Solution Manual for Managerial Econo
5 5 5 5
mics and Business Strategy 10th Michae
5 5 5 5 5
l Baye, Jeff Prince 5 5 5
COMPLETE SOLUTION MANUAL FOR5 5 5
Managerial Economics and Business Strategy 10th Edition By
5 5 5 5 5 5 5
5 Michael Baye, Jeff Prince
5 5 5
Chapter 1 5
The Fundamentals of Managerial Economics Ans
5 5 5 5 5
wers to Questions and Problems
5 5 5 5
1. This5situation5best5represents5producer-
producer5rivalry.5 Here,5Southwest5is5a5producer5attempting5to5steal5customers5aw
ay5from5other5producers5in5the5form5of5lower5prices.
2. The5maximum5you5would5be5willing5to5pay5for5this5asset5is5the5present5value,5
which5is
3.
a. Net5benefits5are5N(Q)5=5205+524Q5–54Q2.
b. Net5benefits5when5Q5=515are5N(1)5=5205+5245–
545=5405and5when5Q5=555they5are5N(5)5=5205+524(5)5–54(5) 5=540.
2
c. Marginal5net5benefits5are5MNB(Q)5=5245–58Q.
d. Marginal5net5benefits5when5Q5 15are5MNB(1)5=5245–58(1)5=5165and5when5Q 5
they5are5MNB(5)5=5245–58(5)5=5-16.
e. Setting5MNB(Q)5=5245–
58Q5=505and5solving5for5Q,5we5see5that5net5benefits5are5maximized5when5Q5=53.
Page51
, f. When5net5benefits5are5maximized5at5Q5=53,5marginal5net5benefits5are5zero.5That5is,5
MNB(3)5=5245–58(3)5=50.
4.
a. The5value5of5the5firm5before5it5pays5out5current5dividends5is
.
b. The5value5of5the5firm5immediately5after5paying5the5dividend5is
Managerial5Economics5and5Business5Strategy,510e
Copyright5©520225by5McGraw-Hill5Education.
All5rights5reserved.5No5reproduction5or5distribution5without5the5prior5written5consent5of5McGraw5Hill5Education.
.
5. The5present5value5of5the5perpetual5stream5of5cash5flows.5This5is5given5by
6. The5completed5table5looks5like5this:
Control5 Total5Benefi Net5Be Marginal
Total Marginal Marginal5C
5Net5Bene
Variable ts5B(Q) 5Cost nefits5N 5Benefit5 ost5MC(Q)
fit5MNB(
5Q 5C(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
Page52 Michael5R.5Baye5&5Jeffrey5T.5Prince
, a. Net5benefits5are5maximized5at5Q5=5107.
b. Marginal5cost5is5slightly5smaller5than5marginal5benefit5(MC5=51305and5MB5=5140).5
This5is5due5to5the5discrete5nature5of5the5control5variable.
7.
a. The5net5present5value5of5attending5school5is5the5present5value5of5the5benefits5derive
d5from5attending5school5(including5the5stream5of5higher5earnings5and5the5value5to5y
ou5of5the5work5environment5and5prestige5that5your5education5provides),5minus5the5
opportunity5cost5of5attending5school.5As5noted5in5the5text,5the5opportunity5cost5of5a
ttending5school5is5generally5greater5than5the5cost5of5books5and5tuition.5It5is5rational5
for5an5individual5to5enroll5in5graduate5school5when5his5or5her5net5present5value5is5gr
eater5than5zero.
b. Since5this5decreases5the5opportunity5cost5of5getting5an5M.B.A.,5one5would5expect5
more5students5to5apply5for5admission5into5M.B.A.5Programs.
8.
a. Her5accounting5profits5are5$170,000.5These5are5computed5as5the5difference5
between5revenues5($200,000)5and5explicit5costs5($30,000).
b. By5working5as5a5painter,5Jaynet5gives5up5the5$110,0005she5could5have5earned5unde
r5her5next5best5alternative.5This5implicit5cost5of5$110,0005is5in5addition5to5the
$30,0005in5explicit5costs.5Since5her5economic5costs5are5$140,000,5her5economic5pro
fits5are5$200,0005-5$140,0005=5$60,000.
