Review the information in the images below, particularly the "Producer Search" option. Based on the information below, explain globalization as if you were trying to convey to somebody who has never heard of Globalization what it is and how it exists in the world today. You can highlight interactions between companies in a Global environment, opportunities for growth, problems due to covid, changes over time - anything that you think captures the essence of Globalization as it exists today. Thanks!

Figure 12-2 shows, an increase in It's up the horizontal line to c*, resulting in a higher reservation price, R*. This means the consumer will now find more prices acceptable and will search less intensively. Similarly, if the cost of searching for lower prices falls, the consumer will search more heavily for lower prices. Our analysis of a consumer's decision to shop for lower prices can be used to aid manag- habeeb betsoligmop er ers in setting prices. In particular, when consumers have imperfect information about prices to anolenov bigidium pala and search costs are low, the optimal prices set by a manager will be lower than when search sonbeig onions Inem costs are high. Moreover, managers must be careful not to price their products above consum- ers' reservation price; doing so will induce consumers to seek out lower prices at other firms. clo am (() sjew .If you observe a large number of consumers "browsing" in your store but not making pur- no a lomuenos 1961/ chases, it may be a sign that your prices are set above their reservation price and that they have esii tomsentoo 6 50no decided to continue to search for a lower price. 769 01 ismuenos of con Webnorog bas-22930 UNCERTAINTY AND THE FIRM vowol We have seen that the presence of uncertainty has a direct impact on consumer behavior and that the firm manager must take these effects into account to fully understand the nature of go (2009) 09 consumer demand. Uncertainty also affects the manager's input and output decisions. In this section, we will examine the implications of uncertainty for production and output decisions.Managerial Economics and Business Strategy important to pome off that all our analysis of the impact of uncertainty on consumes the 387 It isor is directly applicable to the firm's manager. We will briefly discuss extensions of un Dialysis of uncertainty to highlight its direct influence on managerial decisions. Risk Aversion " as consumers have preferences regarding risky prospects, so does the manager of the JUST A manager who is risk neutral is interested in maximizing expected profits; the variance fits does not affect a risk-neutral manager's decisions. If the manager is risk averse, he or she may prefer a risky project with a l ith a lower expected value if it has lower risk than one with "higher expected value. Alternatively, if given a choice between a risky project with an che Bected return of $1 million and a certain return of $1 million, a risk-averse manager will pre chasing for the sure thing. For the manager to be willing to undertake a risky project, the project must Offer a higher expected return than a comparable "safe" project. Just how much higher depends on the manager's particular risk preferences . en pur- benefit Whenever a manager faces a decision to choose among risky projects, it is important to price carefully evaluate the risks and expected returns of the projects and then to document this eval- "ation. The reason is simple. Risky prospects may result in bad outcomes. A manager is less SBad likely to get fired over a bad outcome if she or he provides evidence that, based on the informa- tion available at the time the decision was made, the decision was sound. A convenient way to do this is to use mean-variance analysis, as the next demonstration problem illustrates. and DEMONSTRATION PROBLEM 12-2 arch ing A risk-averse manager is considering two projects. The first project involves expanding the market for bologna; the second involves expanding the market for caviar. There is a 10 percent chance of a recession and a 90 percent chance of an economic boom. During a boom, the bologna project will lose $10,000, whereas the caviar project will earn $20,000. During a recession, the bologna project in will earn $12,000 and the caviar project will lose $8,000. If the alternative is earning $3,000 on a safe his asset (say, a Treasury bill), what should the manager do? Why? li lliw olamexs olquile ly. ANSWER: ily The first thing the manager should do is summarize the available information to document the rele- vant alternatives: 8- es Recession (10%) Mean Standard Deviation Project Boom (90%) 6,600 $12,000 amil vos $ 7,800 Bologna -$10,000 1 monoo loojong ard) 17,200 Plan an 8,400 Caviar jud amil 20,009 01 no vag to -8,000 4,000 ono vd'9,400 ulitorg or 1,800to 10) Joint o vl bamss 10,000 mobnoqabriA 0 T-bill Bad flingsday 3,000 oddsonoria 3,000 amoolup old 3,000 The "joint" option reflects what would happen if the manager adopted both the bologna and caviar projects. For example, if the manager jointly adopted the caviar and bologna projects, during a boom the firm would lose $10,000 on the bologna project but make $20,000 on the caviar project. Thus, during a boom, the joint project will result in a return of $10,000. Similar calculations reveal the joint project will yield a return of $4,000 during a recession. Based on the preceding table, what should a prudent manager do? The first thing to note is that the manager should not invest in a Treasury bill. The joint project will generate profits of $4,000388 CHAPTER 12 The Economics of Information produc Just as con. inputs. Wh Figure 12-2 during a recession and $10,000 during a boom. Thus, regardless of what happens to the economy, the manager is assured of making at least $4,000 under the joint project, which is greater than the return optimal sea of $3,000 on the Treasury bill. same as th The second thing to notice is that the expected (mean) profits of the bologna project are negative. to illustrate A risk-averse manager would never choose this project (neither would a risk-neutral manager). Thus, the manager should adopt either the caviar project or the joint project. Precisely which choice the manager makes will depend on his or her preferences for risk. DEM A risk- The returns associated with the joint project in the preceding problem reveal the import- ity but ant notion of diversification, which is taught in basic business finance courses. By investing in in the multiple projects, the manager may be able to reduce risk. This is merely a technical version $38,0 of the old adage, "Don't put all your eggs in one basket." As the example reveals, there are The fi benefits to diversification, but whether it is optimal to diversify depends on a manager's risk mana preference and the incentives provided to the manager to avoid risk. While many managers are risk averse, generally the owners of the firm (the stockholders) ANS want the manager to behave in a risk-neutral manner. A