Managerial economics and operating beta | Zendy

O'Brien Thomas J. | Zendy

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Managerial economics and operating beta

Author(s) -

O'Brien Thomas J.

Publication year - 2011

Publication title -

managerial and decision economics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.288

H-Index - 51

eISSN - 1099-1468

pISSN - 0143-6570

DOI - 10.1002/mde.1525

Subject(s) - inverse demand function , economics , leverage (statistics) , returns to scale , price elasticity of demand , elasticity (physics) , microeconomics , beta (programming language) , shock (circulatory) , inverse , production (economics) , econometrics , demand curve , mathematics , computer science , programming language , medicine , statistics , materials science , geometry , composite material

We model a firm's unlevered beta in terms of elementary microeconomic variables. The source of uncertainty is a shock to demand. A firm decides on capital before the shock, and on labor, output, and price after the shock. Some insights are: (1) with decreasing returns to scale of production, beta has an inverse relation with price elasticity of demand, given the income elasticity of demand; (2) beta has a direct relation with the firm's returns to scale of production; (3) due to the impact of operating leverage, beta has an inverse relation with industry concentration; and (4) for a given returns to scale, beta has a direct relation with the capital–labor ratio that strengthens as industry concentration decreases. Copyright © 2011 John Wiley & Sons, Ltd.

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