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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. The maximum you would be willing to pay for this asset is the present value, which is 150, 000 150, 000 150, 000 150, 000 150, 000 PV = + + + + 2 3 4 (1 + 0.09 ) (1 + 0.09 ) (1 + 0.09 ) (1 + 0.09 ) (1 + 0.09 )5 = $583, 447.69. 3. a. Net benefits are N (Q ) = 50 + 20Q − 5Q 2 . b. Net benefits when Q = 1 are N (1) = 50 + 20 − 5 = 65 and when Q = 5 they are
2

2.

c. d. e. f.

N (5) = 50 + 20(5) − 5(5) = 25 . Marginal net benefits are MNB (Q ) = 20 − 10Q . Marginal net benefits when Q = 1 are MNB (1) = 20 − 10(1) = 10 and when Q = 5 they are MNB (5) = 20 − 10(5) = −30 . Setting MNB(Q ) = 20 − 10Q = 0 and solving for Q , we see that net benefits are maximized when Q = 2 . When net benefits are maximized at Q = 2 , marginal net benefits are zero. That is, MNB (2 ) = 20 − 10(2 ) = 0 .

4. a. The value of the firm before it pays out current dividends is
⎛ 1 + 0.08 ⎞ PV firm = $550, 000 ⎜ ⎟ ⎝ 0.08 − 0.05 ⎠ . = $19.8 million

b. The value of the firm immediately after paying the dividend is
⎛ 1 + 0.05 ⎞ Ex −Dividend = $550,000⎜ PV firm ⎟ ⎝ 0.08 − 0.05 ⎠ . = $19.25 million

5.

The present value of the perpetual stream of cash flows. This is given by
PVPerpetuity = CF $75 = = $1,875. i 0.04
Page 1

Managerial Economics and Business Strategy, 5e

6.

The completed table looks like this:

Control Variable Q 100 101 102 103 104 105 106 107 108 109 110

Total Benefits B(Q) 1200 1400 1590 1770 1940 2100 2250 2390 2520 2640 2750

Total Cost C(Q) 950 1000 1060 1130 1210 1300 1400 1510 1630 1760 1900

Net Marginal Marginal Benefits Benefit Cost N(Q) MB(Q) MC(Q) 250 400 530 640 730 800 850 880 890 880 850 210 200 190 180 170 160 150

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