Solutions for Managerial Economics 9th Edition by William F. Samuelson
Answers to
Back-of-Chapter
Problems (Complete Chapters)
Chapter 1
1. Managerial economics is the analysis of important management decisions using the
tools of economics. Most business decisions are motivated by the goal of maximizing
the firm’s profit. The tools of managerial economics provide a guide to profit-
maximizing decisions.
2. i) Multinational Production and Pricing. The global automobile company needs
information on 1) demand (how many vehicles can be sold in each market at different
prices), 2) plant capacities and production costs, and 3) trade barriers and tariffs.
ii) Market Entry. Remember that Uber began as a ridesharing idea, before ultimately
becoming a market disruptor with respect to the long established taxicab industry.
Crucial necessary information and questions include: Would city regulators allow Uber
to operate at all? What market niche (how much demand) could it carve out of the taxi
and car service markets? At what prices relative to taxis? Would customers trust a
rideshare service? How many drivers could rideshare firms attract and at what costs?
iii) Building a New Bridge. The authority should estimate usage of the bridge over its
useful life, the likely cost of building and maintaining the bridge, and other important
side-effects, pro and con -- including positive effects on business activity and the
impacts on air pollution and traffic congestion.
iv) A Regulatory Problem. Before deciding whether to promote the oil-to-coal
conversion, government regulators need information on how much oil would be saved
(and the dollar value of savings) and the cost of the chain of side-effects -- not only the
direct cost of electricity provision but also pollution costs and environmental damage.
v) Boeing and the 737 Max. Boeing gathered extensive information on potential airline
demand for a new more fuel-efficient aircraft, yet considerable uncertainty remained
with respect to future orders. Would the new aircraft shift significant orders and sales
from Airbus, Boeing’s longtime rival? Could Boeing achieve its aggressive R&D and
, production plan on budget and on schedule? Could it address and solve myriad
reliability and safety problems, big and small? How severe would be ongoing regulatory
oversight and how high a bar would the FAA set for certification requirements? Five or
ten years from now, would the world economy continue to grow, fueling strong demand
for air travel and for the new and improved aircraft?
vi) An R&D Decision. The pharmaceutical company should quiz its scientists on the
chances of success (and the timetable for completion) for each R&D approach. The
company's marketing department would supply estimates of possible revenues from the
drug; its production department would estimate possible costs.
vii) David Letterman. Dave must carefully assess what he wants from a new contract (in
particular how much he values the earlier time slot). As the negotiations unfold, Dave
will glean valuable information as to the current competing offers of CBS and NBC. Of
course, Dave must also try to assess how far the two networks might be willing to go in
sweetening their offers.
3. The six steps might lead the soft-drink firm to consider the following questions. Step 1:
What is the context? Is this the firm’s first such soft drink? Will it be first to the
marketplace, or is it imitating a competitor? Step 2: What is the profit potential for such
a drink? Would the drink achieve other objectives? Is the fruit drink complementary to
the firm’s other products? Would it enhance the firm’s image? Step 3: Which of six
versions of the drink should the firm introduce? When (now or later) and where
(regionally, nationally, or internationally) should it introduce the drink? What is an
appropriate advertising and promotion policy? Step 4: What are the firm’s profit
forecasts for the drink in its first, second, and third years? What are the chances that the
drink will be a failure after 15 months? Should the firm test market the drink before
launching it? Step 5: Based on the answers to the questions in Steps 1 through 4, what is
the firm’s most profitable course of action? Step 6: In light of expected (or unexpected)
developments in the first year of the launch, how should the firm modify its course of
action?
, Solutions for Managerial Economics 9th Edition by William F. Samuelson
4. Decision vignettes
a. A couple who buy the first house they view have probably sampled too few houses.
Housing markets are notoriously imperfect. Houses come in various shapes, sizes,
conditions, neighborhoods, and prices. Personal preferences for houses also vary
enormously. The couple is likely to get a "better" house for themselves if they view a
dozen, two dozen, or more houses over the course of time before buying their "most-
preferred" house from the lot. Circumstances justifying the first-house purchase include:
(1) the house is so good that viewing others is a waste of time, (2) the house is so good
and the commitment must be made now or another buyer will claim the house, (3) the
couple must buy now (a job transfer has brought them to the area and schools open
tomorrow), (4) they already have full information about the types of other houses
available (the wife's best friend is a real estate agent).
b. The company seems to be launching the product to avoid “wasting” the $6 million
already spent in development. This "sunk" cost is irrelevant and should be ignored.
