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Solutions Me Chapter 1

In: Business and Management

Submitted By pujihk
Words 2679
Pages 11
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
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

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 .
2

c.
d.
e.
f.

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

Managerial Economics and Business Strategy, 7e

Page 1

6.

The completed table looks like this:

Control
Variable
Q

Total
Benefits
B(Q)

Total
Cost
C(Q)

100
101
102
103
104
105
106
107
108
109
110

1200
1400
1590
1770
1940
2100
2250
2390
2520
2640
2750

950
1000
1060
1130
1210
1300
1400
1510
1630
1760
1900

Net
Marginal Marginal…...

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