Solution Manual for Managerial
Economics and Business Strategy 10th
Michael Baye, Jeff Prince
COMPLETEzSOLUTIONzMANUALzFOR
ManagerialzEconomicszandzBusinesszStrategyz10thzEditionzB
yzMichaelzBaye,zJeffzPrince
Chapterz1
The Fundamentals of Managerial Economics
Answers to Questions and Problems
1. Thiszsituationzbestzrepresentszproducer-
producerzrivalry.z Here,zSouthwestziszazproducerzattemptingztozstealzcustomersza
wayzfromzotherzproducerszinzthezformzofzlowerzprices.
2. Thezmaximumzyouzwouldzbezwillingztozpayzforzthiszassetziszthezpresentzvalu
e,zwhichzis
3.
a. NetzbenefitszarezN(Q)z=z20z+z24Qz–z4Q2.
b. NetzbenefitszwhenzQz=z1zarezN(1)z=z20z+z24z–
z4z=z40zandzwhenzQz=z5ztheyzarezN(5)z=z20z+z24(5)z–z4(5) z=z40.
2
c. MarginalznetzbenefitszarezMNB(Q)z=z24z–z8Q.
d. MarginalznetzbenefitszwhenzQz 1zarezMNB(1)z=z24z–z8(1)z=z16zandzwhenzQ 5
theyzarezMNB(5)z=z24z–z8(5)z=z-16.
e. SettingzMNB(Q)z=z24z–
z8Qz=z0zandzsolvingzforzQ,zwezseezthatznetzbenefitszarezmaximizedzwhenzQz=
z3.
Pagez1
, f. WhenznetzbenefitszarezmaximizedzatzQz=z3,zmarginalznetzbenefitszarezzero.zThatzi
s,zMNB(3)z=z24z–z8(3)z=z0.
4.
a. Thezvaluezofzthezfirmzbeforezitzpayszoutzcurrentzdividendszis
.
b. Thezvaluezofzthezfirmzimmediatelyzafterzpayingzthezdividendzis
ManagerialzEconomicszandzBusinesszStrategy,z10e
Copyrightz©z2022zbyzMcGraw-HillzEducation.
Allzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzEducation.
.
5. Thezpresentzvaluezofzthezperpetualzstreamzofzcashzflows.zThisziszgivenzby
6. Thezcompletedztablezlookszlikezthis:
Controlz TotalzBenef NetzBe Marginal
Total Marginal Marginalz
zNetzBen
Variable itszB(Q) zCost nefitszN zBenefit CostzMC(
efitzMNB
zQ zC(Q (Q) zMB(Q) 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
Pagez2 MichaelzR.zBayez&zJeffreyzT.zPrinc
e
, a. NetzbenefitszarezmaximizedzatzQz=z107.
b. Marginalzcostziszslightlyzsmallerzthanzmarginalzbenefitz(MCz=z130zandzMBz=z140
).zThisziszdueztozthezdiscreteznaturezofzthezcontrolzvariable.
7.
a. Theznetzpresentzvaluezofzattendingzschoolziszthezpresentzvaluezofzthezbenefitszder
ivedzfromzattendingzschoolz(includingzthezstreamzofzhigherzearningszandzthezval
ueztozyouzofzthezworkzenvironmentzandzprestigezthatzyourzeducationzprovides),z
minuszthezopportunityzcostzofzattendingzschool.zAsznotedzinztheztext,zthezopportu
nityzcostzofzattendingzschoolziszgenerallyzgreaterzthanzthezcostzofzbookszandztuiti
on.zItziszrationalzforzanzindividualztozenrollzinzgraduatezschoolzwhenzhiszorzherzne
tzpresentzvalueziszgreaterzthanzzero.
b. SincezthiszdecreaseszthezopportunityzcostzofzgettingzanzM.B.A.,zonezwouldzexpe
ctzmorezstudentsztozapplyzforzadmissionzintozM.B.A.zPrograms.
8.
a. Herzaccountingzprofitszarez$170,000.zThesezarezcomputedzaszthezdifferenc
ezbetweenzrevenuesz($200,000)zandzexplicitzcostsz($30,000).
b. Byzworkingzaszazpainter,zJaynetzgiveszupzthez$110,000zshezcouldzhavezearnedzu
nderzherznextzbestzalternative.zThiszimplicitzcostzofz$110,000ziszinzadditionztozthe
$30,000zinzexplicitzcosts.zSincezherzeconomiczcostszarez$140,000,zherzeconomicz
profitszarez$200,000z-z$140,000z=z$60,000.
