Solution Manual for Managerial Econo mf mf mf mf
mics and Business Strategy 10th Micha
mf mf mf mf mf
el Baye, Jeff Prince mf mf mf
COMPLETE SOLUTION MANUAL FOR mf mf mf
Managerial Economics and B usiness Strategy 10th Edition B
mf mf mf mf mf mf mf
y Michael Baye, Jeff Prince
mf mf mf mf
Chapter 1 mf
The Fundamentals of Managerial Economics Ans
mf mf mf mf mf
wers to Questions and Problems mf mf mf mf
1. This situation best represents producer-
mf mf mf mf
producer rivalry. Here, Southwest is a producer attempting to steal customers a
mf m f mf mf mf mf mf mf mf mf mf
way f rom other producers in the form of lower prices.
mf mf mf mf mf mf mf mf mf
2. The maximum you would be willing to pay f or this asset is the present value,
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
which is
mf mf
3.
a. Net benefits are N(Q) = 20 + 24Q – 4Q 2 .
mf mf mf mf mf mf mf mf mf
b. Net benefits when Q = 1 are N(1) = 20 + 24 –
mf mf mf mf mf mf mf mf mf mf mf mf
4 = 40 and when Q = 5 they are N(5) = 20 + 24(5) – 4(5)2 = 40.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
c. Marginal net benefits are MNB(Q) = 24 – 8Q.
mf mf mf mf mf mf mf mf
d. Marginal net benefits when Q 1 are MNB(1) = 24 – 8(1) = 16 and when Q 5
mf mf mf mf m f mf mf mf mf mf mf mf mf mf mf mf
they are MNB(5) = 24 – 8(5) = -16.
mf mf mf mf mf mf mf mf
e. Setting MNB(Q) = 24 – mf mf mf mf
8Q = 0 and solving for Q, we see that net benefits are maximized when Q =
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
3.
Page 1
mf
, f. When net benefits are maximized at Q = 3, marginal net benefits are zero. That is,
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
MNB(3) = 24 – 8(3) = 0.
mf mf mf mf mf mf mf
4.
a. The value of the firm before it pays out current dividends is
mf mf mf mf mf mf mf mf mf mf mf
.
b. The value of the firm immediately after paying the dividend is
mf mf mf mf mf mf mf mf mf mf
Managerial Economics and Business Strategy, 10e
mf mf mf mf mf
Copyright © 2022 by McGraw-Hill Education. mf mf mf mf mf
All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill Education.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
.
5. The present value of the perpetual stream of cash flows. This is given by
mf mf mf mf mf mf mf mf mf mf mf mf mf
6. The completed table looks like this:
mf mf mf mf mf
Marginal
Control Total Benefi Total Net Be Marginal Marginal
Net Ben
mf mf mf mf
Variable ts B(Q) Cost nefits N Benefit Cost MC(
mf mf
efit MNB
mf mf mf mf mf
C(Q MB(Q) Q) mf
Q mf
mf
(Q) mf
(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.
mf mf mf mf mf mf mf
b. Marginal cost is slightly smaller than marginal benefit (MC = 130 and MB = 140).
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
This is due to the discrete nature of the control variable.
mf mf mf mf mf mf mf mf mf mf mf
7.
a. The net present value of attending school is the present value of the benefits deri
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
ved from attending school (including the stream of higher earnings and the value
mf mf mf mf mf mf mf mf mf mf mf mf
to you of the work environment and prestige that your education provides), min
mf mf mf mf mf mf mf mf mf mf mf mf mf
us the opportunity cost of attending school. As noted in the text, the opportunity
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
cost of attending school is generally greater than the cost of books and tuition. It
mf mf mf mf mf mf mf mf mf mf mf mf mf mf m
is rational for an individual to enroll in graduate school when his or her net prese
f mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
nt value is greater than zero.
mf mf mf mf mf
b. Since this decreases the opportunity cost of getting an M.B.A., one would expect
mf mf mf mf mf mf mf mf mf mf mf mf
more students to apply for admission into M.B.A. Programs.
mf mf mf mf mf mf mf mf mf
8.
a. Her accounting profits are $170,000. These are computed as the difference
mf mf mf mf mf mf mf mf mf mf
between revenues ($200,000) and explicit costs ($30,000).
