Solution Manual for Managerial
Economics and Business Strateg 10th
Michael Ba e, Jeff Prince
COMPLETE SOLUTION MANUAL FOR
Managerial Economics and Business Strateg 10th Edition B
Michael Ba e, Jeff Prince
Chapter 1
The Fundamentals of Managerial Economics
Answers to Questions and Problems
1. This situation best represents producer-producer rivalr . Here, Southwest is a
producer attempting to steal customers awa from other producers in the form of
lower prices.
2. The maximum ou would be willing to pa for this asset is the present value,
which is
3.
a. Net benefits are N(Q) = 20 + 24Q – 4Q2.
b. Net benefits when Q = 1 are N(1) = 20 + 24 – 4 = 40 and when Q = 5 the are
N(5) = 20 + 24(5) – 4(5)2 = 40.
c. Marginal net benefits are MNB(Q) = 24 – 8Q.
d. Marginal net benefits when Q 1 are MNB(1) = 24 – 8(1) = 16 and when Q 5
the are MNB(5) = 24 – 8(5) = -16.
e. Setting MNB(Q) = 24 – 8Q = 0 and solving for Q, we see that net benefits are
maximized when Q = 3.
Page 1
, f. When net benefits are maximized at Q = 3, marginal net benefits are zero. That is,
MNB(3) = 24 – 8(3) = 0.
4.
a. The value of the firm before it pa s out current dividends is
.
b. The value of the firm immediatel after pa ing the dividend is
Managerial Economics and Business Strateg , 10e
Cop right © 2022 b McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill Education.
.
5. The present value of the perpetual stream of cash flows. This is given b
6. The completed table looks like this:
Control Total Net Marginal
Total Marginal Marginal
Net
Variable Benefits Cost Benefits Benefit Cost
Benefit
Q B(Q) C(Q) N(Q) MB(Q) MC(Q)
MNB(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. Ba e & Jeffre T. Prince
, a. Net benefits are maximized at Q = 107.
b. Marginal cost is slightl smaller than marginal benefit (MC = 130 and MB = 140).
This is due to the discrete nature of the control variable.
7.
a. The net present value of attending school is the present value of the benefits
derived from attending school (including the stream of higher earnings and the
value to ou of the work environment and prestige that our education provides),
minus the opportunit cost of attending school. As noted in the text, the opportunit
cost of attending school is generall greater than the cost of books and tuition. It is
rational for an individual to enroll in graduate school when his or her net present
value is greater than zero.
b. Since this decreases the opportunit cost of getting an M.B.A., one would expect
more students to appl for admission into M.B.A. Programs.
8.
a. Her accounting profits are $170,000. These are computed as the difference
between revenues ($200,000) and explicit costs ($30,000).
b. B working as a painter, Ja net gives up the $110,000 she could have earned under
her next best alternative. This implicit cost of $110,000 is in addition to the
$30,000 in explicit costs. Since her economic costs are $140,000, her economic
profits are $200,000 - $140,000 = $60,000.
9.
a. Total benefit when Q = 2 is B(2) = 20(2) – 2*22 = 32. When Q = 10, B(10) =
20(10) – 2*102 = 0.
b. Marginal benefit when Q = 2 is MB(2) = 20 – 4(2) = 12. When Q = 10, it is
MB(10) = 20 – 4(10) = -20.
c. The level of Q that maximizes total benefits satisfies MB(Q) = 20 – 4Q = 0, so Q
= 5.
d. Total cost when Q = 2 is C(2) = 4 + 2*22 = 12. When Q = 10 C(Q) = 4 + 2*102 =
204.
e. Marginal cost when Q = 2 is MC(Q) = 4(2) = 8. When Q = 10 MC(Q) = 4(10) =
40.
f. The level of Q that minimizes total cost is MC(Q) = 4Q = 0, or Q = 0.
g. Net benefits are maximized when MNB(Q) = MB(Q) - MC(Q) = 0, or 20 – 4Q –
4Q = 0. Some algebra leads to Q = 20/8 = 2.5 as the level of output that
maximizes net benefits.
