Solutions for Economics textbook. Baye, 8 edition.

© All Rights Reserved

13K views

Solutions for Economics textbook. Baye, 8 edition.

© All Rights Reserved

- Managerial Economics & Business Strategy, Answers, chapter 1
- Managerial Economics Michael Baye Chapter 8 answers
- Solution-Manual-for-Managerial-Economics-Business-Strategy-9th-Edition-By-Baye.pdf
- Managerial Economics by Baye (Chap4 Solutions)
- MANAGERIAL ECONOMICS & BUSINESS STRATEGY Chap014 Solutions
- Managerial Economics Questions and Answers
- Chapter 2 Complete Solutions
- Chap 005
- Solutions Managerial Economics Chapter 3
- Chap006 Solutions
- chap007s
- chap009s
- Solution Manual for Managerial Economics 7th Edition Allen
- Managerial Economics and Business Strategy, 8E Baye Chap. 2
- Chap 010
- Chap 011
- Solutions Manual Managerial Economics 7th Edition Samuelson Marks
- Managerial Economics and Business Strategy, 8E Baye Chap. 3
- Managerial Economics 1
- Solutions ME Chapter 1

You are on page 1of 36

1.

a. When P = $12, R = ($12)(1) = $12. When P = $10, R = ($10)(2) = $20. Thus, the

price decrease results in an $8 increase in total revenue, so demand is elastic over

this range of prices.

b. When P = $4, R = ($4)(5) = $20. When P = $2, R = ($2)(6) = $12. Thus, the price

decrease results in an $8 decrease total revenue, so demand is inelastic over this

range of prices.

c. Recall that total revenue is maximized at the point where demand is unitary

elastic. We also know that marginal revenue is zero at this point. For a linear

demand curve, marginal revenue lies halfway between the demand curve and the

vertical axis. In this case, marginal revenue is a line starting at a price of $14 and

intersecting the quantity axis at a value of Q = 3.5. Thus, marginal revenue is 0 at

3.5 units, which corresponds to a price of $7 as shown below.

Price $14

$12

$10

$8

$6

$4

$2

Demand

$0

0

MR 4

6 Quantity

Figure 3-1

Page 1

2.

a. At the given prices, quantity demanded is 700 units:

Qxd 1000 2 154 .02 400 700 . Substituting the relevant information into

Px

154

2

0.44 . Since this is less

Qx

700

than one in absolute value, demand is inelastic at this price. If the firm charged a

lower price, total revenue would decrease.

b. At the given prices, quantity demanded is 300 units:

Qxd 1000 2 354 .02 400 300 . Substituting the relevant information into

the elasticity formula gives: EQx , Px 2

P

354

the elasticity formula gives: EQx , Px 2 x 2

2.36 . Since this is

300

Qx

greater than one in absolute value, demand is elastic at this price. If the firm

increased its price, total revenue would decrease.

c. At the given prices, quantity demanded is 700 units:

Qxd 1000 2 154 .02 400 700 . Substituting the relevant information into

P

400

the elasticity formula gives: EQx , PZ .02 Z .02

0.011 . Since this

700

Qx

number is positive, goods X and Z are substitutes.

3.

a. The own price elasticity of demand is simply the coefficient of ln Px, which is

0.5. Since this number is less than one in absolute value, demand is inelastic.

b. The cross-price elasticity of demand is simply the coefficient of ln Py, which is

2.5. Since this number is negative, goods X and Y are complements.

c. The income elasticity of demand is simply the coefficient of ln M, which is 1.

Since this number is positive, good X is a normal good.

d. The advertising elasticity of demand is simply the coefficient of ln A, which is 2.

Page 2

Michael R. Baye

4.

% Qxd

2 . Solving,

5

we see that the quantity demanded of good X will decrease by 10 percent if the

price of good X increases by 5 percent.

% Qxd

b. Use the cross-price elasticity of demand formula to write

6 . Solving,

10

we see that the demand for X will decrease by 60 percent if the price of good Y

increases by 10 percent.

% Qxd

c. Use the formula for the advertising elasticity of demand to write

4.

2

Solving, we see that the demand for good X will decrease by 8 percent if

advertising decreases by 2 percent.

% Qxd

d. Use the income elasticity of demand formula to write

3 . Solving, we

3

see that the demand of good X will decrease by 9 percent if income decreases by

3 percent.

a. Use the own price elasticity of demand formula to write

5.

6.

50

5 . Solving, we see that the price

%Py

of good Y would have to decrease by 10 percent in order to increase the consumption

of good X by 50 percent.

R $30,0001 2.5 $70,0001.1.01 $320 . Thus, a 1 percent increase in the

price of good X would cause revenues from both goods to increase by $320.

Page 3

7.

