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chap01solutions - Chapter 1 Answers to Questions and...

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Chapter 1: Answers to Questions and Problems 1. Consumer-consumer rivalry best illustrates this situation. Here, Levi Strauss & Co. is a buyer competing against other bidders for the right to obtain the antique blue jeans. 2. The maximum you would be willing to pay for this asset is the present value, which is ( 29 ( 29 ( 29 ( 29 ( 29 2 3 4 5 150,000 150,000 150,000 150,000 150,000 1 0.09 1 0.09 1 0.09 1 0.09 1 0.09 $583,447.69. PV = + + + + + + + + + = 3. a. Net benefits are ( 29 . 5 20 50 2 Q Q Q N - + = b. Net benefits when 1 = Q are ( 29 65 5 20 50 1 = - + = N and when 5 = Q they are ( 29 ( 29 ( 29 25 5 5 5 20 50 5 2 = - + = N . c. Marginal net benefits are ( 29 Q Q MNB 10 20 - = . d. Marginal net benefits when 1 = Q are ( 29 ( 29 10 1 10 20 1 = - = MNB and when 5 = Q they are ( 29 ( 29 30 5 10 20 5 - = - = MNB . e. Setting ( 29 0 10 20 = - = Q Q MNB and solving for Q , we see that net benefits are maximized when 2 = Q . f. When net benefits are maximized at 2 = Q , marginal net benefits are zero. That is, ( 29 ( 29 0 2 10 20 2 = - = MNB . 4. a. The value of the firm before it pays out current dividends is 1 0.08 $550,000 0.08 0.05 $19.8 million firm PV + = - = . b. The value of the firm immediately after paying the dividend is million 25 . 19 $ 05 . 0 08 . 0 05 . 0 1 000 , 550 $ = - + = - Dividend Ex firm PV . 5. The present value of the perpetual stream of cash flows. This is given by . 875 , 1 $ 04 . 0 75 $ = = = i CF PV Perpetuity Managerial Economics and Business Strategy, 6e Page 1
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6. The completed table looks like this: Control Variable Q Total Benefits B(Q) Total Cost C(Q) Net Benefits N(Q) Marginal Benefit MB(Q) Marginal Cost MC(Q) Marginal Net Benefit MNB(Q) 100 1200 950 250 210 40 170 101 1400 1000 400 200 50 150 102 1590 1060 530 190 60 130 103 1770 1130 640 180 70 110 104 1940 1210 730 170 80 90 105 2100 1300 800 160 90 70 106 2250 1400 850 150 100 50 107 2390 1510 880 140 110 30 108 2520 1630 890 130 120 10 109 2640 1760 880 120 130 -10 110 2750 1900 850 110 140 -30 a. Net benefits are maximized at 108 = Q . b. Marginal cost is slightly smaller than marginal benefit ( 29 130 , 120 = = MB MC . This is due to the discrete nature of the control variable. 7. a. The net present value of attending school is the present value of the benefits derived from attending school (including the stream of higher earnings and the value to you of the work environment and prestige that your education provides), minus the opportunity cost of attending school. As noted in the text, the opportunity cost of attending school is generally greater than the cost of books and tuition. It is rational for an individual to enroll in graduate when his or her net present value is greater than zero. b. Since this increases the opportunity cost of getting an M.B.A., one would expect fewer students to apply for admission into M.B.A. Programs. 8. a. Her accounting profits are $180,000. These are computed as the difference between revenues ($200,000) and explicit costs ($20,000). b. By working as a painter, Jaynet gives up the $100,000 she could have earned under her next best alternative. This implicit cost of $100,000 is in addition to the $20,000 in explicit costs. Since her economic costs are $120,000, her economic profits are $200,000 - $120,000 = $80,000.
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