Solution Manual for Managerial Econo
m m m m
mics and Business Strategy 10th Micha
m m m m m
el Baye, Jeff Princem m m
COMPLETE SOLUTION MANUAL FOR
m m m
ManagerialmEconomics mandmBusinessmStrategy m10thmEditionm
BymMichaelmBaye,mJeffmPrince
Chapter 1 m
The Fundamentals of Managerial Economics An
m m m m m
swers to Questions and Problems
m m m m
1. Thismsituationmbest mrepresentsmproducer-
producermrivalry.m Here,mSouthwest mismamproducermattemptingmtomstealmcustomersm
awaymfrommothermproducersminmthemformmof mlowermprices.
2. Themmaximummyoumwould mbemwillingmtompaymformthismasset mismthempresent mval
ue,mwhichmis
3.
a. Net mbenefitsmaremN(Q)m=m20m+m24Q m–m4Q 2 .
b. Net mbenefitsmwhenmQm=m1maremN(1)m=m20m+m24m–
m4m=m40mand mwhenmQ m=m5mtheymaremN(5)m=m20m+m24(5)m–m4(5) m=m40.
2
c. Marginalmnet mbenefitsmaremMNB(Q)m=m24m–m8Q.
d. Marginalmnet mbenefitsmwhenmQm 1 maremMNB(1)m=m24m–m8(1)m=m16mand mwhenmQ5
theymaremMNB(5)m=m24m–m8(5)m=m-16.
e. SettingmMNB(Q)m=m24m–
m8Q m=m0mand msolvingmformQ,mwemseemthat mnet mbenefitsmaremmaximized mwhenmQ m
=m3.
Pagem1
, f. Whenmnet mbenefitsmaremmaximized mat mQm=m3,mmarginalmnet mbenefitsmaremzero.mThat m
is,mMNB(3)m=m24m–m8(3)m=m0.
4.
a. Themvaluemof mthemfirmmbeforemit mpaysmout mcurrent mdividendsmis
.
b. Themvaluemof mthemfirmmimmediatelymaftermpayingmthemdividend mis
Managerialm Economicsm andm Businessm Strategy,m 10e
Copyrightm©m2022mby mMcGraw-Hill mEducation.
All mrights mreserved.mNo mreproduction mor mdistribution mwithoutmthemprior mwritten mconsentmofmMcGrawmHill mEducation.
.
5. Thempresent mvaluemof mthemperpetualmstreammof mcashmflows.mThismismgiven mby
6. Themcompleted mtablemlooksmlikemthis:
Marginal
Controlm TotalmBenef Total Net mBe Marginal Marginalm
mNet mBen
Variable itsmB(Q) mCost nefitsmN mBenefit Cost mMC(
efit mMNB
mQ mC(Q (Q) mMB(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
Pagem2 MichaelmR.mBayem&mJeffreymT.mPrin
ce
, a. Net mbenefitsmaremmaximized mat mQ m=m107.
b. Marginalmcost mismslightlymsmallermthanmmarginalmbenefit m(MCm=m130mand mMBm=m14
0).mThismismduemtomthemdiscretemnaturemof mthemcontrolmvariable.
7.
a. Themnet mpresent mvaluemof mattendingmschoolmismthempresent mvaluemof mthembenefitsmde
rived mfrommattendingmschoolm(includingmthemstreammof mhighermearningsmand mthemva
luemtomyoumof mthemworkmenvironment mand mprestigemthat myourmeducationmprovides),
mminusmthemopportunitymcost mof mattendingmschool.mAsmnoted minmthemtext,mthemoppor
tunitymcost mof mattendingmschoolmismgenerallymgreatermthanmthemcost mof mbooksmand mt
uition.mIt mismrationalmformanmindividualmtomenrollminmgraduatemschoolmwhenmhismormh
ermnet mpresent mvaluemismgreatermthanmzero.
b. Sincemthismdecreasesmthemopportunitymcost mof mgettingmanmM.B.A.,monemwould mexpe
ct mmoremstudentsmtomapplymformadmissionmintomM.B.A.mPrograms.
