Solution Manual for Managerial Econo
n n n n
mics and Business Strategy 10th Michae
n n n n n
l Baye, Jeff Prince n n n
COMPLETE SOLUTION MANUAL FOR
n n n
Managerial Economics and Business Strategy 10th Edition B
n n n n n n n
y Michael Baye, Jeff Prince
n n n n
Chapter 1 n
The Fundamentals of Managerial Economics Ans
n n n n n
wers to Questions and Problems
n n n n
1. Thisnsituationnbestnrepresentsnproducer-
producernrivalry.n Here,nSouthwestnisnanproducernattemptingntonstealncustomersnaw
aynfromnothernproducersninnthenformnofnlowernprices.
2. Thenmaximumnyounwouldnbenwillingntonpaynfornthisnassetnisnthenpresentnvalue,n
whichnis
3.
a. NetnbenefitsnarenN(Q)n=n20n+n24Qn–n4Q2.
b. NetnbenefitsnwhennQn=n1narenN(1)n=n20n+n24n–
n4n=n40nandnwhennQn=n5ntheynarenN(5)n=n20n+n24(5)n–n4(5) n=n40.
2
c. MarginalnnetnbenefitsnarenMNB(Q)n=n24n–n8Q.
d. MarginalnnetnbenefitsnwhennQn 1narenMNB(1)n=n24n–n8(1)n=n16nandnwhennQ 5
theynarenMNB(5)n=n24n–n8(5)n=n-16.
e. SettingnMNB(Q)n=n24n–
n8Qn=n0nandnsolvingnfornQ,nwenseenthatnnetnbenefitsnarenmaximizednwhennQn=n3.
Pagen1
, f. WhennnetnbenefitsnarenmaximizednatnQn=n3,nmarginalnnetnbenefitsnarenzero.nThatnis,n
MNB(3)n=n24n–n8(3)n=n0.
4.
a. Thenvaluenofnthenfirmnbeforenitnpaysnoutncurrentndividendsnis
.
b. Thenvaluenofnthenfirmnimmediatelynafternpayingnthendividendnis
ManagerialnEconomicsnandnBusinessnStrategy,n10e
Copyrightn©n2022nbynMcGraw-HillnEducation.
Allnrightsnreserved.nNonreproductionnorndistributionnwithoutnthenpriornwrittennconsentnofnMcGrawnHillnEducation.
.
5. Thenpresentnvaluenofnthenperpetualnstreamnofncashnflows.nThisnisngivennby
6. Thencompletedntablenlooksnlikenthis:
Controln TotalnBenefi NetnBe Marginal
Total Marginal MarginalnC
nNetnBene
Variable tsnB(Q) nCost nefitsnN nBenefitn ostnMC(Q)
fitnMNB(
nQ nC(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
Pagen2 MichaelnR.nBayen&nJeffreynT.nPrince
, a. NetnbenefitsnarenmaximizednatnQn=n107.
b. Marginalncostnisnslightlynsmallernthannmarginalnbenefitn(MCn=n130nandnMBn=n140).n
Thisnisnduentonthendiscretennaturenofnthencontrolnvariable.
7.
a. Thennetnpresentnvaluenofnattendingnschoolnisnthenpresentnvaluenofnthenbenefitsnderive
dnfromnattendingnschooln(includingnthenstreamnofnhighernearningsnandnthenvaluentony
ounofnthenworknenvironmentnandnprestigenthatnyourneducationnprovides),nminusnthen
opportunityncostnofnattendingnschool.nAsnnotedninnthentext,nthenopportunityncostnofna
ttendingnschoolnisngenerallyngreaternthannthencostnofnbooksnandntuition.nItnisnrationaln
fornannindividualntonenrollninngraduatenschoolnwhennhisnornhernnetnpresentnvaluenisngr
eaternthannzero.
b. SincenthisndecreasesnthenopportunityncostnofngettingnannM.B.A.,nonenwouldnexpectn
morenstudentsntonapplynfornadmissionnintonM.B.A.nPrograms.
8.
a. Hernaccountingnprofitsnaren$170,000.nThesenarencomputednasnthendifferencen
betweennrevenuesn($200,000)nandnexplicitncostsn($30,000).
b. Bynworkingnasnanpainter,nJaynetngivesnupnthen$110,000nshencouldnhavenearnednunde
rnhernnextnbestnalternative.nThisnimplicitncostnofn$110,000nisninnadditionntonthe
$30,000ninnexplicitncosts.nSincenherneconomicncostsnaren$140,000,nherneconomicnpro
fitsnaren$200,000n-n$140,000n=n$60,000.
