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ManagerialEconomicsandBusinessStrategy,6ePage1Chapter1:AnswerstoQuestionsandProblems1.Consumer-consumerrivalrybestillustratesthissituation.Here,LeviStrauss&Co.isabuyercompetingagainstotherbiddersfortherighttoobtaintheantiquebluejeans.2.Themaximumyouwouldbewillingtopayforthisassetisthepresentvalue,whichis()()()()()2345150,000150,000150,000150,000150,00010.0910.0910.0910.0910.09$583,447.69.PV=+++++++++=3.a.Netbenefitsare().520502QQQN−+=b.Netbenefitswhen1=Qare()65520501=−+=Nandwhen5=Qtheyare()()()25555205052=−+=N.c.Marginalnetbenefitsare()QQMNB1020−=.d.Marginalnetbenefitswhen1=Qare()()10110201=−=MNBandwhen5=Qtheyare()()30510205−=−=MNB.e.Setting()01020=−=QQMNBandsolvingforQ,weseethatnetbenefitsaremaximizedwhen2=Q.f.Whennetbenefitsaremaximizedat2=Q,marginalnetbenefitsarezero.Thatis,()()0210202=−=MNB.4.a.Thevalueofthefirmbeforeitpaysoutcurrentdividendsis10.08$550,0000.080.05$19.8millionfirmPV+⎛⎞=⎜⎟−⎝⎠=.b.Thevalueofthefirmimmediatelyafterpayingthedividendismillion25.19$05.008.005.01000,550$=⎟⎠⎞⎜⎝⎛−+=−DividendExfirmPV.5.Thepresentvalueoftheperpetualstreamofcashflows.Thisisgivenby.875,1$04.075$===iCFPVPerpetuityPage2MichaelR.Baye6.Thecompletedtablelookslikethis:ControlVariableQTotalBenefitsB(Q)TotalCostC(Q)NetBenefitsN(Q)MarginalBenefitMB(Q)MarginalCostMC(Q)MarginalNetBenefitMNB(Q)10012009502502104017010114001000400200501501021590106053019060130103177011306401807011010419401210730170809010521001300800160907010622501400850150100501072390151088014011030108252016308901301201010926401760880120130-1011027501900850110140-30a.Netbenefitsaremaximizedat108=Q.b.Marginalcostisslightlysmallerthanmarginalbenefit()130,120==MBMC.Thisisduetothediscretenatureofthecontrolvariable.7.a.Thenetpresentvalueofattendingschoolisthepresentvalueofthebenefitsderivedfromattendingschool(includingthestreamofhigherearningsandthevaluetoyouoftheworkenvironmentandprestigethatyoureducationprovides),minustheopportunitycostofattendingschool.Asnotedinthetext,theopportunitycostofattendingschoolisgenerallygreaterthanthecostofbooksandtuition.Itisrationalforanindividualtoenrollingraduatewhenhisorhernetpresentvalueisgreaterthanzero.b.SincethisincreasestheopportunitycostofgettinganM.B.A.,onewouldexpectfewerstudentstoapplyforadmissionintoM.B.A.Programs.8.a.Heraccountingprofitsare$180,000.Thesearecomputedasthedifferencebetweenrevenues($200,000)andexplicitcosts($20,000).b.Byworkingasapainter,Jaynetgivesupthe$100,000shecouldhaveearnedunderhernextbestalternative.Thisimplicitcostof$100,000isinadditiontothe$20,000inexplicitcosts.Sincehereconomiccostsare$120,000,hereconomicprofitsare$200,000-$120,000=$80,000.ManagerialEconomicsandBusinessStrategy,6ePage39.First,recalltheequationforthevalueofafirm:⎟⎟⎠⎞⎜⎜⎝⎛−+=giiPVfirm10π.Next,solvethisequationforgtoobtain()firmPViig01π+−=.Substitutingintheknownvaluesimpliesagrowthrateof()06.0000,275000,1010.0110.0=+−=g,or6percent.Thiswouldseemtobeareasonablerateofgrowth:()ig10.006.0.10.Effectively,thisquestionboilsdowntothequestionofwhetheritisagoodinvestmenttospendanextra$100onarefrigeratorthatwillsaveyou$25attheendofeachyearforfiveyears.Thenetpresentvalueofthisinvestmentis()()()()2345$25$25$25$25$25$1001.051.051.051.051.05$108.24$100$8.24.NPV=++++−=−=Youshouldbuytheenergyefficientmodel,sincedoingsosavesyou$8.24inpresentvalueterms.11.Underaflathourlywage,employeeshavelittleincentivetoworkhardasworkinghardwillnotdirectlybenefitthem.Thisadverselyaffectsthefirm,sinceitsprofitswillbelowerthanthe$40,000perstorethatisobtainableeachdaywhenemployeesperformattheirpeak.Undertheproposedpaystructure,employeeshaveastrongincentivetoincreaseeffort,andthiswillbenefitthefirm.Inparticular,underthefixedhourlywage,anemployeereceives$144perdaywhetherheorsheworkshardornot.Underthenewpaystructure,anemployeereceives$264perdayifthestoreachievesitsmaximumpossibledailyprofitandonly$64ifthestore’sdailyprofitiszero.Thisprovidesemployeesanincentivetoworkhardandtoexertpeerpressureonemployeeswhomightotherwisegoofoff.Byprovidingemployeesanincentivetoearnextramoneybyworkinghard,boththefirmandtheemployeeswillbenefit.12.a.Accountingcostsequal$3,160,000peryearinoverheadandoperatingexpenses.Herimplicitcostisthe$56,000salarythatmustbegivenuptostartthenewbusiness.Heropportunitycostincludesbothimplicitandexplicitcosts:$3,160,000+$56,000=$3,216,000.b.Toearnpositiveaccountingprofits,therevenuesperyearshouldgreaterthan$3,160,000.Toearnpositiveeconomicprofits,therevenuesperyearmustbegreaterthan$3,216,000.Page4MichaelR.Baye13.First,notethatthe$170millionspenttodateisirrelevant,asitwillbelostregardlessofthedecision.Therelevantquestioniswhethertheincrementalbenefits(thepresentvalueoftheprofitsgeneratedfromthedrug)exceedtheincrementalcosts(the$30millionneededtokeeptheprojectalive).Sincethesecostsandbenefitsspantime,itisappropriatetocomputethenetpresentvalue.Here,thenetpresentvalueofDAS’sR&Dinitiativeis5678915,000,00016,500,00018,150,00019,965,00021,961,50030,000,000(10.07)(10.07)(10.07)(10.07)(10.07)$26,557,759.86.NPV=++++−+++++=Sincethisispositive,DASshouldspendthe$30million.Doing