8.
a. Hermaccountingmprofitsmarem$170,000.mThesemaremcomputed masmthemdifferen
cembetweenmrevenuesm($200,000)mand mexplicit mcostsm($30,000).
b. Bymworkingmasmampainter,mJaynet mgivesmupmthem$110,000mshemcould mhavemearned mu
ndermhermnext mbest malternative.mThismimplicit mcost mof m$110,000misminmadditionmtomth
e
$30,000minmexplicit mcosts.mSincemhermeconomicmcostsmarem$140,000,mhermeconomic m
profitsmarem$200,000m-m$140,000m=m$60,000.
9.
a. Totalmbenefit mwhenmQm=m2mismB(2)m=m20(2)m–
m2*2 m=m32.mWhenmQ m=m10,mB(10)m=m20(10)m–m2*10 m=m0.
2 2
b. Marginalmbenefit mwhenmQm=m2mismMB(2)m=m20m–
m4(2)m=m12.mWhenmQ m=m10,mit mismMB(10)m=m20m–m4(10)m=m-20.
c. Themlevelmof mQmthat mmaximizesmtotalmbenefitsmsatisfiesmMB(Q)m=m20m–m4Qm=m0,msomQ
=m5.
d. Totalmcost mwhenmQm=m2mismC(2)m=m4m+m2*22 m=m12.m WhenmQ m=m10mC(Q)m=m4m+m2*1
02 m=m204.
e. Marginalmcost mwhenmQm=m2mismMC(Q)m=m4(2)m=m8.mWhenmQ m=m10mMC(Q)m=m4(10
)m=m40.
f. Themlevelmof mQmthat mminimizesmtotalmcost mismMC(Q)m=m4Qm=m0,mormQ m=m0.
g. Net mbenefitsmaremmaximized mwhenmMNB(Q)m=mMB(Q)m-mMC(Q)m=m0,morm20m–
m4Q m–
m4Q m=m0.m SomemalgebramleadsmtomQ m=m20/8m=m2.5masmthemlevelmof moutput mthat mma
ximizesmnet mbenefits.
10.
a. Thempresent mvaluemof mthemstreammof maccountingmprofitsmis
Managerialm Economicsm andm Businessm Strategy,m10 Pagem3
e
, b. Thempresent mvaluemof mthemstreammof meconomicmprofitsmis
Pagem4 MichaelmR.mBayem&mJeffreymT.mPrin
ce
m m m m
mics and Business Strategy 10th Micha
m m m m m
el Baye, Jeff Princem m m
COMPLETE SOLUTION MANUAL FOR
m m m
ManagerialmEconomics mandmBusinessmStrategy m10thmEditionm
BymMichaelmBaye,mJeffmPrince
Chapter 1 m
The Fundamentals of Managerial Economics An
m m m m m
swers to Questions and Problems
m m m m
1. Thismsituationmbest mrepresentsmproducer-
producermrivalry.m Here,mSouthwest mismamproducermattemptingmtomstealmcustomersm
awaymfrommothermproducersminmthemformmof mlowermprices.
2. Themmaximummyoumwould mbemwillingmtompaymformthismasset mismthempresent mval
ue,mwhichmis
3.
a. Net mbenefitsmaremN(Q)m=m20m+m24Q m–m4Q 2 .
b. Net mbenefitsmwhenmQm=m1maremN(1)m=m20m+m24m–
m4m=m40mand mwhenmQ m=m5mtheymaremN(5)m=m20m+m24(5)m–m4(5) m=m40.
2
c. Marginalmnet mbenefitsmaremMNB(Q)m=m24m–m8Q.
d. Marginalmnet mbenefitsmwhenmQm 1 maremMNB(1)m=m24m–m8(1)m=m16mand mwhenmQ5
theymaremMNB(5)m=m24m–m8(5)m=m-16.
e. SettingmMNB(Q)m=m24m–
m8Q m=m0mand msolvingmformQ,mwemseemthat mnet mbenefitsmaremmaximized mwhenmQ m
=m3.
Pagem1
, f. Whenmnet mbenefitsmaremmaximized mat mQm=m3,mmarginalmnet mbenefitsmaremzero.mThat m
is,mMNB(3)m=m24m–m8(3)m=m0.
4.
a. Themvaluemof mthemfirmmbeforemit mpaysmout mcurrent mdividendsmis
.
b. Themvaluemof mthemfirmmimmediatelymaftermpayingmthemdividend mis
Managerialm Economicsm andm Businessm Strategy,m 10e
Copyrightm©m2022mby mMcGraw-Hill mEducation.
