stress that the fundamental goal of
the bookproviding students with the tools from intermediate microeconomics, game the-
ory, and industrial organization that they need to make sound managerial decisionshas not
changed. What has changed are the examples used to make managerial economics come to
life for this generation of students and the utilization of new technologies (such as Connect)
for enhancing the teaching and learning experiences of instructors and their students.

This book begins by teaching managers the practical utility of basic economic tools such
as present value analysis, supply and demand, regression, indifference curves, isoquants, pro-
duction, costs, and the basic models of perfect competition, monopoly, and monopolistic com-
petition. Adopters and reviewers also praise the book for its real-world examples and because
it includes modern topics not contained in any other single managerial economics textbook:
oligopoly, penetration pricing, multistage and repeated games, foreclosure, contracting, ver-
tical and horizontal integration, networks, bargaining, predatory pricing, principalagent
problems, raising rivals costs, adverse selection, auctions, screening and signaling, search,
limit pricing, and a host of other pricing strategies for firms enjoying market power. This
balanced coverage of traditional and modern microeconomic tools makes it appropriate for a
wide variety of managerial economics classrooms. An increasing number of business schools
are adopting this book to replace (or use alongside) managerial strategy texts laden with anec-
dotes but lacking the microeconomic tools needed to identify and implement the business
strategies that are optimal in a given situation.

This ninth edition of Managerial Economics and Business Strategy has been revised to
include updated examples and problems, but it retains all of the basic content that made pre-
vious editions a success. The basic structure of the textbook is unchanged to ensure a smooth
transition to this edition.

KEY PEDAGOGICAL FEATURES

The ninth edition retains all of the class-tested features of previous editions that enhance
students learning experiences and make it easy to teach from this book. But this edition
includes a number of new features available to those using McGraw-Hills wonderful interac-
tive learning products, Connect and SmartBook. McGraw-Hill Connectoffers hundreds of
variations of end-of-chapter problems that may be electronically graded and provide students
with immediate, detailed, feedback. SmartBook provides an adaptive reading experience.
Students and instructors can access these and other powerful resources directly from their
laptops, tablets, and phones. We know how important quality and accuracy is for both instruc-
tors and students when utilizing these enhanced features. For this reason, and unlike many

Preface

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viii Preface

competing books, we are directly involved in the generation and editing of material offered
through both Connect and SmartBook.

Headlines
As in previous editions, each chapter begins with a Headline that is based on a real-world
economic problema problem that students should be able to address after completing the
chapter. These Headlines are essentially hand-picked mini-cases designed to motivate stu-
dents to learn the material in the chapter. Each Headline is answered at the end of the relevant
chapterwhen the student is better prepared to deal with the complications of real-world prob-
lems. Reviewers as well as users of previous editions praise the Headlines not only because
they motivate students to learn the material in the chapter, but also because the answers at the
end of each chapter help students learn how to use economics to make business decisions.

Learning Objectives
Each chapter includes learning objectives designed to enhance the learning experience. End-
of-chapter problems are denoted with the learning objective(s) to which they relate.

Demonstration Problems
The best way to learn economics is to practice solving economic problems. So, in addition
to the Headlines, each chapter contains many Demonstration Problems sprinkled throughout
the text, along with detailed answers. This provides students with a mechanism to verify that
they have mastered the material, and reduces the cost to students and instructors of having
to meet during office hours to discuss answers to problems. Some of the more challenging
demonstration problems have an accompanying video tutorial that walks through the solution
step-by-step. These videos are available via Connectand at www.mhhe.com/baye9e.

Inside Business Applications
Most chapters contain boxed material (called Inside Business applications) to illustrate how
theories explained in the text relate to a host of different business situations. As in previous
editions, we have tried to strike a balance between applications drawn from the current eco-
nomic literature and the popular press.

