Solution Manual for Managerial Econo q q q q
mics and Business Strategy 10th Michae
q q q q q
l Baye, Jeff Prince q q q
COMPLETE SOLUTION MANUAL FOR q q q
Managerial Economics and Business Strategy 10th Edition By
q q q q q q q q
Michael Baye, Jeff Prince
q q q
Chapter 1 q
The Fundamentals of Managerial Economics Ans
q q q q q
wers to Questions and Problems q q q q
1. This situation best represents producer-
q q q q
producer rivalry. Here, Southwest is a producer attempting to steal customers awa
q q q q q q q q q q q
y from other producers in the form of lower prices.
q q q q q q q q q
2. The maximum you would be willing to pay for this asset is the present value, w
q q q q q q q q q q q q q q q
hich is q
3.
a. Net benefits are N(Q) = 20 + 24Q – 4Q2.
q q q q q q q q q
b. Net benefits when Q = 1 are N(1) = 20 + 24 –
q q q q q q q q q q q q
4 = 40 and when Q = 5 they are N(5) = 20 + 24(5) – 4(5)2 = 40.
q q q q q q q q q q q q q q q q q q q
c. Marginal net benefits are MNB(Q) = 24 – 8Q. q q q q q q q q
d. Marginal net benefits when Q 1 are MNB(1) = 24 – 8(1) = 16 and when Q
q q q q q q q q q q q q q q q q 5
they are MNB(5) = 24 – 8(5) = -16.
q q q q q q q q
e. Setting MNB(Q) = 24 – q q q q
8Q = 0 and solving for Q, we see that net benefits are maximized when Q = 3.
q q q q q q q q q q q q q q q q q q
Page 1
q
, f. When net benefits are maximized at Q = 3, marginal net benefits are zero. That is, M
q q q q q q q q q q q q q q q q
NB(3) = 24 – 8(3) = 0.
q q q q q q
4.
a. The value of the firm before it pays out current dividends is
q q q q q q q q q q q
.
b. The value of the firm immediately after paying the dividend is
q q q q q q q q q q
Managerial Economics and Business Strategy, 10e
q q q q q
Copyrightq©q2022qbyqMcGraw-HillqEducation.
Allqrightsqreserved.qNoqreproductionqorqdistributionqwithoutqtheqpriorqwrittenqconsentqofqMcGrawqHillqEducation.
.
5. The present value of the perpetual stream of cash flows. This is given by
q q q q q q q q q q q q q
6. The completed table looks like this:
q q q q q
Control Total Benefi Net Be Marginal
q q Total q Marginal Marginal C q
Net Bene
q q
Variable ts B(Q)q Cost
q q nefits N q Benefit
q q ost MC(Q)
q
fit MNB(
q
Q
q C(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
Page 2 Michael R. Baye & Jeffrey T. Prince
, a. Net benefits are maximized at Q = 107.
q q q q q q q
b. Marginal cost is slightly smaller than marginal benefit (MC = 130 and MB = 140). Th
q q q q q q q q q q q q q q q
is is due to the discrete nature of the control variable.
q q q q q q q q q q
7.
a. The net present value of attending school is the present value of the benefits derived
q q q q q q q q q q q q q q q
from attending school (including the stream of higher earnings and the value to you
q q q q q q q q q q q q q q
of the work environment and prestige that your education provides), minus the opp
q q q q q q q q q q q q
ortunity cost of attending school. As noted in the text, the opportunity cost of attendi
q q q q q q q q q q q q q q
ng school is generally greater than the cost of books and tuition. It is rational for an i
q q q q q q q q q q q q q q q q q
ndividual to enroll in graduate school when his or her net present value is greater tha
q q q q q q q q q q q q q q q
n zero.
q
b. Since this decreases the opportunity cost of getting an M.B.A., one would expect m
q q q q q q q q q q q q q
ore students to apply for admission into M.B.A. Programs.
q q q q q q q q
8.
a. Her accounting profits are $170,000. These are computed as the difference b
q q q q q q q q q q q
etween revenues ($200,000) and explicit costs ($30,000).
q q q q q q
b. By working as a painter, Jaynet gives up the $110,000 she could have earned under
q q q q q q q q q q q q q q q
her next best alternative. This implicit cost of $110,000 is in addition to the
q q q q q q q q q q q q q
$30,000 in explicit costs. Since her economic costs are $140,000, her economic prof
q q q q q q q q q q q q
its are $200,000 - $140,000 = $60,000.
