Solution Manual for Managerial Econo
c c c c
mics and Business Strategy 10th Michae
c c c c c
l Baye, Jeff Prince c c c
COMPLETE SOLUTION MANUAL FORc c c
Managerial Economics and Business Strategy 10th Edition By
c c c c c c c c
Michael Baye, Jeff Prince
c c c
Chapter 1 c
The Fundamentals of Managerial Economics Ans
c c c c c
wers to Questions and Problems
c c c c
1. Thiscsituationcbestcrepresentscproducer-
producercrivalry.c Here,cSouthwestciscacproducercattemptingctocstealccustomerscawa
ycfromcothercproducerscincthecformcofclowercprices.
2. Thecmaximumcyoucwouldcbecwillingctocpaycforcthiscassetciscthecpresentcvalue,cw
hichcis
3.
a. NetcbenefitscarecN(Q)c=c20c+c24Qc–c4Q2.
b. NetcbenefitscwhencQc=c1carecN(1)c=c20c+c24c–
2
c4c=c40candcwhencQc=c5ctheycarecN(5)c=c20c+c24(5)c–c4(5) c=c40.
c. MarginalcnetcbenefitscarecMNB(Q)c=c24c–c8Q.
d. MarginalcnetcbenefitscwhencQc 1carecMNB(1)c=c24c–c8(1)c=c16candcwhencQ 5
theycarecMNB(5)c=c24c–c8(5)c=c-16.
e. SettingcMNB(Q)c=c24c–
c8Qc=c0candcsolvingcforcQ,cwecseecthatcnetcbenefitscarecmaximizedcwhencQc=c3.
Pagec1
, f. WhencnetcbenefitscarecmaximizedcatcQc=c3,cmarginalcnetcbenefitscareczero.cThatcis,cM
NB(3)c=c24c–c8(3)c=c0.
4.
a. Thecvaluecofcthecfirmcbeforecitcpayscoutccurrentcdividendscis
.
b. Thecvaluecofcthecfirmcimmediatelycaftercpayingcthecdividendcis
ManagerialcEconomicscandcBusinesscStrategy,c10e
Copyrightc©c2022cbycMcGraw-HillcEducation.
Allcrightscreserved.cNocreproductioncorcdistributioncwithoutcthecpriorcwrittencconsentcofcMcGrawcHillcEducation.
.
5. Thecpresentcvaluecofcthecperpetualcstreamcofccashcflows.cThisciscgivencby
6. Theccompletedctableclooksclikecthis:
Controlc TotalcBenefi NetcBe Marginal
Total Marginal MarginalcC
cNetcBene
Variable tscB(Q) cCost nefitscN cBenefitc ostcMC(Q)
fitcMNB(
cQ cC(Q (Q) MB(Q)
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
Pagec2 MichaelcR.cBayec&cJeffreycT.cPrince
, a. NetcbenefitscarecmaximizedcatcQc=c107.
b. Marginalccostciscslightlycsmallercthancmarginalcbenefitc(MCc=c130candcMBc=c140).cT
hisciscduectocthecdiscretecnaturecofctheccontrolcvariable.
7.
a. Thecnetcpresentcvaluecofcattendingcschoolciscthecpresentcvaluecofcthecbenefitscderive
dcfromcattendingcschoolc(includingcthecstreamcofchighercearningscandcthecvaluectocy
oucofcthecworkcenvironmentcandcprestigecthatcyourceducationcprovides),cminusctheco
pportunityccostcofcattendingcschool.cAscnotedcincthectext,cthecopportunityccostcofcatte
ndingcschoolciscgenerallycgreatercthanctheccostcofcbookscandctuition.cItciscrationalcforc
ancindividualctocenrollcincgraduatecschoolcwhenchiscorchercnetcpresentcvalueciscgreate
rcthanczero.
b. SincecthiscdecreasescthecopportunityccostcofcgettingcancM.B.A.,conecwouldcexpectc
morecstudentsctocapplycforcadmissioncintocM.B.A.cPrograms.
8.
a. Hercaccountingcprofitscarec$170,000.cThesecareccomputedcascthecdifferencecb
etweencrevenuesc($200,000)candcexplicitccostsc($30,000).
b. Bycworkingcascacpainter,cJaynetcgivescupcthec$110,000csheccouldchavecearnedcunderc
hercnextcbestcalternative.cThiscimplicitccostcofc$110,000ciscincadditionctocthe
$30,000cincexplicitccosts.cSincecherceconomicccostscarec$140,000,cherceconomiccprof
itscarec$200,000c-c$140,000c=c$60,000.