Calculus and Non-Calculus Alternatives
Users can easily include or exclude calculus-based material without losing content or con-
tinuity. Thats because the basic principles and formulae needed to solve a particular class
of economic problems (e.g., MR = MC) are first stated without appealing to the notation of
calculus. Immediately following each stated principle or formula is a clearly marked Calculus
Alternative. Each of these calculus alternatives states the preceding principle or formula in
calculus notation, and explains the relation between the calculus-based and non- calculus-
based formula. More detailed calculus derivations are relegated to chapter Appendices. Thus,
the book is designed for use by instructors who want to integrate calculus into managerial
economics and by those who do not require students to use calculus.

Variety of End-of-Chapter Problems
Three types of problems are offered. Highly structured but nonetheless challenging Conceptual
and Computational Questions stress fundamentals. These are followed by Problems and

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Preface ix

Applications, which are far less structured and, like real-world decision environments, may
contain more information than is actually needed to solve the problem. Many of these applied
problems are based on actual business events.

Additionally, the Time Warner Cable case that follows Chapter 14 includes 13 problems
called Memos that have a real-world feel and complement the text. All of these case-based
problems may be assigned on a chapter-by-chapter basis as specific skills are introduced, or
as part of a capstone experience.

Detailed answers to all problems can be found among the instructor resource material
available via Connect.

Case Study
A case study in business strategyTime Warner Cablefollows Chapter 14 and was pre-
pared especially for this text. It can be used either as a capstone case for the course or to
supplement individual chapters. The case allows students to apply core elements from man-
agerial economics to a remarkably rich business environment. Instructors can use the case
as the basis for an open-ended discussion of business strategy, or they can assign specific
memos (contained at the end of the case) that require students to apply specific tools from
managerial economics to the case. Teaching notes, as well as solutions to all of the memos,
are provided among the instructor resource material available via Connect.

Flexibility
Instructors of managerial economics have genuinely heterogeneous textbook needs. Reviewers
and users continue to praise the book for its flexibility, and they assure us that sections or
even entire chapters can be excluded without losing continuity. For instance, an instructor
wishing to stress microeconomic fundamentals might choose to cover Chapters 2, 3, 4, 5, 8,
9, 10, 11, and 12. An instructor teaching a more applied course that stresses business strategy
might choose to cover Chapters 1, 2, 3, 5, 6, 7, 8, 10, 11, and 13. Each may choose to include
additional chapters (for example, Chapter 14 or the Time Warner Cable case) as time permits.
More generally, instructors can easily omit topics such as present value analysis, regression,
indifference curves, isoquants, or reaction functions without losing continuity.

CHANGES IN THE NINTH EDITION

We have made every effort to update and improve Managerial Economics and Business
Strategy while assuring a smooth transition to the ninth edition. Following is a summary of
the pedagogical improvements, enhanced supplements, and content changes that make the
ninth edition an even more powerful tool for teaching and learning managerial economics and
business strategy.

A brand new Case StudyTime Warner Cablewhich introduces a whole new set of
managerial challenges beyond those posed in our previous case, Challenges at Time
Warner.

New and updated end-of-chapter problems.
Learning objective labels for each end-of-chapter problem, to help foster targeted

learning.
New and updated Headlines.
New and updated Inside Business applications.

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x Preface

Chapter-by-Chapter Changes
Chapter 1 contains new and updated examples, several updated end-of-chapter prob-

lems, and a new end-of-chapter problem that carefully distinguishes total benefits and
total costs from marginal benefits and marginal costs in an applied setting.

Chapter 2 contains updated demonstration problems and an expanded discussion of
price floors in the text and demonstration problems.

Chapter 3 contains a new Headline and an updated table with accompanying discus-
sion. It also has several updated end-of-chapter problems.

Chapter 4 contains an updated Headline and updated Inside Business applications. It
also has several updated end-of-chapter problems.

Chapter 5 contains an updated Inside Business application with details about the
Affordable Care Act. It also includes a formal definition of the law of diminishing
marginal returns and has several updated end-of-chapter problems.

