TEST BANK FOR Managerial Economics & Business Strategy Michael Baye 9th Edition by Michael Baye ISBN 978-1259290619 COMPLETE GUIDE WITH RATIONALES 100% VERIFIED A+ GRADE ASSURED!!!!!NEW LATEST UPDATE!!!!!

SolutionManualforManagerialEcono lh




micsandBusinessStrategy10thMichae l lh




Baye,JeffPrince

COMPLETE SOLUTION MANUAL FOR l h l h lh




Managerial Economics andBusinessStrategy10thEditionBy
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Michael Baye,Jeff Prince
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Chapter1 lh




TheFundamentalsofManagerialEconomicsAns
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werstoQuestionsandProblems lh lh lh




1. This situation best represents producer-
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producerrivalry. Here,Southwest isaproducerattemptingtostealcustomersawa yfro
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m other producers in the form of lower prices.
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2. Themaximum youwouldbe willingtopayforthis assetisthe present value, w hich i
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s




3.
a. Net benefits are N(Q) =20+24Q –4Q2. lhY lh lh lh lh lh lh lh lh




b. Net benefitswhenQ=1 are N(1)=20+24– Y lh lh lh lh lh lh lh lh lh lh lh




4=40andwhenQ=5theyareN(5)=20+24(5) –4(5)2=40.
lh lh lh lh Y lh Y
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c. Marginal net benefitsare MNB(Q) =24 –8Q. lh lh lh lh lh lh lh lh




d. MarginalnetbenefitswhenQ 1areMNB(1)=24–8(1)=16and when Q lh lh lh lh l h lh lh lh lh lh lh lh lh lh Y Y lh 5
theyare MNB(5) =24 – 8(5)= -16. lh lh lh lh Y lh lh lh




e. SettingMNB(Q)=24 – lh lh lh lh




8Q=0andsolving forQ, we seethatnet benefitsaremaximized when Q= 3.
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Page1 lh

, f. Whennet benefits aremaximized atQ=3,marginalnetbenefitsarezero.Thatis,M NB(
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3) = 24 – 8(3) = 0.
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4.
a. Thevalue of the firm before it pays out current dividends is
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.

b. The value of the firm immediatelyafter payingthe dividend is
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ManagerialEconomicsandBusiness Strategy,10e
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Copyright© 2022byMcGraw-Hill Education. lh lh lh lh lh



All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill Education.
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.

5. The present value ofthe perpetual stream of cash flows. Thisis given by
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6. The completed table looks like this:
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Control TotalBenefi Net Be Marginal
Total Marginal MarginalC
l

Y

NetBene
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Variable tsB(Q) Cost nefits N Benefit ost MC(Q)
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fitMNB(
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Q C(Q (Q) MB(Q)
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Q)
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)
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


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lh MichaelR.Baye&JeffreyT. Prince lh lh lh lh lh lh

, a. Net benefits are maximized at Q= 107.
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b. Marginalcost is slightlysmallerthan marginalbenefit (MC=130andMB=140).T his i lh Y Y lh lh Y lh Y lh lh lh lh lh lh lh lh lh




s due to the discrete nature of the control variable.
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7.
a. The net present value ofattending school isthe present value ofthe benefitsderive d fro
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m attending school (including thestream of higher earnings and the valueto y ouofthe
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workenvironmentandprestigethat youreducationprovides),minustheo pportunityc
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ost ofattending school.Asnoted inthetext,theopportunitycostofatte ndingschoolisg
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enerallygreaterthan thecost of books andtuition.Itisrationalfor an individualtoenrol lh lh Y lh Y lh Y lh lh lh lh lh lh Y lh lh




lingraduateschoolwhen hisorhernet presentvalueisgreate r than zero.
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b. Sincethisdecreasestheopportunitycostofgettingan M.B.A.,onewouldexpectm ore s
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tudents to apply for admission into M.B.A. Programs. lh Y lh lh lh lh lh