9.
a. TotalcbenefitcwhencQc=c2ciscB(2)c=c20(2)c–
2 2
c2*2 c=c32.cWhencQc=c10,cB(10)c=c20(10)c–c2*10 c=c0.
b. MarginalcbenefitcwhencQc=c2ciscMB(2)c=c20c–
c4(2)c=c12.cWhencQc=c10,citciscMB(10)c=c20c–c4(10)c=c-20.
c. TheclevelcofcQcthatcmaximizesctotalcbenefitscsatisfiescMB(Q)c=c20c–c4Qc=c0,csocQ
=c5.
d. TotalccostcwhencQc=c2ciscC(2)c=c4c+c2*22c=c12.c WhencQc=c10cC(Q)c=c4c+c2*102c=c204
.
e. MarginalccostcwhencQc=c2ciscMC(Q)c=c4(2)c=c8.cWhencQc=c10cMC(Q)c=c4(10)c=c40.
f. TheclevelcofcQcthatcminimizesctotalccostciscMC(Q)c=c4Qc=c0,corcQc=c0.
g. NetcbenefitscarecmaximizedcwhencMNB(Q)c=cMB(Q)c-cMC(Q)c=c0,corc20c–c4Qc–
c4Qc=c0.c SomecalgebracleadsctocQc=c20/8c=c2.5casctheclevelcofcoutputcthatcmaximize
scnetcbenefits.
10.
a. Thecpresentcvaluecofcthecstreamcofcaccountingcprofitscis
b. Thecpresentcvaluecofcthecstreamcofceconomiccprofitscis
ManagerialcEconomicscandcBusinesscStrategy,c10e Pagec3
, 11. First,crecallcthecequationcforcthecvaluecofcacfirm:c
.c Next,csolvecthiscequationcforcgctocobtainc
.c Substitutingcincthecknowncvaluescimpliesca
growthcratecof: percent.cThiscwouldcseem
c
tocbecacreasonablecratecofcgrowth:c0.0355c<c0.09c(gc<ci).
12. Effectively,cthiscquestioncboilscdownctocthecquestioncofcwhethercitciscacgoodcinvestmen
tctocspendcancextrac$250concacrefrigeratorcthatcwillcsavecyouc$40catcthecendcofceachcyearc
forcfivecyears.cThecnetcpresentcvaluecofcthiscinvestmentcis
.
Youcshouldcbuycthecstandardcmodel,csincecdoingcsocsavescyouc$81.51cincpresentcvaluecte
rms.
13. Undercacflatchourlycwage,cemployeeschaveclittlecincentivectocworkchardcascworkingchardc
willcnotcdirectlycbenefitcthem.cThiscadverselycaffectscthecfirm,csincecitscprofitscwillcbeclo
wercthancthec$25,000cpercstorecthatciscobtainableceachcdaycwhencemployeescperformcatcth
eircpeak.cUndercthecproposedcpaycstructure,cemployeeschavecacstrongcincentivectocincrea
seceffort,candcthiscwillcbenefitcthecfirm.cIncparticular,cundercthec fixedchourlycwage,cancem
ployeecreceivesc$160cpercdaycwhetherchecorcshecworkschardcorcnot.cUndercthecnewcpaycst
ructure,cancemployeecreceivesc$330cpercdaycifcthecstorecachievescitscmaximumcpossiblec
dailycprofitcandconlyc$80cifcthecstore’scdailycprofitcisczero.cThiscprovidescemployeescancin
centivectocworkchardcandctocexertcpeercpressureconcemployeescwhocmightcotherwisecgoof
coff.cBycprovidingcemployeescancincentivectocearncextracmoneycbycworkingchard,cbothcth
ecfirmcandcthecemployeescwillcbenefit.
14.
a. Accountingccostscequalc$145,000cpercyearcincoverheadcandcoperatingcexpe
nses.cHercimplicitccostciscthec$75,000csalarycthatcmustcbecgivencupctocstartcth
ecnewcbusiness.cHercopportunityccostcincludescbothcimplicitcandcexplicitcco
sts:c$145,000c+c$75,000c=c$220,000.