mf mf mf mf mf mf mf
b. By working as a painter, Jaynet gives up the $110,000 she could have earned un
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
der her next best alternative. This implicit cost of $110,000 is in addition to the
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
$30,000 in explicit costs. Since her economic costs are $140,000, her economic p
mf mf mf mf mf mf mf mf mf mf mf mf
rofits are $200,000 - $140,000 = $60,000.
mf mf mf mf mf mf
9.
a. Total benefit when Q = 2 is B(2) = 20(2) –
mf mf mf mf mf mf mf mf mf mf
2*22 = 32. When Q = 10, B(10) = 20(10) – 2*102 = 0.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
b. Marginal benefit when Q = 2 is MB(2) = 20 – mf mf mf mf mf mf mf mf mf mf
4(2) = 12. When Q = 10, it is MB(10) = 20 – 4(10) = -20.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
c. The level of Q that maximizes total benefits satisfies MB(Q) = 20 – 4Q = 0, so Q
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
= 5. mf
d. Total cost when Q = 2 is C(2) = 4 + 2*22 = 12. When Q = 10 C(Q) = 4 + 2*102
mf mf mf mf mf mf mf mf mf mf mf mf mf m f mf mf mf mf mf mf mf mf mf
= 204. mf
e. Marginal cost when Q = 2 is MC(Q) = 4(2) = 8. When Q = 10 MC(Q) = 4(10)
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
= 40. mf
f. The level of Q that minimizes total cost is MC(Q) = 4Q = 0, or Q = 0.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
g. Net benefits are maximized when MNB(Q) = MB(Q) - MC(Q) = 0, or 20 –
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
4Q –
mf mf
4Q = 0. Some algebra leads to Q = 20/8 = 2.5 as the level of output that maxi
mf mf mf m f mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
mizes net benefits. mf mf
10.
a. The present value of the stream of accounting profits is
mf mf mf mf mf mf mf mf mf
b. The present value of the stream of economic profits is
mf mf mf mf mf mf mf mf mf
Managerial Economics and Business Strategy, 10e Page 3
, 11. First, recall the equation for the value of a firm:
mf mf mf mf mf mf mf mf mf mf
. Next, solve this equation for g to obtain
m f mf mf mf mf mf mf mf mf
. Substituting in the known values implies a
m f mf mf mf mf mf mf
growth rate of: mf mf mf percent. This would seem mf mf mf
to be a reasonable rate of growth: 0.0355 < 0.09 (g < i).
mf mf mf mf mf mf mf mf mf mf mf mf
12. Effectively, this question boils down to the question of whether it is a good invest
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
ment to spend an extra $250 on a refrigerator that will save you $40 at the end of ea
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
ch year for five years. The net present value of this investment is
mf mf mf mf mf mf mf mf mf mf mf mf
.
You should buy t he standard model, since doing so saves you $81.51 in present value
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
terms.
mf
13. Under a flat hourly wage, employees have little incentive to work hard as working h
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
ard will not directly benefit them. This adversely affects the firm, since its profits wil
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
l be lower than the $25,000 per store that is obtainable each day when employees per
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
form at their peak. Under the proposed pay structure, employees have a strong incent
mf mf mf mf mf mf mf mf mf mf mf mf mf
ive to increase effort, and this will benefit the firm. In particular, under the fixed ho
mf mf mf mf mf mf mf mf mf mf mf mf mf m f mf
urly wage, an employee receives $160 per day whether he or she works hard or not.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
Under the new pay structure, an employee receives $330 per day if the store achieve
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
s its maximum possible daily profit and only $80 if the store’s daily profit is zero. T
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
his provides employees an incentive to work hard and to exert peer pressure on emplo
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
yees who might otherwise goof off. By providing employees an incentive to earn ext
mf mf mf mf mf mf mf mf mf mf mf mf mf
ra money by working hard, both the firm and the employees will benefit.
mf mf mf mf mf mf mf mf mf mf mf mf
14.