9.
a. Total5benefit5when5Q5=525is5B(2)5=520(2)5–
52*2 5=532.5When5Q5=510,5B(10)5=520(10)5–52*10 5=50.
2 2
b. Marginal5benefit5when5Q5=525is5MB(2)5=5205–
54(2)5=512.5When5Q5=510,5it5is5MB(10)5=5205–54(10)5=5-20.
c. The5level5of5Q5that5maximizes5total5benefits5satisfies5MB(Q)5=5205–54Q5=50,5so5Q
=55.
d. Total5cost5when5Q5=525is5C(2)5=545+52*225=512.5 When5Q5=5105C(Q)5=545+52*1025=520
4.
e. Marginal5cost5when5Q5=525is5MC(Q)5=54(2)5=58.5When5Q5=5105MC(Q)5=54(10)5=54
0.
f. The5level5of5Q5that5minimizes5total5cost5is5MC(Q)5=54Q5=50,5or5Q5=50.
g. Net5benefits5are5maximized5when5MNB(Q)5=5MB(Q)5-5MC(Q)5=50,5or5205–54Q5–
54Q5=50.5 Some5algebra5leads5to5Q5=520/85=52.55as5the5level5of5output5that5maximiz
es5net5benefits.
10.
a. The5present5value5of5the5stream5of5accounting5profits5is
b. The5present5value5of5the5stream5of5economic5profits5is
Managerial5Economics5and5Business5Strategy,510e Page53
, 11. First,5recall5the5equation5for5the5value5of5a5firm:5
.5 Next,5solve5this5equation5for5g5to5obtain5
.5 Substituting5in5the5known5values5implies5a
growth5rate5of: percent.5This5would5seem
5
to5be5a5reasonable5rate5of5growth:50.03555<50.095(g5<5i).
12. Effectively,5this5question5boils5down5to5the5question5of5whether5it5is5a5good5investme
nt5to5spend5an5extra5$2505on5a5refrigerator5that5will5save5you5$405at5the5end5of5each5ye
ar5for5five5years.5The5net5present5value5of5this5investment5is
.
You5should5buy5the5standard5model,5since5doing5so5saves5you5$81.515in5present5value5t
erms.
13. Under5a5flat5hourly5wage,5employees5have5little5incentive5to5work5hard5as5working5hard
5will5not5directly5benefit5them.5This5adversely5affects5the5firm,5since5its5profits5will5be5l
ower5than5the5$25,0005per5store5that5is5obtainable5each5day5when5employees5perform5at
5their5peak.5Under5the5proposed5pay5structure,5employees5have5a5strong5incentive5to5inc
rease5effort,5and5this5will5benefit5the5firm.5In5particular,5under5the5 fixed5hourly5wage,5a
n5employee5receives5$1605per5day5whether5he5or5she5works5hard5or5not.5Under5the5new5
pay5structure,5an5employee5receives5$3305per5day5if5the5store5achieves5its5maximum5po
ssible5daily5profit5and5only5$805if5the5store’s5daily5profit5is5zero.5This5provides5employe
es5an5incentive5to5work5hard5and5to5exert5peer5pressure5on5employees5who5might5otherw
ise5goof5off.5By5providing5employees5an5incentive5to5earn5extra5money5by5working5har
d,5both5the5firm5and5the5employees5will5benefit.
14.
a. Accounting5costs5equal5$145,0005per5year5in5overhead5and5operating5expe
nses.5Her5implicit5cost5is5the5$75,0005salary5that5must5be5given5up5to5start5t
he5new5business.5Her5opportunity5cost5includes5both5implicit5and5explicit5
costs:5$145,0005+5$75,0005=5$220,000.