What does matter for the reinvestment decision are the future revenues and costs of
continuing. (Reinvest if the net present value of future profits is positive.) Some "close-
to-home" examples of the sunk cost fallacy: i) A fellow pays $250 for a year-long tennis
membership but develops severe tennis elbow after two months. He continues to play in
great pain in order to get his money's worth. ii) Ms. K has a subscription to a series of
six plays for $150. She braves a snow storm so as not to waste the $25 cost. On
reflection, she admits that she wouldn't have gone had she been given the ticket for free.
c. It's in the individual motorist's best interest to drive on. (Stopping is risky and
inconvenient). But it's in the collective interest of all the delayed motorists to have
someone stop and move the mattress. Here's an example of the potential conflict
between private and public interests (between private profit and social welfare). In such
circumstances, there is a potential role for government intervention.
d. Allowing the use of thalidomide had a disastrous outcome and more importantly was a
bad decision (besides its potential risk, the drug was of questionable benefit in aiding
sleep). The thalidomide disaster prompted a much tougher stance toward prior drug
testing in the U.S. and elsewhere.
, e. The frantic couple should choose separate lines to take advantage of whichever line is
quicker. Whoever gets served first should check the baggage. The lesson here:
DIVERSIFY.
f. To the extent that his actions and behavior were responsible for his marriage breakup,
the CEO’s mistake was to lose sight of the most important objective.
g. The cost per life saved is $400,000/20 = $20,000 for the ambulance service. It is
$1,200,000/40 = $30,000 for the highway program. Based on these average measures,
its seems strange that the ambulance budget is being cut and the highway budget
expanded. However, the real issue is the impact on lives saved from budget changes at
the margin. Perhaps, the ambulance budget has a lot of administrative "fat" in it. It
could be cut by 40% with very little impact on lives. By the same token, a modest
budget increase for highways might have a large impact on additional lives saved. In
short, the average cost per life may not tell the real story.
h. FEMA’s prediction of the potential hurricane risk to New Orleans was timely and
prescient. However, the warning was not emphasized by the agency and certainly not
heeded by federal, state, or local policy makers. The decision error was a combination of
inattention, wishful thinking, and denial.
i. Compared to these extreme outcomes (abject surrender to terrorism or being a global
policeman) any option looks good. This is hardly an even-handed portrayal. The real
question is whether implementing increased security measures that sacrifice civil
liberties is better than numerous other relevant alternatives.
j. According to the counts of pros and cons, the individual prefers: Home over Beach,
Beach over Mountains, but Mountains over Home. We have a cycle (i.e. intransitive
preferences). The individual is left going around in circles. The obvious way out of this
dilemma is to "score" each alternative by weighting the individual attributes. The more
important the attribute, then the greater is the weight. In addition, the individual could
use a broader scale (1 to 10) for each attribute as a way of measuring relative strength of
preferences between alternatives. (For a related example, see Problem 4.2 in Chapter 4.)
Answers to
Back-of-Chapter
Problems (Complete Chapters)
Chapter 1
1. Managerial economics is the analysis of important management decisions using the
tools of economics. Most business decisions are motivated by the goal of maximizing
the firm’s profit. The tools of managerial economics provide a guide to profit-
maximizing decisions.
2. i) Multinational Production and Pricing. The global automobile company needs
information on 1) demand (how many vehicles can be sold in each market at different
prices), 2) plant capacities and production costs, and 3) trade barriers and tariffs.
ii) Market Entry. Remember that Uber began as a ridesharing idea, before ultimately
becoming a market disruptor with respect to the long established taxicab industry.
Crucial necessary information and questions include: Would city regulators allow Uber
to operate at all? What market niche (how much demand) could it carve out of the taxi
and car service markets? At what prices relative to taxis? Would customers trust a
rideshare service? How many drivers could rideshare firms attract and at what costs?
iii) Building a New Bridge. The authority should estimate usage of the bridge over its
useful life, the likely cost of building and maintaining the bridge, and other important
side-effects, pro and con -- including positive effects on business activity and the
impacts on air pollution and traffic congestion.
iv) A Regulatory Problem. Before deciding whether to promote the oil-to-coal
conversion, government regulators need information on how much oil would be saved
(and the dollar value of savings) and the cost of the chain of side-effects -- not only the
direct cost of electricity provision but also pollution costs and environmental damage.
v) Boeing and the 737 Max. Boeing gathered extensive information on potential airline
demand for a new more fuel-efficient aircraft, yet considerable uncertainty remained
with respect to future orders. Would the new aircraft shift significant orders and sales
from Airbus, Boeing’s longtime rival? Could Boeing achieve its aggressive R&D and
, production plan on budget and on schedule? Could it address and solve myriad
reliability and safety problems, big and small? How severe would be ongoing regulatory
oversight and how high a bar would the FAA set for certification requirements? Five or
ten years from now, would the world economy continue to grow, fueling strong demand
for air travel and for the new and improved aircraft?
vi) An R&D Decision. The pharmaceutical company should quiz its scientists on the
chances of success (and the timetable for completion) for each R&D approach. The
company's marketing department would supply estimates of possible revenues from the
drug; its production department would estimate possible costs.
vii) David Letterman. Dave must carefully assess what he wants from a new contract (in
particular how much he values the earlier time slot). As the negotiations unfold, Dave
will glean valuable information as to the current competing offers of CBS and NBC. Of
course, Dave must also try to assess how far the two networks might be willing to go in
sweetening their offers.
