ECON7870 Managerial Economics and Business Strategy
The Complete Exam Bible · Fall 2026ECON7870 Overview
- Hong Kong Baptist University
- Fall 2026
- Postgraduate taught course
- Economics
- Final examination component
What this course asks you to do
Managerial economics studies decisions made under limited resources. The course begins with consumer preference and constrained choice, then develops demand, welfare and decisions under uncertainty before turning to behavioural departures and auction strategy.
- Assessed by Assignments, a proposal, a presentation and one final examination, with the published weights totalling the full course grade.
- Core method Identify the decision, objective and constraint before using marginal conditions, expected utility or strategic payoffs.
- Hardest step Distinguishing an interior formula from a boundary case and naming the assumption that controls the result.
What you get in the full ECON7870 Exam Bible
- 10 chapters, 43 pages — every examinable topic
- 27 original practice questions, each with a model answer in the Final Examination format
- 10 worked examples, solved the way ECON7870 marks
- 13 computed figures, redrawn from the course’s own numbers
- Exam-morning plan for the Final Examination (40%) — what to revise last, where marks are lost
Free on this page: assessment table, chapter map, one worked example, key terms, FAQ. The rest is in the full exam bible.
How ECON7870 is assessed
| Component | Weight | Format |
|---|---|---|
| Assignments | 30% | One per chapter, two short questions, with a one-week deadline |
| Group project (Proposal) | 10% | No more than two pages, analysing an interesting real-world topic or policy |
| Group project (Presentation) | 20% | Fifteen-minute presentation in the last two lectures |
| Final Examination | 40% | One test of understanding |
The opening lecture publishes these four components and their numeric weights total 100%. It describes the final examination only as one test of understanding. Check the course Moodle page for operational details and any later update.
Assessment structure
The published weights total 100%.
What other students are asking about ECON7870
- Where can I find lecture notes or study guides for ECON7870 at HKBU?
- The ECON7870 study guide in AskSia Library covers Managerial Economics and Business Strategy in 10 chapters, with the assessment table, a chapter-by-chapter topic map, key terms and a worked example, free to read on this page.
- Is there a final exam in ECON7870, and how much is it worth?
- Yes. In the offering this AskSia Library guide is built from, Final Examination carries 40% of the ECON7870 mark; the full split is Assignments 30%, Group project (Proposal) 10%, Group project (Presentation) 20%, Final Examination 40%.
- What does ECON7870 cover on preference relations and utility?
- In AskSia Library's ECON7870 guide, the Preference Relations and Utility chapter explains ordering axioms, monotonicity, convexity and utility representation.
- What does ECON7870 cover on marginal rates and preference shapes?
- In AskSia Library's ECON7870 guide, the Marginal Rates and Preference Shapes chapter explains marginal utilities, MRS, transformations and common preference families.
- What does ECON7870 cover on budget constraints and consumer choice?
- In AskSia Library's ECON7870 guide, the Budget Constraints and Consumer Choice chapter explains feasible sets, tangency, Lagrangians, multipliers and corner solutions.
Current ECON7870 dates
| Date | Item | Control |
|---|---|---|
| 18 September 2026 | Assignment 1 | Due time shown on the course page for this offering. |
| 29 September 2026 | Assignment 2 | Due time shown on the course page for this offering. |
| 20 October 2026 | Assignment 3 | Due time shown on the course page for this offering. |
| 23 October 2026 | Group project proposal | Due time and two-page limit shown on the course page for this offering. |
Dates are as published in the university course page for this offering. Confirm exact deadlines and submission settings in the live LMS.
What ECON7870 covers
The guide moves from models and consumer preferences through optimisation, demand and welfare to risk, behavioural choice and auction strategy.
Economic Models and Managerial Decisions
scarcity, choice variables, objectives, constraints and assumption checksStart with scarcity
Managerial economics begins by identifying resources that cannot satisfy every possible use. The analytical task is to state the available choices, the objective used to rank them and the restrictions that define feasibility.
- Scarcity and opportunity cost
- Choice variables and parameters
- Objectives and feasible sets
- Models as purposeful simplifications
- Assumption checks
- Conditional managerial recommendations
Preference Relations and Utility
ordering axioms, monotonicity, convexity and utility representationRank before measuring
A preference relation says which bundle is preferred or whether two bundles are tied. A utility function assigns numbers that preserve that ranking; it does not create cardinal units of satisfaction.