9.
a. TotalzbenefitzwhenzQz=z2ziszB(2)z=z20(2)z–
z2*2 z=z32.zWhenzQz=z10,zB(10)z=z20(10)z–z2*10 z=z0.
2 2
b. MarginalzbenefitzwhenzQz=z2ziszMB(2)z=z20z–
z4(2)z=z12.zWhenzQz=z10,zitziszMB(10)z=z20z–z4(10)z=z-20.
c. ThezlevelzofzQzthatzmaximizesztotalzbenefitszsatisfieszMB(Q)z=z20z–z4Qz=z0,zsozQ
=z5.
d. TotalzcostzwhenzQz=z2ziszC(2)z=z4z+z2*22z=z12.z WhenzQz=z10zC(Q)z=z4z+z2*102
z=z204.
e. MarginalzcostzwhenzQz=z2ziszMC(Q)z=z4(2)z=z8.zWhenzQz=z10zMC(Q)z=z4(10)
z=z40.
f. ThezlevelzofzQzthatzminimizesztotalzcostziszMC(Q)z=z4Qz=z0,zorzQz=z0.
g. NetzbenefitszarezmaximizedzwhenzMNB(Q)z=zMB(Q)z-zMC(Q)z=z0,zorz20z–
z4Qz–
z4Qz=z0.z SomezalgebrazleadsztozQz=z20/8z=z2.5zaszthezlevelzofzoutputzthatzmaxi
mizesznetzbenefits.
10.
a. Thezpresentzvaluezofzthezstreamzofzaccountingzprofitszis
b. Thezpresentzvaluezofzthezstreamzofzeconomiczprofitszis
ManagerialzEconomicszandzBusinesszStrategy,z10e Pagez3
, 11. First,zrecallzthezequationzforzthezvaluezofzazfirm:z
.z Next,zsolvezthiszequationzforzgztozobtainz
.z Substitutingzinzthezknownzvalueszimpliesza
growthzratezof: zpercent.zThiszwouldzseem
tozbezazreasonablezratezofzgrowth:z0.0355z<z0.09z(gz<zi).
12. Effectively,zthiszquestionzboilszdownztozthezquestionzofzwhetherzitziszazgoodzinvest
mentztozspendzanzextraz$250zonzazrefrigeratorzthatzwillzsavezyouz$40zatzthezendzofz
eachzyearzforzfivezyears.zTheznetzpresentzvaluezofzthiszinvestmentzis
.
Youzshouldzbuyzthezstandardzmodel,zsincezdoingzsozsaveszyouz$81.51zinzpresentzvalu
ezterms.
13. Underzazflatzhourlyzwage,zemployeeszhavezlittlezincentiveztozworkzhardzaszworkingzh
ardzwillznotzdirectlyzbenefitzthem.zThiszadverselyzaffectszthezfirm,zsincezitszprofitszwi
llzbezlowerzthanzthez$25,000zperzstorezthatziszobtainablezeachzdayzwhenzemployeeszp
erformzatztheirzpeak.zUnderzthezproposedzpayzstructure,zemployeeszhavezazstrongzinc
entiveztozincreasezeffort,zandzthiszwillzbenefitzthezfirm.zInzparticular,zunderzthez fixedz
hourlyzwage,zanzemployeezreceivesz$160zperzdayzwhetherzhezorzshezworkszhardzorzn
ot.zUnderztheznewzpayzstructure,zanzemployeezreceivesz$330zperzdayzifzthezstorezachi
eveszitszmaximumzpossiblezdailyzprofitzandzonlyz$80zifzthezstore’szdailyzprofitziszzer
o.zThiszprovideszemployeeszanzincentiveztozworkzhardzandztozexertzpeerzpressurezonze
mployeeszwhozmightzotherwisezgoofzoff.zByzprovidingzemployeeszanzincentiveztozea
rnzextrazmoneyzbyzworkingzhard,zbothzthezfirmzandzthezemployeeszwillzbenefit.
14.
a. Accountingzcostszequalz$145,000zperzyearzinzoverheadzandzoperatingzex
penses.zHerzimplicitzcostziszthez$75,000zsalaryzthatzmustzbezgivenzupztoz
startztheznewzbusiness.zHerzopportunityzcostzincludeszbothzimplicitzandz
explicitzcosts:z$145,000z+z$75,000z=z$220,000.