Pagec4 MichaelcR.cBayec&cJeffreycT.cPrince
c c c c
mics and Business Strategy 10th Michae
c c c c c
l Baye, Jeff Prince c c c
COMPLETE SOLUTION MANUAL FORc c c
Managerial Economics and Business Strategy 10th Edition By
c c c c c c c c
Michael Baye, Jeff Prince
c c c
Chapter 1 c
The Fundamentals of Managerial Economics Ans
c c c c c
wers to Questions and Problems
c c c c
1. Thiscsituationcbestcrepresentscproducer-
producercrivalry.c Here,cSouthwestciscacproducercattemptingctocstealccustomerscawa
ycfromcothercproducerscincthecformcofclowercprices.
2. Thecmaximumcyoucwouldcbecwillingctocpaycforcthiscassetciscthecpresentcvalue,cw
hichcis
3.
a. NetcbenefitscarecN(Q)c=c20c+c24Qc–c4Q2.
b. NetcbenefitscwhencQc=c1carecN(1)c=c20c+c24c–
2
c4c=c40candcwhencQc=c5ctheycarecN(5)c=c20c+c24(5)c–c4(5) c=c40.
c. MarginalcnetcbenefitscarecMNB(Q)c=c24c–c8Q.
d. MarginalcnetcbenefitscwhencQc 1carecMNB(1)c=c24c–c8(1)c=c16candcwhencQ 5
theycarecMNB(5)c=c24c–c8(5)c=c-16.
e. SettingcMNB(Q)c=c24c–
c8Qc=c0candcsolvingcforcQ,cwecseecthatcnetcbenefitscarecmaximizedcwhencQc=c3.
Pagec1
, f. WhencnetcbenefitscarecmaximizedcatcQc=c3,cmarginalcnetcbenefitscareczero.cThatcis,cM
NB(3)c=c24c–c8(3)c=c0.
4.
a. Thecvaluecofcthecfirmcbeforecitcpayscoutccurrentcdividendscis
.
b. Thecvaluecofcthecfirmcimmediatelycaftercpayingcthecdividendcis
ManagerialcEconomicscandcBusinesscStrategy,c10e
Copyrightc©c2022cbycMcGraw-HillcEducation.
Allcrightscreserved.cNocreproductioncorcdistributioncwithoutcthecpriorcwrittencconsentcofcMcGrawcHillcEducation.
.
5. Thecpresentcvaluecofcthecperpetualcstreamcofccashcflows.cThisciscgivencby
6. Theccompletedctableclooksclikecthis:
Controlc TotalcBenefi NetcBe Marginal
Total Marginal MarginalcC
cNetcBene
Variable tscB(Q) cCost nefitscN cBenefitc ostcMC(Q)
fitcMNB(
cQ cC(Q (Q) MB(Q)
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
Pagec2 MichaelcR.cBayec&cJeffreycT.cPrince
, a. NetcbenefitscarecmaximizedcatcQc=c107.
b. Marginalccostciscslightlycsmallercthancmarginalcbenefitc(MCc=c130candcMBc=c140).cT
hisciscduectocthecdiscretecnaturecofctheccontrolcvariable.
7.
a. Thecnetcpresentcvaluecofcattendingcschoolciscthecpresentcvaluecofcthecbenefitscderive
dcfromcattendingcschoolc(includingcthecstreamcofchighercearningscandcthecvaluectocy
oucofcthecworkcenvironmentcandcprestigecthatcyourceducationcprovides),cminusctheco
pportunityccostcofcattendingcschool.cAscnotedcincthectext,cthecopportunityccostcofcatte
ndingcschoolciscgenerallycgreatercthanctheccostcofcbookscandctuition.cItciscrationalcforc
ancindividualctocenrollcincgraduatecschoolcwhenchiscorchercnetcpresentcvalueciscgreate
rcthanczero.
b. SincecthiscdecreasescthecopportunityccostcofcgettingcancM.B.A.,conecwouldcexpectc
morecstudentsctocapplycforcadmissioncintocM.B.A.cPrograms.
8.
a. Hercaccountingcprofitscarec$170,000.cThesecareccomputedcascthecdifferencecb
etweencrevenuesc($200,000)candcexplicitccostsc($30,000).
b. Bycworkingcascacpainter,cJaynetcgivescupcthec$110,000csheccouldchavecearnedcunderc
hercnextcbestcalternative.cThiscimplicitccostcofc$110,000ciscincadditionctocthe
$30,000cincexplicitccosts.cSincecherceconomicccostscarec$140,000,cherceconomiccprof
itscarec$200,000c-c$140,000c=c$60,000.