- Complete preference relations
- Transitivity and cycles
- Continuity
- Monotonicity
- Convexity and mixtures
- Ordinal utility
Marginal Rates and Preference Shapes
marginal utilities, MRS, transformations and common preference familiesTurn a curve into a trade-off
The marginal rate of substitution is the amount of one good surrendered for an extra unit of another while utility remains constant.
- Marginal utilities
- MRS as a slope
- Units and good order
- Diminishing MRS
- Perfect substitutes
- Perfect complements
Budget Constraints and Consumer Choice
feasible sets, tangency, Lagrangians, multipliers and corner solutionsCombine feasibility with preference
Prices and income define the budget set, while preferences rank its bundles. Under monotonicity the budget binds.
- Budget sets and lines
- Price and income changes
- Interior tangency
- Lagrange multipliers
- Marginal utility of income
- Corner solutions
Demand with Cobb-Douglas and CES Utility
expenditure shares, demand functions, comparative statics and substitution elasticityMove from a bundle to a function
Demand expresses the optimal quantity as prices and income vary. Cobb-Douglas exponents, normalised by their sum, become fixed expenditure shares.
- Cobb-Douglas demand
- Expenditure shares
- Own-price response
- Income response
- CES preferences
- Elasticity of substitution
Indirect Utility and Expenditure Duality
primal and dual problems, Hicksian demand, expenditure and Shephard's lemmaTwo optimisation problems
Utility maximisation holds prices and income fixed, yielding Marshallian demand and indirect utility. Expenditure minimisation holds prices and a utility target fixed, yielding Hicksian demand and minimum expenditure.
- Indirect utility
- Expenditure minimisation
- Hicksian demand
- Primal and dual problems
- Expenditure properties
- Shephard's lemma
Price Changes, Demand and Welfare
income and substitution effects, Slutsky decomposition and money-metric welfareSplit one observed movement into two causes
A price change alters relative prices and real purchasing power. The substitution effect moves along a fixed utility level toward the relatively cheaper good.
- Income effects
- Substitution effects
- Normal goods
- Inferior goods
- Slutsky decomposition
- Compensated demand
Expected Utility, Risk and Insurance
lotteries, concavity, certainty equivalents, risk premia and insuranceApply utility inside each state
A lottery is a distribution of outcomes with probabilities. Expected utility evaluates utility at state-dependent wealth and then averages, while expected value averages money.
- Lotteries and states
- Expected value
- Expected utility
- Concave utility
- Certainty equivalents
- Risk premia
Prospect Theory and Reference Dependence
reference points, loss aversion, diminishing sensitivity and probability weightingCode outcomes relative to a benchmark
Prospect theory evaluates gains and losses from a reference point rather than final wealth alone. Its value function is concave for gains, convex for losses and steeper below the reference.
- Reference dependence
- Gain and loss coding
- Diminishing sensitivity
- Loss aversion
- Probability weighting
- Certainty effect
Auction Design and Bidding Strategy
standard formats, bid shading, truth telling, reserves, common values and advertising slotsRead allocation and payment together
English, Dutch, first-price sealed-bid and second-price sealed-bid auctions differ in what bidders observe and how the winner pays. Strategic equivalences rely on information assumptions.
- English and Dutch auctions
- First-price sealed bids
- Second-price sealed bids
- Dominant strategies
- Bid shading
- Reserve prices
Formal mathematics is used to make a trade-off precise, but the opening lecture also insists that a model is a simplification whose assumptions must be questioned.
That pairing defines the course: solve the stated problem cleanly, then identify the assumption most likely to alter the managerial conclusion.
How the topics connect
A preference relation ranks bundles, utility represents that ranking, and marginal rates describe a local willingness to trade.
Prices and income create a feasible set, so matching the marginal trade-off to the market trade-off produces a consumer optimum. Solved choices become demand functions. The dual expenditure problem then prices a utility target and supports monetary welfare measures. Under uncertainty, the object changes from a bundle to state-dependent wealth, making expected utility and certainty equivalence central.