3. The six steps might lead the soft-drink firm to consider the following questions. Step 1:
What is the context? Is this the firm’s first such soft drink? Will it be first to the
marketplace, or is it imitating a competitor? Step 2: What is the profit potential for such
a drink? Would the drink achieve other objectives? Is the fruit drink complementary to
the firm’s other products? Would it enhance the firm’s image? Step 3: Which of six
versions of the drink should the firm introduce? When (now or later) and where
(regionally, nationally, or internationally) should it introduce the drink? What is an
appropriate advertising and promotion policy? Step 4: What are the firm’s profit
forecasts for the drink in its first, second, and third years? What are the chances that the
drink will be a failure after 15 months? Should the firm test market the drink before
launching it? Step 5: Based on the answers to the questions in Steps 1 through 4, what is
the firm’s most profitable course of action? Step 6: In light of expected (or unexpected)
developments in the first year of the launch, how should the firm modify its course of
action?
, Solutions for Managerial Economics 9th Edition by William F. Samuelson
4. Decision vignettes
a. A couple who buy the first house they view have probably sampled too few houses.
Housing markets are notoriously imperfect. Houses come in various shapes, sizes,
conditions, neighborhoods, and prices. Personal preferences for houses also vary
enormously. The couple is likely to get a "better" house for themselves if they view a
dozen, two dozen, or more houses over the course of time before buying their "most-
preferred" house from the lot. Circumstances justifying the first-house purchase include:
(1) the house is so good that viewing others is a waste of time, (2) the house is so good
and the commitment must be made now or another buyer will claim the house, (3) the
couple must buy now (a job transfer has brought them to the area and schools open
tomorrow), (4) they already have full information about the types of other houses
available (the wife's best friend is a real estate agent).
b. The company seems to be launching the product to avoid “wasting” the $6 million
already spent in development. This "sunk" cost is irrelevant and should be ignored.
What does matter for the reinvestment decision are the future revenues and costs of
continuing. (Reinvest if the net present value of future profits is positive.) Some "close-
to-home" examples of the sunk cost fallacy: i) A fellow pays $250 for a year-long tennis
membership but develops severe tennis elbow after two months. He continues to play in
great pain in order to get his money's worth. ii) Ms. K has a subscription to a series of
six plays for $150. She braves a snow storm so as not to waste the $25 cost. On
reflection, she admits that she wouldn't have gone had she been given the ticket for free.
c. It's in the individual motorist's best interest to drive on. (Stopping is risky and
inconvenient). But it's in the collective interest of all the delayed motorists to have
someone stop and move the mattress. Here's an example of the potential conflict
between private and public interests (between private profit and social welfare). In such
circumstances, there is a potential role for government intervention.
d. Allowing the use of thalidomide had a disastrous outcome and more importantly was a
bad decision (besides its potential risk, the drug was of questionable benefit in aiding
sleep). The thalidomide disaster prompted a much tougher stance toward prior drug
testing in the U.S. and elsewhere.
, e. The frantic couple should choose separate lines to take advantage of whichever line is
quicker. Whoever gets served first should check the baggage. The lesson here:
DIVERSIFY.
f. To the extent that his actions and behavior were responsible for his marriage breakup,
the CEO’s mistake was to lose sight of the most important objective.
g. The cost per life saved is $400,000/20 = $20,000 for the ambulance service. It is
$1,200,000/40 = $30,000 for the highway program. Based on these average measures,
its seems strange that the ambulance budget is being cut and the highway budget
expanded. However, the real issue is the impact on lives saved from budget changes at
the margin. Perhaps, the ambulance budget has a lot of administrative "fat" in it. It
could be cut by 40% with very little impact on lives. By the same token, a modest
budget increase for highways might have a large impact on additional lives saved. In
short, the average cost per life may not tell the real story.
h. FEMA’s prediction of the potential hurricane risk to New Orleans was timely and
prescient. However, the warning was not emphasized by the agency and certainly not
heeded by federal, state, or local policy makers. The decision error was a combination of
inattention, wishful thinking, and denial.
i. Compared to these extreme outcomes (abject surrender to terrorism or being a global
policeman) any option looks good. This is hardly an even-handed portrayal. The real
question is whether implementing increased security measures that sacrifice civil
liberties is better than numerous other relevant alternatives.
j. According to the counts of pros and cons, the individual prefers: Home over Beach,
Beach over Mountains, but Mountains over Home. We have a cycle (i.e. intransitive
preferences). The individual is left going around in circles. The obvious way out of this
dilemma is to "score" each alternative by weighting the individual attributes. The more
important the attribute, then the greater is the weight. In addition, the individual could
use a broader scale (1 to 10) for each attribute as a way of measuring relative strength of
preferences between alternatives. (For a related example, see Problem 4.2 in Chapter 4.)