All mrights mreserved.mNo mreproduction mor mdistribution mwithoutmthemprior mwritten mconsentmofmMcGrawmHill mEducation.
.
5. Thempresent mvaluemof mthemperpetualmstreammof mcashmflows.mThismismgiven mby
6. Themcompleted mtablemlooksmlikemthis:
Marginal
Controlm TotalmBenef Total Net mBe Marginal Marginalm
mNet mBen
Variable itsmB(Q) mCost nefitsmN mBenefit Cost mMC(
efit mMNB
mQ mC(Q (Q) mMB(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
Pagem2 MichaelmR.mBayem&mJeffreymT.mPrin
ce
, a. Net mbenefitsmaremmaximized mat mQ m=m107.
b. Marginalmcost mismslightlymsmallermthanmmarginalmbenefit m(MCm=m130mand mMBm=m14
0).mThismismduemtomthemdiscretemnaturemof mthemcontrolmvariable.
7.
a. Themnet mpresent mvaluemof mattendingmschoolmismthempresent mvaluemof mthembenefitsmde
rived mfrommattendingmschoolm(includingmthemstreammof mhighermearningsmand mthemva
luemtomyoumof mthemworkmenvironment mand mprestigemthat myourmeducationmprovides),
mminusmthemopportunitymcost mof mattendingmschool.mAsmnoted minmthemtext,mthemoppor
tunitymcost mof mattendingmschoolmismgenerallymgreatermthanmthemcost mof mbooksmand mt
uition.mIt mismrationalmformanmindividualmtomenrollminmgraduatemschoolmwhenmhismormh
ermnet mpresent mvaluemismgreatermthanmzero.
b. Sincemthismdecreasesmthemopportunitymcost mof mgettingmanmM.B.A.,monemwould mexpe
ct mmoremstudentsmtomapplymformadmissionmintomM.B.A.mPrograms.
8.
a. Hermaccountingmprofitsmarem$170,000.mThesemaremcomputed masmthemdifferen
cembetweenmrevenuesm($200,000)mand mexplicit mcostsm($30,000).
b. Bymworkingmasmampainter,mJaynet mgivesmupmthem$110,000mshemcould mhavemearned mu
ndermhermnext mbest malternative.mThismimplicit mcost mof m$110,000misminmadditionmtomth
e
$30,000minmexplicit mcosts.mSincemhermeconomicmcostsmarem$140,000,mhermeconomic m
profitsmarem$200,000m-m$140,000m=m$60,000.
9.
a. Totalmbenefit mwhenmQm=m2mismB(2)m=m20(2)m–
m2*2 m=m32.mWhenmQ m=m10,mB(10)m=m20(10)m–m2*10 m=m0.
2 2
b. Marginalmbenefit mwhenmQm=m2mismMB(2)m=m20m–
m4(2)m=m12.mWhenmQ m=m10,mit mismMB(10)m=m20m–m4(10)m=m-20.
c. Themlevelmof mQmthat mmaximizesmtotalmbenefitsmsatisfiesmMB(Q)m=m20m–m4Qm=m0,msomQ
=m5.
d. Totalmcost mwhenmQm=m2mismC(2)m=m4m+m2*22 m=m12.m WhenmQ m=m10mC(Q)m=m4m+m2*1
02 m=m204.
e. Marginalmcost mwhenmQm=m2mismMC(Q)m=m4(2)m=m8.mWhenmQ m=m10mMC(Q)m=m4(10
)m=m40.
f. Themlevelmof mQmthat mminimizesmtotalmcost mismMC(Q)m=m4Qm=m0,mormQ m=m0.
g. Net mbenefitsmaremmaximized mwhenmMNB(Q)m=mMB(Q)m-mMC(Q)m=m0,morm20m–
m4Q m–
m4Q m=m0.m SomemalgebramleadsmtomQ m=m20/8m=m2.5masmthemlevelmof moutput mthat mma
ximizesmnet mbenefits.
10.
a. Thempresent mvaluemof mthemstreammof maccountingmprofitsmis
Managerialm Economicsm andm Businessm Strategy,m10 Pagem3
e
, b. Thempresent mvaluemof mthemstreammof meconomicmprofitsmis
Pagem4 MichaelmR.mBayem&mJeffreymT.mPrin
ce