Pagez4 MichaelzR.zBayez&zJeffreyzT.zPrinc
e
Economics and Business Strategy 10th
Michael Baye, Jeff Prince
COMPLETEzSOLUTIONzMANUALzFOR
ManagerialzEconomicszandzBusinesszStrategyz10thzEditionzB
yzMichaelzBaye,zJeffzPrince
Chapterz1
The Fundamentals of Managerial Economics
Answers to Questions and Problems
1. Thiszsituationzbestzrepresentszproducer-
producerzrivalry.z Here,zSouthwestziszazproducerzattemptingztozstealzcustomersza
wayzfromzotherzproducerszinzthezformzofzlowerzprices.
2. Thezmaximumzyouzwouldzbezwillingztozpayzforzthiszassetziszthezpresentzvalu
e,zwhichzis
3.
a. NetzbenefitszarezN(Q)z=z20z+z24Qz–z4Q2.
b. NetzbenefitszwhenzQz=z1zarezN(1)z=z20z+z24z–
z4z=z40zandzwhenzQz=z5ztheyzarezN(5)z=z20z+z24(5)z–z4(5) z=z40.
2
c. MarginalznetzbenefitszarezMNB(Q)z=z24z–z8Q.
d. MarginalznetzbenefitszwhenzQz 1zarezMNB(1)z=z24z–z8(1)z=z16zandzwhenzQ 5
theyzarezMNB(5)z=z24z–z8(5)z=z-16.
e. SettingzMNB(Q)z=z24z–
z8Qz=z0zandzsolvingzforzQ,zwezseezthatznetzbenefitszarezmaximizedzwhenzQz=
z3.
Pagez1
, f. WhenznetzbenefitszarezmaximizedzatzQz=z3,zmarginalznetzbenefitszarezzero.zThatzi
s,zMNB(3)z=z24z–z8(3)z=z0.
4.
a. Thezvaluezofzthezfirmzbeforezitzpayszoutzcurrentzdividendszis
.
b. Thezvaluezofzthezfirmzimmediatelyzafterzpayingzthezdividendzis
ManagerialzEconomicszandzBusinesszStrategy,z10e
Copyrightz©z2022zbyzMcGraw-HillzEducation.
Allzrightszreserved.zNozreproductionzorzdistributionzwithoutzthezpriorzwrittenzconsentzofzMcGrawzHillzEducation.
.
5. Thezpresentzvaluezofzthezperpetualzstreamzofzcashzflows.zThisziszgivenzby
6. Thezcompletedztablezlookszlikezthis:
Controlz TotalzBenef NetzBe Marginal
Total Marginal Marginalz
zNetzBen
Variable itszB(Q) zCost nefitszN zBenefit CostzMC(
efitzMNB
zQ zC(Q (Q) zMB(Q) 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
Pagez2 MichaelzR.zBayez&zJeffreyzT.zPrinc
e
, a. NetzbenefitszarezmaximizedzatzQz=z107.
b. Marginalzcostziszslightlyzsmallerzthanzmarginalzbenefitz(MCz=z130zandzMBz=z140
).zThisziszdueztozthezdiscreteznaturezofzthezcontrolzvariable.
7.
a. Theznetzpresentzvaluezofzattendingzschoolziszthezpresentzvaluezofzthezbenefitszder
ivedzfromzattendingzschoolz(includingzthezstreamzofzhigherzearningszandzthezval
ueztozyouzofzthezworkzenvironmentzandzprestigezthatzyourzeducationzprovides),z
minuszthezopportunityzcostzofzattendingzschool.zAsznotedzinztheztext,zthezopportu
nityzcostzofzattendingzschoolziszgenerallyzgreaterzthanzthezcostzofzbookszandztuiti
on.zItziszrationalzforzanzindividualztozenrollzinzgraduatezschoolzwhenzhiszorzherzne
tzpresentzvalueziszgreaterzthanzzero.
b. SincezthiszdecreaseszthezopportunityzcostzofzgettingzanzM.B.A.,zonezwouldzexpe
ctzmorezstudentsztozapplyzforzadmissionzintozM.B.A.zPrograms.
8.
a. Herzaccountingzprofitszarez$170,000.zThesezarezcomputedzaszthezdifferenc
ezbetweenzrevenuesz($200,000)zandzexplicitzcostsz($30,000).
b. Byzworkingzaszazpainter,zJaynetzgiveszupzthez$110,000zshezcouldzhavezearnedzu
nderzherznextzbestzalternative.zThiszimplicitzcostzofz$110,000ziszinzadditionztozthe
$30,000zinzexplicitzcosts.zSincezherzeconomiczcostszarez$140,000,zherzeconomicz
profitszarez$200,000z-z$140,000z=z$60,000.