manager who is risk neutral cares only This about the expected value of a risky project, not the underlying risk. More specifically, a work risk-neutral manager's objective is to take actions that maximize the expected present value of half the firm, that is, actions that maximize expected profits. A risk-neutral manager would choose will a risky action over a sure thing provided the expected profits of the risky prospect exceeded those of the sure thing. Why would shareholders want managers to take actions that maximize expected profits even when doing so might involve considerable risk? Shareholders can pool and diversify Sin risks by purchasing shares of many different firms to eliminate the systematic risk associated for with the firm's operation. It therefore is inefficient for managers to spend time and money attempting to diversify against risk when doing so will reduce the firm's expected profits. Thus, while the owners of a firm may be risk averse, they prefer managers who make risk-neutral decisions. Pro A simple example will illustrate why shareholders desire managers to behave in a risk-neutral manner. Suppose a manager must decide which of two projects to undertake. The The first project is risky, with a 50-50 chance of yielding profits of $2 million or zero. The sec- illus ond project will yield a certain return of $900,000. The expected profits earned by the risky cer project are $1 million, which is greater than those of the project yielding a certain return. But goa the variance of the risky project is greater than that of the certain one; half the time profits will be zero, half the time they will be $2 million. Why would shareholders want the man- the ager to undertake the risky project even though it has greater risk? The answer is that share- holders can purchase shares of many firms in the economy. If the managers of each of these tha firms choose the risky project, the projects will not pay off for some firms but will pay off ma for others. If the profits earned by one firm are independent of those earned by other firms, then, on average, the unfavorable outcomes experienced by some firms will be more than offset by the favorable outcomes at other firms. This situation is similar to flipping a coin: Flip a coin once and you cannot be sure it will turn up heads; flip a coin many times and you can rest assured that half the flips will be heads. Similarly, when shareholders own shares of many different firms, each of which takes on risky projects, they can rest assured that half of the firms will earn $2 million. For these reasons, as a manager you are likely to be given an incentive to maximize the expected profits of your firm. If you are provided with such incentives, you will behave in a risk-neutral manner even if you and the owners of the firm are risk averse.Managerial Economics and Business Strategy 389 producer Search Ma Jao94 NOITANTeNOMad of what happens to the economy, the as consumers beach for stores charging low prices, producers search for low prices ject, which is greater than the return "When there is uncertainty regarding the prices of inputs, optimizing firms empre of the bologna project are negative. inpal search strategies. The search strategy for a risk-neutral manager will be precisely ould a risk-neutral manager). Thus, optiflag that of a risk-neutral consumer. Rather than repeat the basic theory, it is more userur illustrate these concepts with an example. roject. Precisely which choice the DEMONSTRATION PROBLEM g problem reveal the import- Arisk-neutral manager is attempting to hire a worker. All workers in the market are of identical qual 12-3 ance courses. By investing in " but differ with respect to the wage at which they are willing to work. Suppose half of the workers is merely a technical version in the labor market are willing to work for a salary of $40,000 and half will accept a salary of example reveals, there are 18.000. The manager spends three hours interviewing a given worker and values this time at $300. epends on a manager's risk The first worker the manager interviews says he will work only if paid $40,000. Should the firm manager make him an offer or interview another worker? K. ;ders regularly trade in the the firm (the stockholders) ANSWER : o is risk neutral cares only risk. More specifically, a This is an optimal search problem with a search cost of $300. If the manager searches for another expected present value of worker, half of the time she will find one willing to work for $38,000 and thus will save $2,000. But al manager would choose half of the time the manager will find a worker just like the one she chose not to hire, and the effort will have been for nothing. Thus, the expected benefit of interviewing another worker is risky prospect exceeded 8orEB = -($2,000) + -(0) = $1,000 ximize expected profits can pool and diversify Since this is greater than the cost of $300, the manager should not hire the worker but instead search tematic risk associated for a worker willing to work for $38,000. spend time and money (0be: 1)e800.0 - 605 rm's expected profits. 2toe - 218-005 - 0ed.1- is better than existing products. managers who make Profit Maximization product is indeed perior agers to behave in a The basic principles of profit maximization can also be modified to deal with uncertainty. To cts to undertake. The illustrate how the basic principles of profit maximization are affected by the presence of un- on or zero. The sec- certainty, let us suppose the manager is risk neutral and demand is uncertain. Recall that the earned by the risky goal of a risk-neutral manager is to maximize expected profits. a certain return. But The risk-neutral manager must determine what output to produce before she is certain of half the time profits the demand for the product. Because demand is uncertain, revenues are uncertain. This means lers want the man- that to maximize expected profits, the manager should equate expected marginal revenue with swer is that share- rs of each of these marginal cost in setting output. chase on s but will pay off ability to pay off the debt thing WE[MR] = MC CHA YEHIATHEONU ed by other firms, The reason is simple. If expected marginal revenue exceeded marginal cost, the manager will be more than could increase expected profits by expanding output. The production of another unit of flipping a coin: output would, on average, add more to revenue than it would to costs. Similarly, if ex- y times and you pected marginal revenue was less than marginal cost, the manager should reduce output. rs own shares of This is because by reducing output, the firm would reduce costs by more than it would ured that half of Thus we see that when the manager is risk neutral, profit maximization under uncertain reduce expected revenue. o maximize the demand is very similar to profit maximization under certainty. All the manager needs to do is will behave in a adjust the corresponding formula to represent the expected marginal revenue. m notlammolni