Prospect theory adds reference dependence and probability weighting. Auction design closes the sequence by making outcomes depend on rivals, information and payment rules.
How to study it efficiently
Work every question in four visible stages: identify the economic object, write the governing relationship, solve with units and signs intact, and interpret the result under a stated assumption.
Keep a separate error log for method, algebra and interpretation. When a formula returns a negative quantity, a surprising welfare sign or a dominant strategy outside its benchmark environment, treat that as a prompt to inspect the boundary rather than as an exotic result. The worked examples in this guide are independently authored with new numbers so that revision rehearses transfer instead of recall.
Worked example · free
Choose a consumer optimum and test the boundary
- 3Use MRS and the price ratio to obtain the bundle ratio.
- 3Substitute the ratio into the binding budget and solve quantities.
- 2Verify feasibility and state the boundary condition.
Key terms
- Budget Set
- The collection of bundles affordable at given prices and income, including every point on and below the budget line.
- Marginal Utility
- The change in utility associated with a small increase in one good while the other goods are held fixed.
- Marginal Rate
- The local willingness to exchange one good for another while remaining on the same indifference curve.
- Marshallian Demand
- The utility-maximising quantity chosen at given prices and nominal income, so it includes both substitution and income effects.
- Hicksian Demand
- The expenditure-minimising quantity chosen at given prices and a fixed utility target, isolating substitution.
- Indirect Utility
- The maximum utility attainable as a function of prices and income after the consumer has optimised.
- Expenditure Function
- The minimum spending required to reach a target utility at stated prices.
- Certainty Equivalent
- The sure wealth that gives the same utility as a risky prospect.
- Risk Premium
- Expected wealth minus the certainty equivalent, measuring willingness to pay to remove risk.
- Reference Point
- The benchmark relative to which prospect theory codes an outcome as a gain or a loss.
- Loss Aversion
- The property that a loss has a larger value impact than an equal-sized gain around the reference point.
- Dominant Strategy
- An action that performs at least as well as every alternative for every action taken by rivals.
- Winner's Curse
- The tendency for the winning common-value bid to come from the most optimistic signal and therefore exceed conditional value.
- Reserve Price
- The minimum acceptable auction price, which can raise revenue while preventing some efficient trades.
ECON7870 FAQ
How is the course assessed?
The opening lecture assigns 30% to chapter assignments, 10% to the group proposal, 20% to the group presentation and 40% to the final examination. Those numeric weights total 100%. The proposal is capped at two pages and the presentation lasts fifteen minutes. Check the course Moodle page for operational details and updates.
What is published about the final examination?
The available opening lecture describes one final examination worth 40% and calls it one test of understanding. It says a past exam will be uploaded for reference, but that past-exam file is not present in the available folder. Duration, sections, question count and permitted materials are not published in the files used for this guide.
How much mathematics does the course use?
The course explicitly uses formal but simple mathematics to represent decision making. You should be comfortable with partial derivatives, ratios, constrained optimisation, probability-weighted sums and basic algebra. The harder part is usually selecting the right economic object and checking a boundary, not performing a long calculation.
When should I use Marshallian rather than Hicksian demand?
Use Marshallian demand when prices and nominal income are given and you want the utility-maximising bundle. Use Hicksian demand when prices and a utility target are given and you want the cheapest bundle reaching that target. A price change in Marshallian demand mixes substitution and purchasing-power effects; Hicksian demand isolates substitution.
How do I know whether a tangency solution is valid?
Check that preferences are smooth around the candidate, quantities are non-negative, the budget is satisfied and the shape makes the point a maximum. Perfect substitutes often produce a corner and perfect complements a kink. A negative demand is evidence that the interior calculation left the feasible set, so compare boundaries instead of interpreting it literally.
What is the difference between expected value and expected utility?
Expected value averages monetary outcomes using their probabilities. Expected utility first applies the utility function to wealth in each state and then averages those utilities. Under concave utility, the certainty equivalent lies below expected wealth, which is why a fair gamble can be rejected and fair full insurance can be preferred.
Why does prospect theory need a reference point?
Prospect theory values gains and losses rather than final wealth alone, so the benchmark determines the sign of each outcome. Current wealth, a target, an expectation or a displayed entitlement can serve as a candidate reference. A good analysis justifies that benchmark from context instead of choosing it after observing the decision.