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.62

0.39

0.37

190.90

100.00

ANOVA

degrees of freedom

Regression

Residual

Total

2.00

97.00

99.00

Coefficients

Intercept

Price of X

Income

187.15

-4.32

0.09

SS

MS

2,223,017.77 1,111,508.88

3,535,019.49

36,443.50

5,758,037.26

Standard Error

t Stat

534.71

0.35

0.69

0.02

6.26

4.47

30.50

P-value

0.73

0.00

0.00

Significance F

0.00

Lower 95%

-880.56

-5.69

0.05

Upper 95%

1,254.86

-2.96

0.14

Table 3-1

a. Qxd 187.15 4.32 Px .09 M .

b. Only the coefficients for the Price of X and Income are statistically significant at

the 5 percent level or better.

c. The R-square is fairly low, indicating that the model explains only 39 percent of

the total variation in demand for X. The adjusted R-square is only marginally

lower (37 percent), suggesting that the R-square is not the result of an excessive

number of estimated coefficients relative to the sample size. The F-statistic,

however, suggests that the overall regression is statistically significant at better

than the 5 percent level.

8.

Page 4

can be 95 percent confident that a is within the range of 8 and 12. The approximate

95 percent confidence interval for b is b 2 b 2.5 1 . Thus, you can be 95

percent confident that b is within the range of 3.5 and 1.5.

Michael R. Baye

9.

a. The t statistics are as follows: t a

9369.45

1.36

0.848 ; t b

2.429 ; and

11067.07

0.56

0.14

2.80 .

0.05

b. Since t a 2 the coefficient estimate, a , is not statistically different from zero.

t c

statistically different from zero.

c. The R-square and adjust R-square tell us the proportion of variation explained by

the regression. The R-square tells us that 24 percent of the variability in the

dependent variable is explained by price and income. The adjusted R-square

confirms that fact and the R-square is not the result of estimating too many

coefficients (i.e. few degrees of freedom).

10.

a. The own-price elasticity of demand is -1.36, so demand is elastic.

b. The income elasticity of demandis-0.14, so X is an inferior good.

11.

The result is not surprising. Given the available information, the own price elasticity

137

of demand for major cellular telephone manufacturer is EQ ,P

8.06 . Since

17

this number is greater than one in absolute value, demand is elastic. By the total

revenue test, this means that a reduction in price will increase revenues.

Page 5

12.

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.97

0.94

0.94

0.00

49

ANOVA

df

Regression

Residual

Total

Intercept

LN Price

LN Income

2

46

48

SS

0.00702

0.00044

0.00745

1.29

0.41

-0.07

0.00

-0.03

0.09

MS

0.004

0.000

t Stat

3.12

-26.62

-0.33

F

Significance F

370.38

0.0000

P-value

0.00

0.00

0.74

Lower 95%

0.46

-0.08

-0.22

Upper 95%

2.12

-0.07

0.16

Table 3-2

Thus, the demand for your batteries is given by ln Q 1.29 0.07 ln P 0.03ln M .

Since this is a log-linear demand equation, the best estimate of the income elasticity

of demand for your product is -.03: Your batteries are an inferior good. However,

note the estimated income elasticity is very close to zero (implying that a 3 percent

reduction in global incomes would increase the demand for your product by less than

one tenth of one percent). More importantly, the estimated income elasticity is not

statistically different from zero (the 95 percent confidence interval ranges from a low

of -.22 to a high of .16, with a t-statistic that is well below 2 in absolute value). On

balance, this means that a 3 percent decline in global incomes is unlikely to impact

the sales of your product. Note that the R-square is reasonably high, suggesting the

model explains 94 percent of the total variation in the demand for this product.

Likewise, the F-test indicates that the regression fit is highly significant.

13.

14.

Page 6

Based on this information, the own price elasticity of demand for Big G cereal is

3

EQ , P

1.5 . Thus, demand for Big G cereal is elastic (since this number is

2

greater than one in absolute value). Since Lucky Charms is one particular brand of

cereal for which even more substitutes exist, you would expect the demand for Lucky

Charms to be even more elastic than the demand for Big G cereal. Thus, since the

demand for Lucky Charms is elastic, one would predict that the increase in price of

Lucky Charms resulted in a reduction in revenues on sales of Lucky Charms.

% Q d

1.75 . Solving, we see that coffee

4

purchases are expected to decrease by 7 percent.

Use the income elasticity formula to write

Michael R. Baye

15.

To maximize revenue, Toyota should charge the price that makes demand unit elastic.

Using the own price elasticity of demand formula,

P

EQ , P 1.25

1 . Solving this equation for P implies that the

100, 000 1.25P

revenue maximizing price is P $40,000 .

16.

R $6001 2.5 $400 0.2 .01 $9.8 million , so revenues will increase

by $9.8 million.