q q q q q q
9.
a. Total benefit when Q = 2 is B(2) = 20(2) –
q q q q q q q q q q
2*22 = 32. When Q = 10, B(10) = 20(10) – 2*102 = 0.
q q q q q q q q q q q q q q
b. Marginal benefit when Q = 2 is MB(2) = 20 – q q q q q q q q q q
4(2) = 12. When Q = 10, it is MB(10) = 20 – 4(10) = -20.
q q q q q q q q q q q q q q q q
c. The level of Q that maximizes total benefits satisfies MB(Q) = 20 – 4Q = 0, so Q
q q q q q q q q q q q q q q q q q
= 5. q
d. Total cost when Q = 2 is C(2) = 4 + 2*22 = 12. When Q = 10 C(Q) = 4 + 2*102 = 204.
q q q q q q q q q q q q q q q q q q q q q q q q
e. Marginal cost when Q = 2 is MC(Q) = 4(2) = 8. When Q = 10 MC(Q) = 4(10) = 40.
q q q q q q q q q q q q q q q q q q q q
f. The level of Q that minimizes total cost is MC(Q) = 4Q = 0, or Q = 0.
q q q q q q q q q q q q q q q q q
g. Net benefits are maximized when MNB(Q) = MB(Q) - MC(Q) = 0, or 20 – 4Q –
q q q q q q q q q q q q q q q q
4Q = 0. Some algebra leads to Q = 20/8 = 2.5 as the level of output that maximizes
q q q q q q q q q q q q q q q q q q q q
net benefits. q
10.
a. The present value of the stream of accounting profits is
q q q q q q q q q
b. The present value of the stream of economic profits is
q q q q q q q q q
Managerial Economics and Business Strategy, 10e Page 3
, 11. First, recall the equation for the value of a firm:
q q q q q q q q q q
. Next, solve this equation for g to obtain
q q q q q q q q q
. Substituting in the known values implies a
q q q q q q q
growth rate of: q q percent. This would seem
q q q q
to be a reasonable rate of growth: 0.0355 < 0.09 (g < i).
q q q q q q q q q q q q
12. Effectively, this question boils down to the question of whether it is a good investment
q q q q q q q q q q q q q q
to spend an extra $250 on a refrigerator that will save you $40 at the end of each year fo
q q q q q q q q q q q q q q q q q q q q
r five years. The net present value of this investment is
q q q q q q q q q q
.
You should buy the standard model, since doing so saves you $81.51 in present value ter
q q q q q q q q q q q q q q q
ms.
13. Under a flat hourly wage, employees have little incentive to work hard as working hard
q q q q q q q q q q q q q q q
will not directly benefit them. This adversely affects the firm, since its profits will be lo
q q q q q q q q q q q q q q q
wer than the $25,000 per store that is obtainable each day when employees perform at th
q q q q q q q q q q q q q q q
eir peak. Under the proposed pay structure, employees have a strong incentive to increas
q q q q q q q q q q q q q
e effort, and this will benefit the firm. In particular, under the fixed hourly wage, an emp
q q q q q q q q q q q q q q q q
loyee receives $160 per day whether he or she works hard or not. Under the new pay stru
q q q q q q q q q q q q q q q q q
cture, an employee receives $330 per day if the store achieves its maximum possible dail
q q q q q q q q q q q q q q
y profit and only $80 if the store’s daily profit is zero. This provides employees an incent
q q q q q q q q q q q q q q q q
ive to work hard and to exert peer pressure on employees who might otherwise goof off.
q q q q q q q q q q q q q q q q
By providing employees an incentive to earn extra money by working hard, both the fir
q q q q q q q q q q q q q q
m and the employees will benefit.
q q q q q
14.