a. Accounting costs equal $145,000 per year in overhead and operating ex mf mf mf mf mf mf mf mf mf mf
penses. Her implicit cost is the $75,000 salary t hat must be given up to s
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
tart the new business. Her opportunity cost includes both implicit and e
mf mf mf mf mf mf mf mf mf mf mf
xplicit costs: $145,000 + $75,000 = $220,000. mf mf mf mf mf mf
Page 4 Michael R. Baye & Jeffrey T. Prince
mics and Business Strategy 10th Micha
mf mf mf mf mf
el Baye, Jeff Prince mf mf mf
COMPLETE SOLUTION MANUAL FOR mf mf mf
Managerial Economics and B usiness Strategy 10th Edition B
mf mf mf mf mf mf mf
y Michael Baye, Jeff Prince
mf mf mf mf
Chapter 1 mf
The Fundamentals of Managerial Economics Ans
mf mf mf mf mf
wers to Questions and Problems mf mf mf mf
1. This situation best represents producer-
mf mf mf mf
producer rivalry. Here, Southwest is a producer attempting to steal customers a
mf m f mf mf mf mf mf mf mf mf mf
way f rom other producers in the form of lower prices.
mf mf mf mf mf mf mf mf mf
2. The maximum you would be willing to pay f or this asset is the present value,
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
which is
mf mf
3.
a. Net benefits are N(Q) = 20 + 24Q – 4Q 2 .
mf mf mf mf mf mf mf mf mf
b. Net benefits when Q = 1 are N(1) = 20 + 24 –
mf mf mf mf mf mf mf mf mf mf mf mf
4 = 40 and when Q = 5 they are N(5) = 20 + 24(5) – 4(5)2 = 40.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
c. Marginal net benefits are MNB(Q) = 24 – 8Q.
mf mf mf mf mf mf mf mf
d. Marginal net benefits when Q 1 are MNB(1) = 24 – 8(1) = 16 and when Q 5
mf mf mf mf m f mf mf mf mf mf mf mf mf mf mf mf
they are MNB(5) = 24 – 8(5) = -16.
mf mf mf mf mf mf mf mf
e. Setting MNB(Q) = 24 – mf mf mf mf
8Q = 0 and solving for Q, we see that net benefits are maximized when Q =
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
3.
Page 1
mf
, f. When net benefits are maximized at Q = 3, marginal net benefits are zero. That is,
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
MNB(3) = 24 – 8(3) = 0.
mf mf mf mf mf mf mf
4.
a. The value of the firm before it pays out current dividends is
mf mf mf mf mf mf mf mf mf mf mf
.
b. The value of the firm immediately after paying the dividend is
mf mf mf mf mf mf mf mf mf mf
Managerial Economics and Business Strategy, 10e
mf mf mf mf mf
Copyright © 2022 by McGraw-Hill Education. mf mf mf mf mf
All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill Education.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
.
5. The present value of the perpetual stream of cash flows. This is given by
mf mf mf mf mf mf mf mf mf mf mf mf mf
6. The completed table looks like this:
mf mf mf mf mf
Marginal
Control Total Benefi Total Net Be Marginal Marginal
Net Ben
mf mf mf mf
Variable ts B(Q) Cost nefits N Benefit Cost MC(
mf mf
efit MNB
mf mf mf mf mf
C(Q MB(Q) Q) mf
Q mf
mf
(Q) mf
(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.
mf mf mf mf mf mf mf
b. Marginal cost is slightly smaller than marginal benefit (MC = 130 and MB = 140).
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
This is due to the discrete nature of the control variable.
mf mf mf mf mf mf mf mf mf mf mf
7.
a. The net present value of attending school is the present value of the benefits deri
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
ved from attending school (including the stream of higher earnings and the value
mf mf mf mf mf mf mf mf mf mf mf mf
to you of the work environment and prestige that your education provides), min
mf mf mf mf mf mf mf mf mf mf mf mf mf
us the opportunity cost of attending school. As noted in the text, the opportunity
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
cost of attending school is generally greater than the cost of books and tuition. It
mf mf mf mf mf mf mf mf mf mf mf mf mf mf m
is rational for an individual to enroll in graduate school when his or her net prese
f mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
nt value is greater than zero.
mf mf mf mf mf
b. Since this decreases the opportunity cost of getting an M.B.A., one would expect
mf mf mf mf mf mf mf mf mf mf mf mf
more students to apply for admission into M.B.A. Programs.
mf mf mf mf mf mf mf mf mf
8.
a. Her accounting profits are $170,000. These are computed as the difference
mf mf mf mf mf mf mf mf mf mf
between revenues ($200,000) and explicit costs ($30,000).