9.
a. TotalcbenefitcwhencQc=c2ciscB(2)c=c20(2)c–
2 2
c2*2 c=c32.cWhencQc=c10,cB(10)c=c20(10)c–c2*10 c=c0.
b. MarginalcbenefitcwhencQc=c2ciscMB(2)c=c20c–
c4(2)c=c12.cWhencQc=c10,citciscMB(10)c=c20c–c4(10)c=c-20.
c. TheclevelcofcQcthatcmaximizesctotalcbenefitscsatisfiescMB(Q)c=c20c–c4Qc=c0,csocQ
=c5.
d. TotalccostcwhencQc=c2ciscC(2)c=c4c+c2*22c=c12.c WhencQc=c10cC(Q)c=c4c+c2*102c=c204
.
e. MarginalccostcwhencQc=c2ciscMC(Q)c=c4(2)c=c8.cWhencQc=c10cMC(Q)c=c4(10)c=c40.
f. TheclevelcofcQcthatcminimizesctotalccostciscMC(Q)c=c4Qc=c0,corcQc=c0.
g. NetcbenefitscarecmaximizedcwhencMNB(Q)c=cMB(Q)c-cMC(Q)c=c0,corc20c–c4Qc–
c4Qc=c0.c SomecalgebracleadsctocQc=c20/8c=c2.5casctheclevelcofcoutputcthatcmaximize
scnetcbenefits.
10.
a. Thecpresentcvaluecofcthecstreamcofcaccountingcprofitscis
b. Thecpresentcvaluecofcthecstreamcofceconomiccprofitscis
ManagerialcEconomicscandcBusinesscStrategy,c10e Pagec3
, 11. First,crecallcthecequationcforcthecvaluecofcacfirm:c
.c Next,csolvecthiscequationcforcgctocobtainc
.c Substitutingcincthecknowncvaluescimpliesca
growthcratecof: percent.cThiscwouldcseem
c
tocbecacreasonablecratecofcgrowth:c0.0355c<c0.09c(gc<ci).
12. Effectively,cthiscquestioncboilscdownctocthecquestioncofcwhethercitciscacgoodcinvestmen
tctocspendcancextrac$250concacrefrigeratorcthatcwillcsavecyouc$40catcthecendcofceachcyearc
forcfivecyears.cThecnetcpresentcvaluecofcthiscinvestmentcis
.
Youcshouldcbuycthecstandardcmodel,csincecdoingcsocsavescyouc$81.51cincpresentcvaluecte
rms.
13. Undercacflatchourlycwage,cemployeeschaveclittlecincentivectocworkchardcascworkingchardc
willcnotcdirectlycbenefitcthem.cThiscadverselycaffectscthecfirm,csincecitscprofitscwillcbeclo
wercthancthec$25,000cpercstorecthatciscobtainableceachcdaycwhencemployeescperformcatcth
eircpeak.cUndercthecproposedcpaycstructure,cemployeeschavecacstrongcincentivectocincrea
seceffort,candcthiscwillcbenefitcthecfirm.cIncparticular,cundercthec fixedchourlycwage,cancem
ployeecreceivesc$160cpercdaycwhetherchecorcshecworkschardcorcnot.cUndercthecnewcpaycst
ructure,cancemployeecreceivesc$330cpercdaycifcthecstorecachievescitscmaximumcpossiblec
dailycprofitcandconlyc$80cifcthecstore’scdailycprofitcisczero.cThiscprovidescemployeescancin
centivectocworkchardcandctocexertcpeercpressureconcemployeescwhocmightcotherwisecgoof
coff.cBycprovidingcemployeescancincentivectocearncextracmoneycbycworkingchard,cbothcth
ecfirmcandcthecemployeescwillcbenefit.
14.
a. Accountingccostscequalc$145,000cpercyearcincoverheadcandcoperatingcexpe
nses.cHercimplicitccostciscthec$75,000csalarycthatcmustcbecgivencupctocstartcth
ecnewcbusiness.cHercopportunityccostcincludescbothcimplicitcandcexplicitcco
sts:c$145,000c+c$75,000c=c$220,000.
Pagec4 MichaelcR.cBayec&cJeffreycT.cPrince