10.
a. The present value of the stream of accounting profits is
b. The present value of the stream of economic profits is
Managerial Economics and Business Strateg , 10e Page 3
, 11. First, recall the equation for the value of a firm: . Next, solve this
equation for g to obtain . Substituting in the known values implies a
growth rate of: percent. This would seem
to be a reasonable rate of growth: 0.0355 < 0.09 (g < i).
12. Effectivel , this question boils down to the question of whether it is a good
investment to spend an extra $250 on a refrigerator that will save ou $40 at the end
of each ear for five ears. The net present value of this investment is
.
ou should bu the standard model, since doing so saves ou $81.51 in present value
terms.
13. Under a flat hourl wage, emplo ees have little incentive to work hard as working hard
will not directl benefit them. This adversel affects the firm, since its profits will be
lower than the $25,000 per store that is obtainable each da when emplo ees perform at
their peak. Under the proposed pa structure, emplo ees have a strong incentive to
increase effort, and this will benefit the firm. In particular, under the fixed hourl
wage, an emplo ee receives $160 per da whether he or she works hard or not. Under
the new pa structure, an emplo ee receives $330 per da if the store achieves its
maximum possible dail profit and onl $80 if the store’s dail profit is zero. This
provides emplo ees an incentive to work hard and to exert peer pressure on emplo ees
who might otherwise goof off. B providing emplo ees an incentive to earn extra mone
b working hard, both the firm and the emplo ees will benefit.
14.
a. Accounting costs equal $145,000 per ear in overhead and operating
expenses. Her implicit cost is the $75,000 salar that must be given up to
start the new business. Her opportunit cost includes both implicit and
explicit costs: $145,000 + $75,000 = $220,000.
Page 4 Michael R. Ba e & Jeffre T. Prince
Economics and Business Strateg 10th
Michael Ba e, Jeff Prince
COMPLETE SOLUTION MANUAL FOR
Managerial Economics and Business Strateg 10th Edition B
Michael Ba e, Jeff Prince
Chapter 1
The Fundamentals of Managerial Economics
Answers to Questions and Problems
1. This situation best represents producer-producer rivalr . Here, Southwest is a
producer attempting to steal customers awa from other producers in the form of
lower prices.
2. The maximum ou would be willing to pa for this asset is the present value,
which is
3.
a. Net benefits are N(Q) = 20 + 24Q – 4Q2.
b. Net benefits when Q = 1 are N(1) = 20 + 24 – 4 = 40 and when Q = 5 the are
N(5) = 20 + 24(5) – 4(5)2 = 40.
c. Marginal net benefits are MNB(Q) = 24 – 8Q.
d. Marginal net benefits when Q 1 are MNB(1) = 24 – 8(1) = 16 and when Q 5
the are MNB(5) = 24 – 8(5) = -16.
e. Setting MNB(Q) = 24 – 8Q = 0 and solving for Q, we see that net benefits are
maximized when Q = 3.
Page 1
, f. When net benefits are maximized at Q = 3, marginal net benefits are zero. That is,
MNB(3) = 24 – 8(3) = 0.
4.
a. The value of the firm before it pa s out current dividends is
.
b. The value of the firm immediatel after pa ing the dividend is
Managerial Economics and Business Strateg , 10e
Cop right © 2022 b McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill Education.
.
5. The present value of the perpetual stream of cash flows. This is given b
6. The completed table looks like this:
Control Total Net Marginal
Total Marginal Marginal
Net
Variable Benefits Cost Benefits Benefit Cost
Benefit
Q B(Q) C(Q) N(Q) MB(Q) MC(Q)
MNB(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. Ba e & Jeffre T. Prince
, a. Net benefits are maximized at Q = 107.
b. Marginal cost is slightl smaller than marginal benefit (MC = 130 and MB = 140).