17.

d

Q RHF

136.96 91.69 PRHF 43.88PNG 11.92 PE 0.05M , where PRHF is the price

of residential heating fuel, PNG is the price of natural gas, PE is the price of

electricity, and M is income. However, notice that coefficients of income and the

price of electricity are not statistically different from zero. Among other things, this

means that the proposal to increase the price of electricity by $5 is unlikely to have a

statistically significant impact on the demand for residential heating fuel. Since the

coefficient of PRHF is -91.69, a $2 increase in PRHF would lead to a 183.38 unit

reduction in the consumption of residential heating fuel (since (-91.69)($2) = - 183.38

units). Since the coefficient of PNG is 43.88, a $1 reduction in PNG would lead to a

43.88 unit reduction in the consumption of residential heating fuel (since (43.88)(-$1)

= -43.88). Thus, the proposal to increase the price of residential heating fuel by $2

would lead to the greatest expected reduction in the consumption of residential

heating fuel.

Page 7

18.

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.97

0.94

0.94

0.06

41

ANOVA

df

Regression

Residual

Total

Intercept

ln (Price)

SS

1

39

40

2.24

0.15

2.38

MS

2.24

0.00

F

Significance F

599.26

0.00

4.29

0.12 37.17

0.00

-1.38

0.06 -24.48

0.00

Lower 95%

Upper 95%

4.06

4.53

-1.50

-1.27

Table 3-3

Thus, the least squares regression line is ln Q 4.29 1.38 ln P . The own price

elasticity of demand for broilers is 1.38. From the t-statistic, this is statistically

different from zero (the t-statistic is well over 2 in absolute value). The R-square is

relatively high, suggesting that the model explains 94 percent of the total variation in

the demand for chicken. Given that your current revenues are $750,000 and the

elasticity of demand is 1.38, we may use the following formula to determine how

much you must change price to increase revenues by $50,000:

Px

Px

P

$50,000 $750,0001 1.38 x

Px

R Px Q x 1 EQx ,Px

Px

$50,000

Px

$285,000

you must decrease your price by 17.5 percent.

Solving yields

Page 8

Michael R. Baye

19.

The regression output (and corresponding demand equations) for each state are

presented below:

ILLINOIS

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.29

0.09

0.05

151.15

50

ANOVA

degrees of freedom

Regression

Residual

Total

2

47

49

SS

MS

Significance F

100540.93

1073835.15

1174376.08

50270.47

22847.56

2.20

0.12

t Stat

P-value

Lower 95%

Intercept

Price

Income

-42.65

2.62

14.32

496.56

13.99

6.83

-0.09

0.19

2.10

0.93

0.85

0.04

-1041.60

-25.53

0.58

Upper 95%

956.29

30.76

28.05

Table 3-4

The estimated demand equation is Q 42.65 2.62 P 14.32 M . While it appears

that demand slopes upward, note that coefficient on price is not statistically different

from zero. An increase in income by $1,000 increases demand by 14.32 units. Since

the t-statistic associated with income is greater than 2 in absolute value, income is a

significant factor in determining quantity demanded. The R-square is extremely low,

suggesting that the model explains only 9 percent of the total variation in the demand

for KBC microbrews. Factors other than price and income play an important role in

determining quantity demanded.

Page 9

INDIANA

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.87

0.76

0.75

3.94

50

ANOVA

degrees of freedom

Regression

Residual

Total

2

47

49

SS

MS

2294.93 1147.46

729.15

15.51

3024.08

Intercept

Price

Income

97.53

-2.52

2.11

10.88

0.25

0.26

t Stat

8.96

-10.24

8.12

F

73.96

P-value

0.00

0.00

0.00

Significance F

0.00

Lower 95%

75.64

-3.01

1.59

Upper 95%

119.42

-2.02

2.63

Table 3-5

The estimated demand equation is Q 97.53 2.52 P 2.11M . This equation says

that increasing price by $1 decreases quantity demanded by 2.52 units. Likewise,

increasing income by $1,000 increases demand by 2.11 units. Since the t-statistics for

each of the variables is greater than 2 in absolute value, price and income are

significant factors in determining quantity demanded. The R-square is reasonably

high, suggesting that the model explains 76 percent of the total variation in the

demand for KBC microbrews.

Page 10

Michael R. Baye

MICHIGAN

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.63

0.40

0.37

10.59

50

ANOVA

degrees of freedom

Regression

Residual

Total

2

47

49

SS

MS

Significance F

3474.75

5266.23

8740.98

1737.38

112.05

15.51

0.00

t Stat

P-value

Lower 95%

Upper 95%

11.23

-3.28

4.09

0.0000

0.0020

0.0002

149.75

-1.65

0.72

215.12

-0.40

2.11

Intercept

Price

Income

182.44

-1.02

1.41

16.25

0.31

0.35

Table 3-6

The estimated demand equation is Q 182.44 1.02 P 1.41M . This equation says

that increasing price by $1 decreases quantity demanded by 1.02 units. Likewise,

increasing income by $1,000 increases demand by 1.41 units. Since the t-statistics

associated with each of the variables is greater than 2 in absolute value, price and

income are significant factors in determining quantity demanded. The R-square is

relatively low, suggesting that the model explains about 40 percent of the total

variation in the demand for KBC microbrews. The F-statistic is zero, suggesting that

the overall fit of the regression to the data is highly significant.