9.
a. TotalzbenefitzwhenzQz=z2ziszB(2)z=z20(2)z–
z2*2 z=z32.zWhenzQz=z10,zB(10)z=z20(10)z–z2*10 z=z0.
2 2
b. MarginalzbenefitzwhenzQz=z2ziszMB(2)z=z20z–
z4(2)z=z12.zWhenzQz=z10,zitziszMB(10)z=z20z–z4(10)z=z-20.
c. ThezlevelzofzQzthatzmaximizesztotalzbenefitszsatisfieszMB(Q)z=z20z–z4Qz=z0,zsozQ
=z5.
d. TotalzcostzwhenzQz=z2ziszC(2)z=z4z+z2*22z=z12.z WhenzQz=z10zC(Q)z=z4z+z2*102
z=z204.
e. MarginalzcostzwhenzQz=z2ziszMC(Q)z=z4(2)z=z8.zWhenzQz=z10zMC(Q)z=z4(10)
z=z40.
f. ThezlevelzofzQzthatzminimizesztotalzcostziszMC(Q)z=z4Qz=z0,zorzQz=z0.
g. NetzbenefitszarezmaximizedzwhenzMNB(Q)z=zMB(Q)z-zMC(Q)z=z0,zorz20z–
z4Qz–
z4Qz=z0.z SomezalgebrazleadsztozQz=z20/8z=z2.5zaszthezlevelzofzoutputzthatzmaxi
mizesznetzbenefits.
10.
a. Thezpresentzvaluezofzthezstreamzofzaccountingzprofitszis
b. Thezpresentzvaluezofzthezstreamzofzeconomiczprofitszis
ManagerialzEconomicszandzBusinesszStrategy,z10e Pagez3
, 11. First,zrecallzthezequationzforzthezvaluezofzazfirm:z
.z Next,zsolvezthiszequationzforzgztozobtainz
.z Substitutingzinzthezknownzvalueszimpliesza
growthzratezof: zpercent.zThiszwouldzseem
tozbezazreasonablezratezofzgrowth:z0.0355z<z0.09z(gz<zi).
12. Effectively,zthiszquestionzboilszdownztozthezquestionzofzwhetherzitziszazgoodzinvest
mentztozspendzanzextraz$250zonzazrefrigeratorzthatzwillzsavezyouz$40zatzthezendzofz
eachzyearzforzfivezyears.zTheznetzpresentzvaluezofzthiszinvestmentzis
.
Youzshouldzbuyzthezstandardzmodel,zsincezdoingzsozsaveszyouz$81.51zinzpresentzvalu
ezterms.
13. Underzazflatzhourlyzwage,zemployeeszhavezlittlezincentiveztozworkzhardzaszworkingzh
ardzwillznotzdirectlyzbenefitzthem.zThiszadverselyzaffectszthezfirm,zsincezitszprofitszwi
llzbezlowerzthanzthez$25,000zperzstorezthatziszobtainablezeachzdayzwhenzemployeeszp
erformzatztheirzpeak.zUnderzthezproposedzpayzstructure,zemployeeszhavezazstrongzinc
entiveztozincreasezeffort,zandzthiszwillzbenefitzthezfirm.zInzparticular,zunderzthez fixedz
hourlyzwage,zanzemployeezreceivesz$160zperzdayzwhetherzhezorzshezworkszhardzorzn
ot.zUnderztheznewzpayzstructure,zanzemployeezreceivesz$330zperzdayzifzthezstorezachi
eveszitszmaximumzpossiblezdailyzprofitzandzonlyz$80zifzthezstore’szdailyzprofitziszzer
o.zThiszprovideszemployeeszanzincentiveztozworkzhardzandztozexertzpeerzpressurezonze
mployeeszwhozmightzotherwisezgoofzoff.zByzprovidingzemployeeszanzincentiveztozea
rnzextrazmoneyzbyzworkingzhard,zbothzthezfirmzandzthezemployeeszwillzbenefit.
14.
a. Accountingzcostszequalz$145,000zperzyearzinzoverheadzandzoperatingzex
penses.zHerzimplicitzcostziszthez$75,000zsalaryzthatzmustzbezgivenzupztoz
startztheznewzbusiness.zHerzopportunityzcostzincludeszbothzimplicitzandz
explicitzcosts:z$145,000z+z$75,000z=z$220,000.
Pagez4 MichaelzR.zBayez&zJeffreyzT.zPrinc
e