8.
a. Her accountingprofitsare$170,000.Thesearecomputedasthe difference b etw
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een revenues ($200,000) and explicit costs ($30,000).
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b. Byworkingasapainter,Jaynetgives upthe$110,000shecouldhaveearnedunder her n
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ext best alternative. This implicit cost of $110,000 is in additionto the
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$30,000in explicitcosts.Sincehereconomiccostsare$140,000,hereconomicprof its a lh Y lh lh lh lh lh lh lh lh lh lh lh Y



re $200,000 - $140,000 = $60,000.
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9.
a. Totalbenefit when Q=2 isB(2)=20(2)– lh lh lh lh lh lh lh lh lh lh




2*22=32.When Q=10,B(10) =20(10)– 2*102 =0. lh lh lh lh lh lh lh lh lh lh lh lh lh




b. Marginalbenefit when Q=2isMB(2)=20 – lh lh lh lh lh lh lh lh lh lh




4(2)=12. WhenQ=10,it is MB(10) = 20 – 4(10) = -20.
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c. Thelevel of Qthat maximizes total benefits satisfies MB(Q) =20 – 4Q= 0, so Q
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=5. lh




d. TotalcostwhenQ=2isC(2)=4+2*22=12. WhenQ=10C(Q)=4+2*102=204.
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e. Marginalcost when Q= 2isMC(Q)=4(2) =8. When Q=10MC(Q) =4(10)= 40. lh Y Y lh lh lh lh lh lh lh lh lh lh lh lh lh lh lh lh lh




f. Thelevel of Qthat minimizestotal costisMC(Q) =4Q= 0, or Q=0.
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g. Net benefitsare maximized whenMNB(Q) = MB(Q) -MC(Q) = 0, or 20 – 4Q–
Y lh lh lh lh lh lh lh lh lh lh lh lh lh lh lh




4Q=0. Somealgebraleads toQ=20/8=2.5asthelevelofoutputthat maximizes netbe
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nefits.

10.
a. Thepresent value ofthe stream of accounting profits is
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b. Thepresent value ofthe stream ofeconomic profits is
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ManagerialEconomicsandBusinessStrategy,10e lh lh lh lh Page3 lh

, 11. First,recalltheequation forthe value ofafirm: lh lh lh lh lh lh lh lh lh




. Next,solvethisequation forgtoobtain
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. Substituting intheknown valuesimpliesa
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growth rate of: lh lh lh percent. This would seem lh lh lh




tobeareasonable rate of growth:0.0355 < 0.09 (g< i).
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12. Effectively, this question boilsdown to thequestion of whether it isa good investmen t tosp lh lh lh lh lh lh lh lh lh lh lh lh lh lh lh Y lh




endanextra$250ona refrigeratorthatwillsave you$40attheendofeachyear for five year
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s. The net present value of this investment is
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.

Youshouldbuythestandardmodel,sincedoingsosavesyou$81.51inpresentvalueter ms.
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13. Under a flat hourlywage, employees have little incentive towork hard as workinghard will
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not directlybenefit them. This adverselyaffects thefirm,since itsprofits will be lo werthant
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he$25,000perstorethatisobtainableeach daywhenemployees performat th eirpeak.Unde
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r theproposed paystructure,employeeshavea strongincentive toincrea seeffort,and thiswi
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llbenefit thefirm.Inparticular,underthe fixed hourlywage,anem ployeereceives$160 per
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daywhetherhe orshe workshard ornot. Underthe newpayst ructure,anemployeereceives$
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330perdayifthestoreachievesitsmaximumpossibled ailyprofit and only$80ifthe store’sd
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ailyprofit iszero.Thisprovidesemployeesaninc entivetowork hardandtoexertpeerpressur
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eon employees who might otherwise goof o
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ff.Byprovidingemployeesanincentivetoearnextramoneybyworkinghard,boththe firm a
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nd the employees will benefit.
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14.
a. Accountingcostsequal$145,000peryearinoverhead andoperating expe nse lh lh lh lh lh lh lh Y lh Y lh




s.Herimplicitcostisthe$75,000 salarythatmustbegiven uptostartth e new busi
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ness. Her opportunitycost includes both implicit and explicit co sts: $145,000
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+ $75,000 = $220,000. lh lh lh




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lh MichaelR.Baye&JeffreyT. Prince lh lh lh lh lh lh