a. Accounting costs equal $145,000 per year in overhead and operating expe q q q q q q q q q q
nses. Her implicit cost is the $75,000 salary that must be given up to start th
q q q q q q q q q q q q q q q
e new business. Her opportunity cost includes both implicit and explicit co
q q q q q q q q q q q
sts: $145,000 + $75,000 = $220,000. q q q q q
Page 4 Michael R. Baye & Jeffrey T. Prince
mics and Business Strategy 10th Michae
q q q q q
l Baye, Jeff Prince q q q
COMPLETE SOLUTION MANUAL FOR q q q
Managerial Economics and Business Strategy 10th Edition By
q q q q q q q q
Michael Baye, Jeff Prince
q q q
Chapter 1 q
The Fundamentals of Managerial Economics Ans
q q q q q
wers to Questions and Problems q q q q
1. This situation best represents producer-
q q q q
producer rivalry. Here, Southwest is a producer attempting to steal customers awa
q q q q q q q q q q q
y from other producers in the form of lower prices.
q q q q q q q q q
2. The maximum you would be willing to pay for this asset is the present value, w
q q q q q q q q q q q q q q q
hich is q
3.
a. Net benefits are N(Q) = 20 + 24Q – 4Q2.
q q q q q q q q q
b. Net benefits when Q = 1 are N(1) = 20 + 24 –
q q q q q q q q q q q q
4 = 40 and when Q = 5 they are N(5) = 20 + 24(5) – 4(5)2 = 40.
q q q q q q q q q q q q q q q q q q q
c. Marginal net benefits are MNB(Q) = 24 – 8Q. q q q q q q q q
d. Marginal net benefits when Q 1 are MNB(1) = 24 – 8(1) = 16 and when Q
q q q q q q q q q q q q q q q q 5
they are MNB(5) = 24 – 8(5) = -16.
q q q q q q q q
e. Setting MNB(Q) = 24 – q q q q
8Q = 0 and solving for Q, we see that net benefits are maximized when Q = 3.
q q q q q q q q q q q q q q q q q q
Page 1
q
, f. When net benefits are maximized at Q = 3, marginal net benefits are zero. That is, M
q q q q q q q q q q q q q q q q
NB(3) = 24 – 8(3) = 0.
q q q q q q
4.
a. The value of the firm before it pays out current dividends is
q q q q q q q q q q q
.
b. The value of the firm immediately after paying the dividend is
q q q q q q q q q q
Managerial Economics and Business Strategy, 10e
q q q q q
Copyrightq©q2022qbyqMcGraw-HillqEducation.
Allqrightsqreserved.qNoqreproductionqorqdistributionqwithoutqtheqpriorqwrittenqconsentqofqMcGrawqHillqEducation.
.
5. The present value of the perpetual stream of cash flows. This is given by
q q q q q q q q q q q q q
6. The completed table looks like this:
q q q q q
Control Total Benefi Net Be Marginal
q q Total q Marginal Marginal C q
Net Bene
q q
Variable ts B(Q)q Cost
q q nefits N q Benefit
q q ost MC(Q)
q
fit MNB(
q
Q
q C(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
Page 2 Michael R. Baye & Jeffrey T. Prince
, a. Net benefits are maximized at Q = 107.
q q q q q q q
b. Marginal cost is slightly smaller than marginal benefit (MC = 130 and MB = 140). Th
q q q q q q q q q q q q q q q
is is due to the discrete nature of the control variable.
q q q q q q q q q q
7.
a. The net present value of attending school is the present value of the benefits derived
q q q q q q q q q q q q q q q
from attending school (including the stream of higher earnings and the value to you
q q q q q q q q q q q q q q
of the work environment and prestige that your education provides), minus the opp
q q q q q q q q q q q q
ortunity cost of attending school. As noted in the text, the opportunity cost of attendi
q q q q q q q q q q q q q q
ng school is generally greater than the cost of books and tuition. It is rational for an i
q q q q q q q q q q q q q q q q q
ndividual to enroll in graduate school when his or her net present value is greater tha
q q q q q q q q q q q q q q q
n zero.
q
b. Since this decreases the opportunity cost of getting an M.B.A., one would expect m
q q q q q q q q q q q q q
ore students to apply for admission into M.B.A. Programs.
q q q q q q q q
8.
a. Her accounting profits are $170,000. These are computed as the difference b
q q q q q q q q q q q
etween revenues ($200,000) and explicit costs ($30,000).
q q q q q q
b. By working as a painter, Jaynet gives up the $110,000 she could have earned under
q q q q q q q q q q q q q q q
her next best alternative. This implicit cost of $110,000 is in addition to the
q q q q q q q q q q q q q
$30,000 in explicit costs. Since her economic costs are $140,000, her economic prof
q q q q q q q q q q q q
its are $200,000 - $140,000 = $60,000.