9.
a. TotalnbenefitnwhennQn=n2nisnB(2)n=n20(2)n–
n2*2 n=n32.nWhennQn=n10,nB(10)n=n20(10)n–n2*10 n=n0.
2 2
b. MarginalnbenefitnwhennQn=n2nisnMB(2)n=n20n–
n4(2)n=n12.nWhennQn=n10,nitnisnMB(10)n=n20n–n4(10)n=n-20.
c. ThenlevelnofnQnthatnmaximizesntotalnbenefitsnsatisfiesnMB(Q)n=n20n–n4Qn=n0,nsonQ
=n5.
d. TotalncostnwhennQn=n2nisnC(2)n=n4n+n2*22n=n12.n WhennQn=n10nC(Q)n=n4n+n2*102n=n20
4.
e. MarginalncostnwhennQn=n2nisnMC(Q)n=n4(2)n=n8.nWhennQn=n10nMC(Q)n=n4(10)n=n4
0.
f. ThenlevelnofnQnthatnminimizesntotalncostnisnMC(Q)n=n4Qn=n0,nornQn=n0.
g. NetnbenefitsnarenmaximizednwhennMNB(Q)n=nMB(Q)n-nMC(Q)n=n0,norn20n–n4Qn–
n4Qn=n0.n SomenalgebranleadsntonQn=n20/8n=n2.5nasnthenlevelnofnoutputnthatnmaximiz
esnnetnbenefits.
10.
a. Thenpresentnvaluenofnthenstreamnofnaccountingnprofitsnis
b. Thenpresentnvaluenofnthenstreamnofneconomicnprofitsnis
ManagerialnEconomicsnandnBusinessnStrategy,n10e Pagen3
, 11. First,nrecallnthenequationnfornthenvaluenofnanfirm:n
.n Next,nsolventhisnequationnforngntonobtainn
.n Substitutingninnthenknownnvaluesnimpliesna
growthnratenof: percent.nThisnwouldnseem
n
tonbenanreasonablenratenofngrowth:n0.0355n<n0.09n(gn<ni).
12. Effectively,nthisnquestionnboilsndownntonthenquestionnofnwhethernitnisnangoodninvestme
ntntonspendnannextran$250nonnanrefrigeratornthatnwillnsavenyoun$40natnthenendnofneachnye
arnfornfivenyears.nThennetnpresentnvaluenofnthisninvestmentnis
.
Younshouldnbuynthenstandardnmodel,nsincendoingnsonsavesnyoun$81.51ninnpresentnvaluent
erms.
13. Undernanflatnhourlynwage,nemployeesnhavenlittlenincentiventonworknhardnasnworkingnhard
nwillnnotndirectlynbenefitnthem.nThisnadverselynaffectsnthenfirm,nsincenitsnprofitsnwillnbenl
owernthannthen$25,000npernstorenthatnisnobtainableneachndaynwhennemployeesnperformnat
ntheirnpeak.nUndernthenproposednpaynstructure,nemployeesnhavenanstrongnincentiventoninc
reaseneffort,nandnthisnwillnbenefitnthenfirm.nInnparticular,nundernthen fixednhourlynwage,na
nnemployeenreceivesn$160nperndaynwhethernhenornshenworksnhardnornnot.nUndernthennewn
paynstructure,nannemployeenreceivesn$330nperndaynifnthenstorenachievesnitsnmaximumnpo
ssiblendailynprofitnandnonlyn$80nifnthenstore’sndailynprofitnisnzero.nThisnprovidesnemploye
esnannincentiventonworknhardnandntonexertnpeernpressurenonnemployeesnwhonmightnotherw
isengoofnoff.nBynprovidingnemployeesnannincentiventonearnnextranmoneynbynworkingnhar
d,nbothnthenfirmnandnthenemployeesnwillnbenefit.
14.
a. Accountingncostsnequaln$145,000npernyearninnoverheadnandnoperatingnexpe
nses.nHernimplicitncostnisnthen$75,000nsalarynthatnmustnbengivennupntonstartnt
hennewnbusiness.nHernopportunityncostnincludesnbothnimplicitnandnexplicitn
costs:n$145,000n+n$75,000n=n$220,000.