When is truthful bidding a dominant strategy?
Truthful bidding is weakly dominant in the standard single-object second-price auction with independent private values. The result does not automatically extend to common values, where winning conveys adverse information, or to generalised second-price advertising with multiple slots. State the value model and payment rule before using the theorem.
Questions students ask in each ECON7870 chapter
- Why do economic models leave details out?
- A model removes detail so one mechanism can be traced from assumptions to outcomes. The omission is useful when the excluded feature would not change the direction of the result. A strong analysis identifies the boundary and explains which omitted channel would matter enough to reverse the recommendation. Chapter 01 · Economic Models and Managerial Decisions
- Does a higher utility number measure more happiness?
- Not in the cardinal sense used by that question. Utility in this part of consumer theory preserves order: a higher number identifies a preferred bundle. Multiplying every value by a positive constant or applying another strictly increasing transformation can change the numbers while leaving every choice unchanged. Chapter 02 · Preference Relations and Utility
- Why is MRS a ratio of marginal utilities?
- Holding utility fixed gives MUx dx + MUy dy = 0, so the absolute slope |dy/dx| equals MUx/MUy. The numerator and denominator must match the stated good order. The result describes a local willingness to exchange, not the market price or a complete demand choice. Chapter 03 · Marginal Rates and Preference Shapes
- What rotates a budget line?
- A change in one price rotates the line around the intercept associated with the unchanged price. A change in income shifts both intercepts proportionally and leaves the slope unchanged. Label intercepts before describing the movement so a rotation is not mistakenly called a parallel shift. Chapter 04 · Budget Constraints and Consumer Choice
- Why do Cobb-Douglas expenditure shares stay fixed?
- The first-order conditions allocate income in proportions determined by the utility exponents. When a price changes, the monetary share remains fixed but the purchased quantity adjusts inversely with that price. Fixed shares therefore do not imply fixed quantities or unchanged utility. Chapter 05 · Demand with Cobb-Douglas and CES Utility
- Why are indirect utility and expenditure called dual?
- They describe the same preferences from opposite constraints. One asks how much utility a budget can buy; the other asks how much budget a utility target costs. Feeding the optimal value from one into the other returns the original constraint under standard conditions. Chapter 06 · Indirect Utility and Expenditure Duality
- Why does a price change have two effects?
- It changes the rate at which goods trade in the market and changes the purchasing power of nominal income. Hicksian compensation isolates the first movement at fixed utility. The remaining movement to the final Marshallian bundle is the income effect. Chapter 07 · Price Changes, Demand and Welfare
- Why not choose the option with highest expected money?
- Expected money ignores how the decision maker values wealth across states. Concave utility makes a loss reduce utility more than an equal gain raises it, so a fair gamble can lower expected utility even when expected wealth is unchanged. Chapter 08 · Expected Utility, Risk and Insurance
- How is loss aversion different from risk aversion?
- Risk aversion under expected utility comes from concavity over final wealth. Loss aversion compares equal movements on opposite sides of a reference point and makes the loss more influential. A risky choice can display one mechanism without establishing the other. Chapter 09 · Prospect Theory and Reference Dependence
- Why do bidders shade in first-price auctions?
- The winner pays their own bid, so bidding full value leaves zero surplus whenever the bid wins. A lower bid preserves surplus conditional on winning but reduces the chance of winning. The equilibrium balances those effects and depends on rivals' value distribution and risk assumptions. Chapter 10 · Auction Design and Bidding Strategy
How to study for the exam
Build one sheet with five columns: economic object, governing condition, boundary check, interpretation and source chapter. For consumer choice, reproduce MRS, the binding budget and the corner test. For duality, write which variable is fixed and which value function is being used. For risk, list final wealth in every state before applying utility.
For prospect theory, justify the reference point before coding gains and losses. For auctions, write allocation, payment and information structure before proposing a bid. Each evening, solve one original problem without notes, then change one input and predict the direction before recalculating. Keep mistakes separated into method, algebra and interpretation so a corrected number does not conceal a repeated conceptual error.
In the final review, use the course Moodle page to confirm any operational assessment detail not contained in the opening lecture.
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