Page54 Michael5R.5Baye5&5Jeffrey5T.5Prince
5 5 5 5
mics and Business Strategy 10th Michae
5 5 5 5 5
l Baye, Jeff Prince 5 5 5
COMPLETE SOLUTION MANUAL FOR5 5 5
Managerial Economics and Business Strategy 10th Edition By
5 5 5 5 5 5 5
5 Michael Baye, Jeff Prince
5 5 5
Chapter 1 5
The Fundamentals of Managerial Economics Ans
5 5 5 5 5
wers to Questions and Problems
5 5 5 5
1. This5situation5best5represents5producer-
producer5rivalry.5 Here,5Southwest5is5a5producer5attempting5to5steal5customers5aw
ay5from5other5producers5in5the5form5of5lower5prices.
2. The5maximum5you5would5be5willing5to5pay5for5this5asset5is5the5present5value,5
which5is
3.
a. Net5benefits5are5N(Q)5=5205+524Q5–54Q2.
b. Net5benefits5when5Q5=515are5N(1)5=5205+5245–
545=5405and5when5Q5=555they5are5N(5)5=5205+524(5)5–54(5) 5=540.
2
c. Marginal5net5benefits5are5MNB(Q)5=5245–58Q.
d. Marginal5net5benefits5when5Q5 15are5MNB(1)5=5245–58(1)5=5165and5when5Q 5
they5are5MNB(5)5=5245–58(5)5=5-16.
e. Setting5MNB(Q)5=5245–
58Q5=505and5solving5for5Q,5we5see5that5net5benefits5are5maximized5when5Q5=53.
Page51
, f. When5net5benefits5are5maximized5at5Q5=53,5marginal5net5benefits5are5zero.5That5is,5
MNB(3)5=5245–58(3)5=50.
4.
a. The5value5of5the5firm5before5it5pays5out5current5dividends5is
.
b. The5value5of5the5firm5immediately5after5paying5the5dividend5is
Managerial5Economics5and5Business5Strategy,510e
Copyright5©520225by5McGraw-Hill5Education.
All5rights5reserved.5No5reproduction5or5distribution5without5the5prior5written5consent5of5McGraw5Hill5Education.
.
5. The5present5value5of5the5perpetual5stream5of5cash5flows.5This5is5given5by
6. The5completed5table5looks5like5this:
Control5 Total5Benefi Net5Be Marginal
Total Marginal Marginal5C
5Net5Bene
Variable ts5B(Q) 5Cost nefits5N 5Benefit5 ost5MC(Q)
fit5MNB(
5Q 5C(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
Page52 Michael5R.5Baye5&5Jeffrey5T.5Prince
, a. Net5benefits5are5maximized5at5Q5=5107.
b. Marginal5cost5is5slightly5smaller5than5marginal5benefit5(MC5=51305and5MB5=5140).5
This5is5due5to5the5discrete5nature5of5the5control5variable.
7.
a. The5net5present5value5of5attending5school5is5the5present5value5of5the5benefits5derive
d5from5attending5school5(including5the5stream5of5higher5earnings5and5the5value5to5y
ou5of5the5work5environment5and5prestige5that5your5education5provides),5minus5the5
opportunity5cost5of5attending5school.5As5noted5in5the5text,5the5opportunity5cost5of5a
ttending5school5is5generally5greater5than5the5cost5of5books5and5tuition.5It5is5rational5
for5an5individual5to5enroll5in5graduate5school5when5his5or5her5net5present5value5is5gr
eater5than5zero.
b. Since5this5decreases5the5opportunity5cost5of5getting5an5M.B.A.,5one5would5expect5
more5students5to5apply5for5admission5into5M.B.A.5Programs.
8.
a. Her5accounting5profits5are5$170,000.5These5are5computed5as5the5difference5
between5revenues5($200,000)5and5explicit5costs5($30,000).
b. By5working5as5a5painter,5Jaynet5gives5up5the5$110,0005she5could5have5earned5unde
r5her5next5best5alternative.5This5implicit5cost5of5$110,0005is5in5addition5to5the
$30,0005in5explicit5costs.5Since5her5economic5costs5are5$140,000,5her5economic5pro
fits5are5$200,0005-5$140,0005=5$60,000.