q q q q q q
9.
a. Total benefit when Q = 2 is B(2) = 20(2) –
q q q q q q q q q q
2*22 = 32. When Q = 10, B(10) = 20(10) – 2*102 = 0.
q q q q q q q q q q q q q q
b. Marginal benefit when Q = 2 is MB(2) = 20 – q q q q q q q q q q
4(2) = 12. When Q = 10, it is MB(10) = 20 – 4(10) = -20.
q q q q q q q q q q q q q q q q
c. The level of Q that maximizes total benefits satisfies MB(Q) = 20 – 4Q = 0, so Q
q q q q q q q q q q q q q q q q q
= 5. q
d. Total cost when Q = 2 is C(2) = 4 + 2*22 = 12. When Q = 10 C(Q) = 4 + 2*102 = 204.
q q q q q q q q q q q q q q q q q q q q q q q q
e. Marginal cost when Q = 2 is MC(Q) = 4(2) = 8. When Q = 10 MC(Q) = 4(10) = 40.
q q q q q q q q q q q q q q q q q q q q
f. The level of Q that minimizes total cost is MC(Q) = 4Q = 0, or Q = 0.
q q q q q q q q q q q q q q q q q
g. Net benefits are maximized when MNB(Q) = MB(Q) - MC(Q) = 0, or 20 – 4Q –
q q q q q q q q q q q q q q q q
4Q = 0. Some algebra leads to Q = 20/8 = 2.5 as the level of output that maximizes
q q q q q q q q q q q q q q q q q q q q
net benefits. q
10.
a. The present value of the stream of accounting profits is
q q q q q q q q q
b. The present value of the stream of economic profits is
q q q q q q q q q
Managerial Economics and Business Strategy, 10e Page 3
, 11. First, recall the equation for the value of a firm:
q q q q q q q q q q
. Next, solve this equation for g to obtain
q q q q q q q q q
. Substituting in the known values implies a
q q q q q q q
growth rate of: q q percent. This would seem
q q q q
to be a reasonable rate of growth: 0.0355 < 0.09 (g < i).
q q q q q q q q q q q q
12. Effectively, this question boils down to the question of whether it is a good investment
q q q q q q q q q q q q q q
to spend an extra $250 on a refrigerator that will save you $40 at the end of each year fo
q q q q q q q q q q q q q q q q q q q q
r five years. The net present value of this investment is
q q q q q q q q q q
.
You should buy the standard model, since doing so saves you $81.51 in present value ter
q q q q q q q q q q q q q q q
ms.
13. Under a flat hourly wage, employees have little incentive to work hard as working hard
q q q q q q q q q q q q q q q
will not directly benefit them. This adversely affects the firm, since its profits will be lo
q q q q q q q q q q q q q q q
wer than the $25,000 per store that is obtainable each day when employees perform at th
q q q q q q q q q q q q q q q
eir peak. Under the proposed pay structure, employees have a strong incentive to increas
q q q q q q q q q q q q q
e effort, and this will benefit the firm. In particular, under the fixed hourly wage, an emp
q q q q q q q q q q q q q q q q
loyee receives $160 per day whether he or she works hard or not. Under the new pay stru
q q q q q q q q q q q q q q q q q
cture, an employee receives $330 per day if the store achieves its maximum possible dail
q q q q q q q q q q q q q q
y profit and only $80 if the store’s daily profit is zero. This provides employees an incent
q q q q q q q q q q q q q q q q
ive to work hard and to exert peer pressure on employees who might otherwise goof off.
q q q q q q q q q q q q q q q q
By providing employees an incentive to earn extra money by working hard, both the fir
q q q q q q q q q q q q q q
m and the employees will benefit.
q q q q q
14.
a. Accounting costs equal $145,000 per year in overhead and operating expe q q q q q q q q q q
nses. Her implicit cost is the $75,000 salary that must be given up to start th
q q q q q q q q q q q q q q q
e new business. Her opportunity cost includes both implicit and explicit co
q q q q q q q q q q q
sts: $145,000 + $75,000 = $220,000. q q q q q
Page 4 Michael R. Baye & Jeffrey T. Prince
