COMPLETE SOLUTION MANUAL FOR
Managerial Economics and Business Strategy 10th Edition
By Michael Baye, Jeff Prince
Chapter .1
The .Fundamentals .of .Managerial .Economics
.Answers .to .Questions .and .Problems
1. This .situation .best .represents .producer-producer .rivalry. . Here, .Southwest .is .a
.producer .attempting .to .steal .customers .away .from .other .producers .in .the .form
.of .lower .prices.
2. The .maximum .you .would .be .willing .to .pay .for .this .asset .is .the .present .value, .which .is
250,000 250,000 250,000 250,000 250,000
𝑃𝑉 . = . +. +. +. +.
(1 .+ .0.08) . (1 .+ .0.08) . (1 .+ .0.08) . (1 .+ .0.08) . (1 .+ .0.08)5
2 3 4
= . $998,177.51
3.
a. Net .benefits .are .N(Q) .= .20 .+ .24Q .– .4Q2.
b. Net .benefits .when .Q .= .1 .are .N(1) .= .20 .+ .24 .– .4 .= .40 .and .when .Q .= .5 .they .are
N(5) .= .20 .+ .24(5) .– .4(5)2 .= .40.
c. Marginal .net .benefits .are .MNB(Q) .= .24 .– .8Q.
d. Marginal .net . benefits .when . Q . .1 . are .MNB(1) .= .24 .– .8(1) .= .16 .and .when . Q
. .5
they .are .MNB(5) .= .24 .– .8(5) .= .-16.
e. Setting .MNB(Q) .= .24 .– .8Q .= .0 .and .solving .for .Q, .we .see .that .net .benefits .are
maximized .when .Q .= .3.
f. When .net .benefits .are .maximized .at . Q .= .3, .marginal .net .benefits .are .zero. .That
.is,
MNB(3) .= .24 .– .8(3) .= .0.
4.
a. The .value .of .the .firm .before .it .pays .out .current .dividends .is
1 .+ .0.06
𝑃𝑉𝑓𝑖𝑟𝑚 = . $400,000 .( )
0.06 .− .0.04
= . $21.2 .million.
Managerial .Economics .and .Business .Strategy, .10e Page .1
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, b. . . The .value .of .the .firm .immediately .after .paying .the .dividend .is
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Prince
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.Education.
, 1 .+ .0.04 .
𝑃𝑉𝐸𝑥−𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 .= .$400,000 .( . )
𝑓𝑖𝑟𝑚
0.06 .− .0.04
= . $20.8 .million.
5. The .present .value .of .the .perpetual .stream .of .cash .flows. .This .is .given .by
𝐶𝐹 $120
𝑃𝑉𝑃𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 . = =. = . $4,000
𝑖. . 0.03 .
6. The .completed .table .looks .like .this:
Marginal
Control Total Total Net Marginal Marginal
.Net
.Variabl .Benefit .Cost .Benefit .Benefit .Cost
.Benefit
e .Q s .B(Q) .C(Q s .N(Q) .MB(Q) .MC(Q)
MNB(Q)
)
100 1200 950 250 210 60 150
101 1400 1020 380 200 70 130
102 1590 1100 490 190 80 110
103 1770 1190 580 180 90 90
104 1940 1290 650 170 100 70
105 2100 1400 700 160 110 50
106 2250 1520 730 150 120 30
107 2390 1650 740 140 130 10
108 2520 1790 730 130 140 -10
109 2640 1940 700 120 150 -30
110 2750 2100 650 110 160 -50
a. Net .benefits .are .maximized .at .Q .= .107.
b. Marginal .cost .is .slightly .smaller .than .marginal .benefit .(MC .= .130 .and .MB .=
.140). .This .is .due .to .the .discrete .nature .of .the .control .variable.