9.
a. Total5benefit5when5Q5=525is5B(2)5=520(2)5–
52*2 5=532.5When5Q5=510,5B(10)5=520(10)5–52*10 5=50.
2 2
b. Marginal5benefit5when5Q5=525is5MB(2)5=5205–
54(2)5=512.5When5Q5=510,5it5is5MB(10)5=5205–54(10)5=5-20.
c. The5level5of5Q5that5maximizes5total5benefits5satisfies5MB(Q)5=5205–54Q5=50,5so5Q
=55.
d. Total5cost5when5Q5=525is5C(2)5=545+52*225=512.5 When5Q5=5105C(Q)5=545+52*1025=520
4.
e. Marginal5cost5when5Q5=525is5MC(Q)5=54(2)5=58.5When5Q5=5105MC(Q)5=54(10)5=54
0.
f. The5level5of5Q5that5minimizes5total5cost5is5MC(Q)5=54Q5=50,5or5Q5=50.
g. Net5benefits5are5maximized5when5MNB(Q)5=5MB(Q)5-5MC(Q)5=50,5or5205–54Q5–
54Q5=50.5 Some5algebra5leads5to5Q5=520/85=52.55as5the5level5of5output5that5maximiz
es5net5benefits.
10.
a. The5present5value5of5the5stream5of5accounting5profits5is
b. The5present5value5of5the5stream5of5economic5profits5is
Managerial5Economics5and5Business5Strategy,510e Page53
, 11. First,5recall5the5equation5for5the5value5of5a5firm:5
.5 Next,5solve5this5equation5for5g5to5obtain5
.5 Substituting5in5the5known5values5implies5a
growth5rate5of: percent.5This5would5seem
5
to5be5a5reasonable5rate5of5growth:50.03555<50.095(g5<5i).
12. Effectively,5this5question5boils5down5to5the5question5of5whether5it5is5a5good5investme
nt5to5spend5an5extra5$2505on5a5refrigerator5that5will5save5you5$405at5the5end5of5each5ye
ar5for5five5years.5The5net5present5value5of5this5investment5is
.
You5should5buy5the5standard5model,5since5doing5so5saves5you5$81.515in5present5value5t
erms.
13. Under5a5flat5hourly5wage,5employees5have5little5incentive5to5work5hard5as5working5hard
5will5not5directly5benefit5them.5This5adversely5affects5the5firm,5since5its5profits5will5be5l
ower5than5the5$25,0005per5store5that5is5obtainable5each5day5when5employees5perform5at
5their5peak.5Under5the5proposed5pay5structure,5employees5have5a5strong5incentive5to5inc
rease5effort,5and5this5will5benefit5the5firm.5In5particular,5under5the5 fixed5hourly5wage,5a
n5employee5receives5$1605per5day5whether5he5or5she5works5hard5or5not.5Under5the5new5
pay5structure,5an5employee5receives5$3305per5day5if5the5store5achieves5its5maximum5po
ssible5daily5profit5and5only5$805if5the5store’s5daily5profit5is5zero.5This5provides5employe
es5an5incentive5to5work5hard5and5to5exert5peer5pressure5on5employees5who5might5otherw
ise5goof5off.5By5providing5employees5an5incentive5to5earn5extra5money5by5working5har
d,5both5the5firm5and5the5employees5will5benefit.
14.
a. Accounting5costs5equal5$145,0005per5year5in5overhead5and5operating5expe
nses.5Her5implicit5cost5is5the5$75,0005salary5that5must5be5given5up5to5start5t
he5new5business.5Her5opportunity5cost5includes5both5implicit5and5explicit5
costs:5$145,0005+5$75,0005=5$220,000.
Page54 Michael5R.5Baye5&5Jeffrey5T.5Prince