mf mf mf mf mf mf mf
b. By working as a painter, Jaynet gives up the $110,000 she could have earned un
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
der her next best alternative. This implicit cost of $110,000 is in addition to the
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
$30,000 in explicit costs. Since her economic costs are $140,000, her economic p
mf mf mf mf mf mf mf mf mf mf mf mf
rofits are $200,000 - $140,000 = $60,000.
mf mf mf mf mf mf
9.
a. Total benefit when Q = 2 is B(2) = 20(2) –
mf mf mf mf mf mf mf mf mf mf
2*22 = 32. When Q = 10, B(10) = 20(10) – 2*102 = 0.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
b. Marginal benefit when Q = 2 is MB(2) = 20 – mf mf mf mf mf mf mf mf mf mf
4(2) = 12. When Q = 10, it is MB(10) = 20 – 4(10) = -20.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
c. The level of Q that maximizes total benefits satisfies MB(Q) = 20 – 4Q = 0, so Q
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
= 5. mf
d. Total cost when Q = 2 is C(2) = 4 + 2*22 = 12. When Q = 10 C(Q) = 4 + 2*102
mf mf mf mf mf mf mf mf mf mf mf mf mf m f mf mf mf mf mf mf mf mf mf
= 204. mf
e. Marginal cost when Q = 2 is MC(Q) = 4(2) = 8. When Q = 10 MC(Q) = 4(10)
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
= 40. mf
f. The level of Q that minimizes total cost is MC(Q) = 4Q = 0, or Q = 0.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
g. Net benefits are maximized when MNB(Q) = MB(Q) - MC(Q) = 0, or 20 –
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
4Q –
mf mf
4Q = 0. Some algebra leads to Q = 20/8 = 2.5 as the level of output that maxi
mf mf mf m f mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
mizes net benefits. mf mf
10.
a. The present value of the stream of accounting profits is
mf mf mf mf mf mf mf mf mf
b. The present value of the stream of economic profits is
mf mf mf mf mf mf mf mf mf
Managerial Economics and Business Strategy, 10e Page 3
, 11. First, recall the equation for the value of a firm:
mf mf mf mf mf mf mf mf mf mf
. Next, solve this equation for g to obtain
m f mf mf mf mf mf mf mf mf
. Substituting in the known values implies a
m f mf mf mf mf mf mf
growth rate of: mf mf mf percent. This would seem mf mf mf
to be a reasonable rate of growth: 0.0355 < 0.09 (g < i).
mf mf mf mf mf mf mf mf mf mf mf mf
12. Effectively, this question boils down to the question of whether it is a good invest
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
ment to spend an extra $250 on a refrigerator that will save you $40 at the end of ea
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
ch year for five years. The net present value of this investment is
mf mf mf mf mf mf mf mf mf mf mf mf
.
You should buy t he standard model, since doing so saves you $81.51 in present value
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
terms.
mf
13. Under a flat hourly wage, employees have little incentive to work hard as working h
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
ard will not directly benefit them. This adversely affects the firm, since its profits wil
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
l be lower than the $25,000 per store that is obtainable each day when employees per
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
form at their peak. Under the proposed pay structure, employees have a strong incent
mf mf mf mf mf mf mf mf mf mf mf mf mf
ive to increase effort, and this will benefit the firm. In particular, under the fixed ho
mf mf mf mf mf mf mf mf mf mf mf mf mf m f mf
urly wage, an employee receives $160 per day whether he or she works hard or not.
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
Under the new pay structure, an employee receives $330 per day if the store achieve
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
s its maximum possible daily profit and only $80 if the store’s daily profit is zero. T
mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf mf
his provides employees an incentive to work hard and to exert peer pressure on emplo
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
yees who might otherwise goof off. By providing employees an incentive to earn ext
mf mf mf mf mf mf mf mf mf mf mf mf mf
ra money by working hard, both the firm and the employees will benefit.
mf mf mf mf mf mf mf mf mf mf mf mf
14.
a. Accounting costs equal $145,000 per year in overhead and operating ex mf mf mf mf mf mf mf mf mf mf
penses. Her implicit cost is the $75,000 salary t hat must be given up to s
mf mf mf mf mf mf mf mf mf mf mf mf mf mf
tart the new business. Her opportunity cost includes both implicit and e
mf mf mf mf mf mf mf mf mf mf mf
xplicit costs: $145,000 + $75,000 = $220,000. mf mf mf mf mf mf
Page 4 Michael R. Baye & Jeffrey T. Prince