7.
a. The .net .present .value .of .attending .school .is .the .present .value .of .the .benefits
.derived .from .attending .school .(including .the .stream .of .higher .earnings .and .the
.value .to .you .of .the .work .environment .and .prestige .that .your .education
.provides), .minus .the .opportunity .cost .of .attending .school. .As .noted .in .the .text,
.the .opportunity .cost .of .attending .school .is .generally .greater .than .the .cost .of
.books .and .tuition. .It .is .rational .for .an .individual .to .enroll .in .graduate .school
.when .his .or .her .net .present .value .is .greater .than .zero.
b. Since .this .decreases .the .opportunity .cost .of .getting .an .M.B.A., .one .would
.expect .more .students .to .apply .for .admission .into .M.B.A. .Programs.
8.
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.Education.
, a. Her .accounting .profits .are .$170,000. .These .are .computed .as .the
.difference .between .revenues .($200,000) .and .explicit .costs .($30,000).
b. By .working .as .a .painter, .Jaynet .gives .up .the .$110,000 .she .could .have .earned
.under .her .next .best .alternative. .This .implicit .cost .of .$110,000 .is .in .addition .to
.the
$30,000 .in .explicit .costs. .Since .her .economic .costs .are .$140,000, .her .economic
.profits .are .$200,000 .- .$140,000 .= .$60,000.
9.
a. Total .benefit .when .Q .= .2 .is .B(2) .= .20(2) .– .2*22 .= .32. .When .Q .= .10,
2
.B(10) .= .20(10) .– .2*10 .= .0.
b. Marginal .benefit .when .Q .= .2 .is .MB(2) .= .20 .– .4(2) .= .12. .When .Q .= .10,
.it .is .MB(10) .= .20 .– .4(10) .= .-20.
c. The .level .of .Q .that .maximizes .total .benefits .satisfies .MB(Q) .= .20 .– .4Q .= .0, .so . Q
= .5.
d. Total .cost .when .Q .= .2 .is .C(2) .= .4 .+ .2*22 .= .12. . When .Q .= .10 .C(Q) .= .4 .+
2
.2*10 .= .204.
e. Marginal .cost .when .Q .= .2 .is .MC(Q) .= .4(2) .= .8. .When .Q .= .10 .MC(Q) .=
.4(10) .= .40.
f. The .level .of .Q .that .minimizes .total .cost .is .MC(Q) .= .4Q .= .0, .or .Q .= .0.
g. Net .benefits .are .maximized .when .MNB(Q) .= .MB(Q) .- .MC(Q) .= .0, .or .20 .–
.4Q .– .4Q .= .0. . Some .algebra .leads .to .Q .= .20/8 .= .2.5 .as .the .level .of .output
.that .maximizes .net .benefits.
10.
a. The .present .value .of .the .stream .of .accounting .profits .is
(150,000 .− .50,000) (150,000 .− .50,000) (150,000 .− .50,000)
𝑃𝑉 + + = . $262,431.60
1.07 (1.07)2 (1.07)3
.=
b. The .present .value .of .the .stream .of .economic .profits .is
(150,000 .− .50,000 .− .65,000) (150,000 .− .50,000 .− .65,000)
𝑃𝑉 . = +
1.07 (1.07)2
(150,000 .− .50,000 .− .65,000)
+ = . $91,851.06
(1.07)3
1+𝑖
11. First, .recall .the .equation .for .the .value .of .a .firm: = ( ). . Next, . solve . this
𝑖−g
. 𝑃𝑉𝑓𝑖𝑟𝑚 . 𝜋0
(1+𝑖)𝜋0
equation .for .g .to .obtain .𝑔 . = . 𝑖 . − . . . Substituting . in .the .known .values .implies .a
𝑃𝑉𝑓𝑖r𝑚
(1+0.09)25,000 .
growth .rate .of: .𝑔 . = . 0.09 .− . = . 0.0355 .or .3.55 .percent. .This .would .seem
500,000
to .be .a .reasonable .rate .of .growth: . 0.0355 .< .0.09 .(g .< .i).
Page .4 Michael .R. .Baye .& .Jeffrey .T.
Prince
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All .rights .reserved. .No .reproduction .or .distribution .without .the .prior .written .consent .of .McGraw-Hill
.Education.
