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Solutions Me Chapter 1

In: Business and Management

Submitted By pujihk
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Chapter 1: Answers to Questions and Problems

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 =
(1 + 0.09 ) (1 + 0.09 ) (1 + 0.09 ) (1 + 0.09 ) (1 + 0.09 )5
= $583, 447.69.


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

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 .


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


The present value of the perpetual stream of cash flows. This is given by
PVPerpetuity =

CF $75
= $1,875. i 0.04

Managerial Economics and Business Strategy, 7e

Page 1


The completed table looks like this:







Marginal Marginal…...

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