Solution Manual for Managerial Economics & Business Strategy, 10th Edition

Solution Manual for Managerial Economics
& Business Strategy, 10th Edition, Michael
Baye Jeff Prince

, Chapter 1
The Fundamentals of Managerial Economics
Answers to Questions and Problems

1. This situation best represents producer-producer rivalry. Here, Southwest is a producer
attempting to steal customers away from other producers in the form of lower prices.

2. The maximum you would be willing to pay for this asset is the present value, which is

250,000 250,000 250,000 250,000 250,000
𝑃𝑉 = + 2
+ 3
+ 4
+
(1 + 0.08) (1 + 0.08) (1 + 0.08) (1 + 0.08) (1 + 0.08)5
= $998,177.51

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 they 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
they 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.
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 pays out current dividends is

1 + 0.06
𝑃𝑉𝑓𝑖𝑟𝑚 = $400,000 ( )
0.06 − 0.04

= $21.2 million.

b. The value of the firm immediately after paying the dividend is

𝐸𝑥−𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 1 + 0.04
𝑃𝑉𝑓𝑖𝑟𝑚 = $400,000 ( )
0.06 − 0.04

= $20.8 million.

5. The present value of the perpetual stream of cash flows. This is given by