Chapter 6 offers a new Inside Business on the duration of franchise contracts,
updated examples, and several updated end-of-chapter problems.

Chapter 7 contains a new Headline, updated examples and industry data, as well as
several updated end-of-chapter problems.

Chapter 8 contains an updated Inside Business concerning automobile competition in
China, updated examples, and several updated end-of-chapter problems.

Chapter 9 contains an updated end-of-chapter problem, as well as a new end-of-
chapter problem looking at contestability within airline markets.

Chapter 10 contains a new Inside Business application examining airline competition,
as well as improved Demonstration Problem exposition. It also has several updated
end-of-chapter problems.

Chapter 11 contains a new Inside Business application discussing the use of fuel points
by major U.S. grocery chains. It also has several updated end-of-chapter problems.

Chapter 12 includes a new discussion of online reviews as a means of attracting risk-
averse customers. It also includes a new Inside Business application, as well as several
updated end-of-chapter problems.

Chapter 13 contains a new Inside Business on limit pricing and the Southwest
Effect. It also has two updated end-of-chapter problems.

Chapter 14 contains a new Inside Business application discussing the Small Business
Act for Europe as a key distinction in competition policy between Europe and the
United States. In addition, it has two updated end-of-chapter problems, including one
discussing the Trans-Pacific Partnership (TPP).

ORGANIZED LEARNING IN THE NINTH EDITION

Chapter Learning Objectives
Students and instructors can be confident that the organization of each chapter reflects com-
mon themes outlined by four to seven learning objectives listed on the first page of each
chapter. These objectives, along with AACSB and Blooms taxonomy learning categories, are
connected to all end-of-chapter material and test bank questions to offer a comprehensive and
thorough teaching and learning experience.

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Preface xi

Assurance of Learning Ready
Many educational institutions today are focused on the notion of assurance of learning, an
important element of some accreditation standards. Managerial Economics and Business
Strategy is designed specifically to support your assurance of learning initiatives with a sim-
ple, yet powerful solution.

Instructors can use Connect to easily query for learning outcomes/objectives that directly
relate to the learning objectives of the course. You can then use the reporting features of
Connect to aggregate student results in similar fashion, making the collection and presenta-
tion of assurance of learning data simple and easy.

AACSB Statement
McGraw-Hill Global Education is a proud corporate member of AACSB International.
Understanding the importance and value of AACSB accreditation, Managerial Economics and
Business Strategy, 9/e, has sought to recognize the curricula guidelines detailed in the AACSB
standards for business accreditation by connecting questions in the test bank and end-of-chapter
material to the general knowledge and skill guidelines found in the AACSB standards.

It is important to note that the statements contained in Managerial Economics and
Business Strategy, 9/e, are provided only as a guide for the users of this text. The AACSB
leaves content coverage and assessment within the purview of individual schools, the mission
of the school, and the faculty. WhileManagerial Economics and Business Strategy,9/e, and
the teaching package make no claim of any specific AACSB qualification or evaluation, we
have labeled questions according to the general knowledge and skill areas.

ACKNOWLEDGMENTS

We thank the many users of Managerial Economics and Business Strategy who provided both
direct and indirect feedback that has helped improve your book. This includes thousands of
students at Indiana Universitys Kelley School of Business and instructors worldwide who
have used this book in their own classrooms, colleagues who unselfishly gave up their own
time to provide comments and suggestions, and reviewers who provided detailed suggestions
to improve this and previous editions of the book. We especially thank the following profes-
sors, past and present, for enlightening us on the markets diverse needs and for providing
suggestions and constructive criticisms to improve this book.