Pagen4 MichaelnR.nBayen&nJeffreynT.nPrince
n n n n
mics and Business Strategy 10th Michae
n n n n n
l Baye, Jeff Prince n n n
COMPLETE SOLUTION MANUAL FOR
n n n
Managerial Economics and Business Strategy 10th Edition B
n n n n n n n
y Michael Baye, Jeff Prince
n n n n
Chapter 1 n
The Fundamentals of Managerial Economics Ans
n n n n n
wers to Questions and Problems
n n n n
1. Thisnsituationnbestnrepresentsnproducer-
producernrivalry.n Here,nSouthwestnisnanproducernattemptingntonstealncustomersnaw
aynfromnothernproducersninnthenformnofnlowernprices.
2. Thenmaximumnyounwouldnbenwillingntonpaynfornthisnassetnisnthenpresentnvalue,n
whichnis
3.
a. NetnbenefitsnarenN(Q)n=n20n+n24Qn–n4Q2.
b. NetnbenefitsnwhennQn=n1narenN(1)n=n20n+n24n–
n4n=n40nandnwhennQn=n5ntheynarenN(5)n=n20n+n24(5)n–n4(5) n=n40.
2
c. MarginalnnetnbenefitsnarenMNB(Q)n=n24n–n8Q.
d. MarginalnnetnbenefitsnwhennQn 1narenMNB(1)n=n24n–n8(1)n=n16nandnwhennQ 5
theynarenMNB(5)n=n24n–n8(5)n=n-16.
e. SettingnMNB(Q)n=n24n–
n8Qn=n0nandnsolvingnfornQ,nwenseenthatnnetnbenefitsnarenmaximizednwhennQn=n3.
Pagen1
, f. WhennnetnbenefitsnarenmaximizednatnQn=n3,nmarginalnnetnbenefitsnarenzero.nThatnis,n
MNB(3)n=n24n–n8(3)n=n0.
4.
a. Thenvaluenofnthenfirmnbeforenitnpaysnoutncurrentndividendsnis
.
b. Thenvaluenofnthenfirmnimmediatelynafternpayingnthendividendnis
ManagerialnEconomicsnandnBusinessnStrategy,n10e
Copyrightn©n2022nbynMcGraw-HillnEducation.
Allnrightsnreserved.nNonreproductionnorndistributionnwithoutnthenpriornwrittennconsentnofnMcGrawnHillnEducation.
.
5. Thenpresentnvaluenofnthenperpetualnstreamnofncashnflows.nThisnisngivennby
6. Thencompletedntablenlooksnlikenthis:
Controln TotalnBenefi NetnBe Marginal
Total Marginal MarginalnC
nNetnBene
Variable tsnB(Q) nCost nefitsnN nBenefitn ostnMC(Q)
fitnMNB(
nQ nC(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
Pagen2 MichaelnR.nBayen&nJeffreynT.nPrince
, a. NetnbenefitsnarenmaximizednatnQn=n107.
b. Marginalncostnisnslightlynsmallernthannmarginalnbenefitn(MCn=n130nandnMBn=n140).n
Thisnisnduentonthendiscretennaturenofnthencontrolnvariable.
7.
a. Thennetnpresentnvaluenofnattendingnschoolnisnthenpresentnvaluenofnthenbenefitsnderive
dnfromnattendingnschooln(includingnthenstreamnofnhighernearningsnandnthenvaluentony
ounofnthenworknenvironmentnandnprestigenthatnyourneducationnprovides),nminusnthen
opportunityncostnofnattendingnschool.nAsnnotedninnthentext,nthenopportunityncostnofna
ttendingnschoolnisngenerallyngreaternthannthencostnofnbooksnandntuition.nItnisnrationaln
fornannindividualntonenrollninngraduatenschoolnwhennhisnornhernnetnpresentnvaluenisngr
eaternthannzero.
b. SincenthisndecreasesnthenopportunityncostnofngettingnannM.B.A.,nonenwouldnexpectn
morenstudentsntonapplynfornadmissionnintonM.B.A.nPrograms.
8.
a. Hernaccountingnprofitsnaren$170,000.nThesenarencomputednasnthendifferencen
betweennrevenuesn($200,000)nandnexplicitncostsn($30,000).
b. Bynworkingnasnanpainter,nJaynetngivesnupnthen$110,000nshencouldnhavenearnednunde
rnhernnextnbestnalternative.nThisnimplicitncostnofn$110,000nisninnadditionntonthe
$30,000ninnexplicitncosts.nSincenherneconomicncostsnaren$140,000,nherneconomicnpro
fitsnaren$200,000n-n$140,000n=n$60,000.