This is due to the discrete nature of the control variable.
7.
a. The net present value of attending school is the present value of the benefits
derived from attending school (including the stream of higher earnings and the
value to ou of the work environment and prestige that our education provides),
minus the opportunit cost of attending school. As noted in the text, the opportunit
cost of attending school is generall greater than the cost of books and tuition. It is
rational for an individual to enroll in graduate school when his or her net present
value is greater than zero.
b. Since this decreases the opportunit cost of getting an M.B.A., one would expect
more students to appl for admission into M.B.A. Programs.
8.
a. Her accounting profits are $170,000. These are computed as the difference
between revenues ($200,000) and explicit costs ($30,000).
b. B working as a painter, Ja net gives up the $110,000 she could have earned under
her next best alternative. This implicit cost of $110,000 is in addition to the
$30,000 in explicit costs. Since her economic costs are $140,000, her economic
profits are $200,000 - $140,000 = $60,000.
9.
a. Total benefit when Q = 2 is B(2) = 20(2) – 2*22 = 32. When Q = 10, B(10) =
20(10) – 2*102 = 0.
b. Marginal benefit when Q = 2 is MB(2) = 20 – 4(2) = 12. When Q = 10, it is
MB(10) = 20 – 4(10) = -20.
c. The level of Q that maximizes total benefits satisfies MB(Q) = 20 – 4Q = 0, so Q
= 5.
d. Total cost when Q = 2 is C(2) = 4 + 2*22 = 12. When Q = 10 C(Q) = 4 + 2*102 =
204.
e. Marginal cost when Q = 2 is MC(Q) = 4(2) = 8. When Q = 10 MC(Q) = 4(10) =
40.
f. The level of Q that minimizes total cost is MC(Q) = 4Q = 0, or Q = 0.
g. Net benefits are maximized when MNB(Q) = MB(Q) - MC(Q) = 0, or 20 – 4Q –
4Q = 0. Some algebra leads to Q = 20/8 = 2.5 as the level of output that
maximizes net benefits.
10.
a. The present value of the stream of accounting profits is
b. The present value of the stream of economic profits is
Managerial Economics and Business Strateg , 10e Page 3
, 11. First, recall the equation for the value of a firm: . Next, solve this
equation for g to obtain . Substituting in the known values implies a
growth rate of: percent. This would seem
to be a reasonable rate of growth: 0.0355 < 0.09 (g < i).
12. Effectivel , this question boils down to the question of whether it is a good
investment to spend an extra $250 on a refrigerator that will save ou $40 at the end
of each ear for five ears. The net present value of this investment is
.
ou should bu the standard model, since doing so saves ou $81.51 in present value
terms.
13. Under a flat hourl wage, emplo ees have little incentive to work hard as working hard
will not directl benefit them. This adversel affects the firm, since its profits will be
lower than the $25,000 per store that is obtainable each da when emplo ees perform at
their peak. Under the proposed pa structure, emplo ees have a strong incentive to
increase effort, and this will benefit the firm. In particular, under the fixed hourl
wage, an emplo ee receives $160 per da whether he or she works hard or not. Under
the new pa structure, an emplo ee receives $330 per da if the store achieves its
maximum possible dail profit and onl $80 if the store’s dail profit is zero. This
provides emplo ees an incentive to work hard and to exert peer pressure on emplo ees
who might otherwise goof off. B providing emplo ees an incentive to earn extra mone
b working hard, both the firm and the emplo ees will benefit.
14.
a. Accounting costs equal $145,000 per ear in overhead and operating
expenses. Her implicit cost is the $75,000 salar that must be given up to
start the new business. Her opportunit cost includes both implicit and
explicit costs: $145,000 + $75,000 = $220,000.
Page 4 Michael R. Ba e & Jeffre T. Prince