Contributing reviewers for this edition:

Narine Badasyan, Murray State University
Cristanna Cook, Husson University
Robert Daffenbach, University of

Oklahoma

Jeffrey Edwards, North Carolina A&T
University

Silke Forbes, Case Western Reserve
University

Martin Heintzelman, Clarkson University
Craig Hovey, Brenau University, Gainesville

Anand Jha, Texas A&M International
University

Harlan Platt, Northeastern University
Stefan Ruediger, Arizona State University
Charles Sebuhara, Virginia Technical

University

Thomas White, Fontbonne University
Keith Willett, Oklahoma State University,

Stillwater

Laura Youderian, Xavier University

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xii Preface

Contributing reviewers for previous editions:

Fatma Abdel-Raouf, Goldey-Beacom
College

Burton Abrams, University of Delaware
Rashid Al-Hmoud, Texas Tech University
Anthony Paul Andrews, Governors State

University

Sisay Asefa, Western Michigan University
Simon Avenell, Murdoch University
Joseph P. Bailey, University of Maryland
Dale G. Bails Christian Brothers University
Dean Baim, Pepperdine University
Sheryl Ball, Virginia Polytechnic University
Klaus Becker, Texas Tech University
Richard Beil, Auburn University
Barbara C. Belivieu, University of

Connecticut

Dan Black, University of Chicago
Louis Cain, Northwestern University
Kerem Cakirer, Indiana University
Leo Chan, University of Kansas
Robert L. Chapman, Florida Metropolitan

University

Joni Charles, Texas State UniversitySan
Marcos

Basanta Chaudhuri, Rutgers University
New Brunswick

Shuo Chen, State University of New York at
Geneseo

Xiujian Chen, State University of New
YorkBinghamton University

Kwang Soo Cheong, Johns Hopkins
University

Christopher B. Colburn, Old Dominion
University

Daniel Patrick Condon, Dominican
University

Michael Conlin, Syracuse University
Cristanna Cook, Husson University
Keith Crocker, Penn State University
Ian Cromb, University of Western Ontario
Dean Croushore, Federal Reserve

Wilffrid W. Csaplar Jr., Bethany College
Shah Dabirian, California State University,

Long Beach

Joseph DaBoll-Lavioe, Nazareth College of
Rochester

George Darko, Tusculum College
Tina Das, Elon University
Ron Deiter, Iowa State University
Jonathan C. Deming, Seattle Pacific

University

Casey Dirienzo, Appalachian State
University

Eric Drabkin, Hawaii Pacific University
Martine Duchatelet, Barry University
Keven C. Duncan, University of Southern

Colorado

Yvonne Durham, Western Washington
University

Eugene F. Elander, Brenau University
Ibrahim Elsaify, Goldey-Beacom College
David Ely, San Diego State University
Mark J. Eschenfelder, Robert Morris

University

Li Feng, Texas State UniversitySan Marcos
David Figlio, University of Florida
Ray Fisman, Graduate School of Business,

Columbia University

Silke Forbes, University of CaliforniaSan
Diego

David Gerard, Carnegie Mellon University
Sharon Gifford, Rutgers University
Lynn G. Gillette, Northeast Missouri State

University

Otis Gilley, Louisiana Tech University
Roy Gobin, Loyola University
Stephan Gohmann, University of Louisville
Steven Gold, Rochester Institute of

Technology

Julie Hupton Gonzalez, University of
CaliforniaSanta Cruz

Thomas A. Gresik, Mendoza College of
Business (University of Notre Dame)

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Preface xiii

Andrea Mays Griffith, California State
University

Madhurima Gupta, University of Notre
Dame

Carl Gwin, Pepperdine University
Gail Heyne Hafer, Lindenwood College
Karen Hallows, George Mason University
William Hamlen Jr., SUNY Buffalo
Shawkat Hammoudeh, Drexel University
Mehdi Harian, Bloomsburg University
Nile W. Hatch, Marriott School (Brigham

Young University)

Clifford Hawley, West Virginia University
Ove Hedegaard, Copenhagen Business

School

Steven Hinson, Webster University
Hart Hodges, Western Washington

University

Robert L. Holland, Purdue University
Jack Hou, California State University

Long Beach

Lowel R. Jacobsen, William Jewell
College

Thomas D. Jeitschko, Michigan State
University

Jaswant R. Jindia, Southern University
Russell Kashian, University of

WisconsinWhitewater

Paul Kattuman, Judge Business School
(Cambridge University)