9.
a. TotalnbenefitnwhennQn=n2nisnB(2)n=n20(2)n–
n2*2 n=n32.nWhennQn=n10,nB(10)n=n20(10)n–n2*10 n=n0.
2 2
b. MarginalnbenefitnwhennQn=n2nisnMB(2)n=n20n–
n4(2)n=n12.nWhennQn=n10,nitnisnMB(10)n=n20n–n4(10)n=n-20.
c. ThenlevelnofnQnthatnmaximizesntotalnbenefitsnsatisfiesnMB(Q)n=n20n–n4Qn=n0,nsonQ
=n5.
d. TotalncostnwhennQn=n2nisnC(2)n=n4n+n2*22n=n12.n WhennQn=n10nC(Q)n=n4n+n2*102n=n20
4.
e. MarginalncostnwhennQn=n2nisnMC(Q)n=n4(2)n=n8.nWhennQn=n10nMC(Q)n=n4(10)n=n4
0.
f. ThenlevelnofnQnthatnminimizesntotalncostnisnMC(Q)n=n4Qn=n0,nornQn=n0.
g. NetnbenefitsnarenmaximizednwhennMNB(Q)n=nMB(Q)n-nMC(Q)n=n0,norn20n–n4Qn–
n4Qn=n0.n SomenalgebranleadsntonQn=n20/8n=n2.5nasnthenlevelnofnoutputnthatnmaximiz
esnnetnbenefits.
10.
a. Thenpresentnvaluenofnthenstreamnofnaccountingnprofitsnis
b. Thenpresentnvaluenofnthenstreamnofneconomicnprofitsnis
ManagerialnEconomicsnandnBusinessnStrategy,n10e Pagen3
, 11. First,nrecallnthenequationnfornthenvaluenofnanfirm:n
.n Next,nsolventhisnequationnforngntonobtainn
.n Substitutingninnthenknownnvaluesnimpliesna
growthnratenof: percent.nThisnwouldnseem
n
tonbenanreasonablenratenofngrowth:n0.0355n<n0.09n(gn<ni).
12. Effectively,nthisnquestionnboilsndownntonthenquestionnofnwhethernitnisnangoodninvestme
ntntonspendnannextran$250nonnanrefrigeratornthatnwillnsavenyoun$40natnthenendnofneachnye
arnfornfivenyears.nThennetnpresentnvaluenofnthisninvestmentnis
.
Younshouldnbuynthenstandardnmodel,nsincendoingnsonsavesnyoun$81.51ninnpresentnvaluent
erms.
13. Undernanflatnhourlynwage,nemployeesnhavenlittlenincentiventonworknhardnasnworkingnhard
nwillnnotndirectlynbenefitnthem.nThisnadverselynaffectsnthenfirm,nsincenitsnprofitsnwillnbenl
owernthannthen$25,000npernstorenthatnisnobtainableneachndaynwhennemployeesnperformnat
ntheirnpeak.nUndernthenproposednpaynstructure,nemployeesnhavenanstrongnincentiventoninc
reaseneffort,nandnthisnwillnbenefitnthenfirm.nInnparticular,nundernthen fixednhourlynwage,na
nnemployeenreceivesn$160nperndaynwhethernhenornshenworksnhardnornnot.nUndernthennewn
paynstructure,nannemployeenreceivesn$330nperndaynifnthenstorenachievesnitsnmaximumnpo
ssiblendailynprofitnandnonlyn$80nifnthenstore’sndailynprofitnisnzero.nThisnprovidesnemploye
esnannincentiventonworknhardnandntonexertnpeernpressurenonnemployeesnwhonmightnotherw
isengoofnoff.nBynprovidingnemployeesnannincentiventonearnnextranmoneynbynworkingnhar
d,nbothnthenfirmnandnthenemployeesnwillnbenefit.
14.
a. Accountingncostsnequaln$145,000npernyearninnoverheadnandnoperatingnexpe
nses.nHernimplicitncostnisnthen$75,000nsalarynthatnmustnbengivennupntonstartnt
hennewnbusiness.nHernopportunityncostnincludesnbothnimplicitnandnexplicitn
costs:n$145,000n+n$75,000n=n$220,000.
Pagen4 MichaelnR.nBayen&nJeffreynT.nPrince