Brian Kench, University of Tampa
Kimberley L. Kinsley, University of Mary

Washington

Peter Klein, University of Georgia,
University of MissouriColumbia

Audrey D. Kline, University of Louisville
Robert A. Krell, George Mason

University

Paul R. Kutasovic, New York Institute of
Technology

W. J. Lane, University of New Orleans
Daniel Lee, Shippensburg University

Dick Leiter, American Public University
Canlin Li, University of

CaliforniaRiverside

Chung-Ping Loh, University of North
Florida

Vahe Lskavyan, Ohio UniversityAthens
Heather Luea, Newman University
Nancy L. Lumpkin, Georgetown

College

Thomas Lyon, University of Michigan
Richard Marcus, University of

WisconsinMilwaukee

Vincent Marra, University of Delaware
Wade Martin, California State University,

Long Beach

Catherine Matraves, Michigan State
UniversityEast Lansing

John Maxwell, Indiana University
David May, Oklahoma City University
Alan McInnes, California State University,

Fullerton

Christopher McIntosh, University of
Minnesota Duluth

Kimberly L. Merritt, Oklahoma Christian
University

Edward Millner, Virginia Commonwealth
University

John Moran, Syracuse University
Shahriar Mostashari, Campbell University
John Morgan, Haas Business School

(University of CaliforniaBerkeley)

Ram Mudambi, Temple University
Francis Mummery, California State

UniversityFullerton

Inder Nijhawan, Fayetteville State University
Albert A. Okunade, University of Memphis
Walton M. Padelford, Union University
Darrell Parker, Georgia Southern University
Stephen Pollard, California State University,

Los Angeles

Dwight A. Porter, College of St. Thomas
Stanko Racic, University of Pittsburgh

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xiv Preface

Eric Rasmusen, Indiana University
Matthew Roelofs, Western Washington

University

Christian Roessler, National University
of Singapore

Bansi Sawhney, University of Baltimore
George L. Schatz, Maine Maritime

Academy

Craig Schulman, University of Arkansas
Karen Schultes, University of

MichiganDearborn

Peter M. Schwartz, University of North
Carolina

Richard Alan Seals Jr., Oklahoma City
University

Edward Shinnick, University College
Ireland

Dean Showalter, Southwest Texas State
University

Chandra Shrestha, Virginia Commonwealth
University

Karen Smith, Columbia Southern University
John Stapleford, Eastern University
Mark Stegeman, University of Arizona

Ed Steinberg, New York University
Barbara M. Suleski, Cardinal Stritch

College

Caroline Swartz, University of North
Carolina Charlotte

Joseph K. Tanimura, San Diego State
University

Bill Taylor, New Mexico Highlands
University

Roger Tutterow, Kennesaw State College
Nora Underwood, University of Central

Florida

Lskavyan Vahe, Ohio University
Lawrence White, Stern School of Business

(New York University)

Leonard White, University of Arkansas
Keith Willett, Oklahoma State

UniversityStillwater

Mike Williams, Bethune Cookman College
Richard Winkelman, Arizona State

University

Eduardo Zambrano, University of Notre Dame
Rick Zuber, University of North Carolina,

Charlotte

We thank Katie Hoenicke, Christina Kouvelis, James Heine, and Doug Ruby at McGraw-
Hill for all they have done to make this project a success. We also thank Mitchell Baye, Patrick
Scholten, Eric Schmidbauer, Susan Kayser, Kyle Anderson, and Vikram Ahuja for sugges-
tions and assistance during various stages of the revision, and Ellie Mafi-Kreft, Haizhen Lin,
and Steven Kreft, who graciously agreed to class test the Connectfeatures in their classrooms.
Finally, we thank our families for their continued love and support.

As always, we welcome your comments and suggestions for the next edition. Please feel
free to write to us dir