Page 11

MINNESOTA

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.64

0.41

0.39

16.43

50

ANOVA

degrees of freedom

Regression

Residual

Total

2

47

49

SS

MS

Significance F

8994.34

12680.48

21674.82

4497.17

269.80

16.67

0.00

t Stat

P-value

Lower 95%

Upper 95%

1.00

-0.05

5.68

0.32

0.96

0.00

-82.23

-5.19

2.20

245.62

4.94

4.62

Intercept

Price

Income

81.70

-0.12

3.41

81.49

2.52

0.60

Table 3-7

The estimated demand equation is Q 81.70 0.12 P 3.41M . This equation says

that increasing price by $1 decreases quantity demanded by 0.12 units. Likewise, a

$1,000 increase in consumer income increases demand by 3.41 units. Since the tstatistic associated with income is greater than 2 in absolute value, it is a significant

factor in determining quantity demanded; however, price is not a statistically

significant determinant of quantity demanded. The R-square is relatively low,

suggesting that the model explains 41 percent of the total variation in the demand for

KBC microbrews.

Page 12

Michael R. Baye

MISSOURI

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.88

0.78

0.77

15.56

50

ANOVA

degrees of freedom

Regression

Residual

Total

2

47

49

SS

MS

Significance F

39634.90

11385.02

51019.92

19817.45

242.23

81.81

0.00

t Stat

P-value

Lower 95%

Upper 95%

5.13

-1.36

12.73

0.00

0.18

0.00

75.57

-1.96

6.27

173.05

0.38

8.63

Intercept

Price

Income

124.31

-0.79

7.45

24.23

0.58

0.59

Table 3-8

The estimated demand equation is Q 124.31 0.79 P 7.45M . This equation says

that increasing price by $1 decreases quantity demanded by 0.79 units. Likewise, a

$1,000 increase in income increases demand by 7.45 units. The t-statistic associated

with price is not greater than 2 in absolute value; suggesting that price does not

statistically impact the quantity demanded. However, the estimated income

coefficient is statistically different from zero. The R-square is reasonably high,

suggesting that the model explains 78 percent of the total variation in the demand for

KBC microbrews.

Page 13

OHIO

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.99

0.98

0.98

10.63

50

ANOVA

degrees of freedom

Regression

Residual

Total

2

47

49

SS

323988.26

5306.24

329294.50

Intercept

Price

Income

111.06

-2.48

7.03

23.04

0.79

0.13

MS

161994.13 1434.86

112.90

Significance F

0.00

t Stat

P-value

Lower 95%

Upper 95%

4.82

-3.12

52.96

0.0000

0.0031

0.0000

64.71

-4.07

6.76

157.41

-0.88

7.30

Table 3-9

The estimated demand equation is Q 111.06 2.48P 7.03M . This equation says

that increasing price by $1 decreases quantity demanded by 2.48 units. Likewise,

increasing income by $1,000 increases demand by 7.03 units. Since the t-statistics

associated with each of the variables is greater than 2 in absolute value, price and

income are significant factors in determining quantity demanded. The R-square is

very high, suggesting that the model explains 98 percent of the total variation in the

demand for KBC microbrews.

Page 14

Michael R. Baye

WISCONSIN

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square

Adjusted R Square

Standard Error

Observations

0.999

0.998

0.998

4.79

50

ANOVA

degrees of freedom

Regression

Residual

Total

2

47

49

SS

Intercept

Price

Income

107.60

-1.94

10.01

MS

1079.75

22.97

615357.12

7.97

0.25

0.06

t Stat

13.49

-7.59

163.48

Significance F

0.00

P-value

Lower 95%

Upper 95%

0.00

0.00

0.00

91.56

-2.45

9.88

123.65

-1.42

10.13

Table 3-10

The estimated demand equation is Q 107.60 1.94 P 10.01M . This equation says

that increasing price by $1 decreases quantity demanded by 1.94 units. Likewise,

increasing income by $1,000 increases demand by 10.01 units. Since the t-statistics

associated with price and income are greater than 2 in absolute value, price and

income are both significant factors in determining quantity demanded. The R-square

is very high, suggesting that the model explains 99.8 percent of the total variation in

the demand for KBC microbrews.

Page 15

20.

Table 3-11 contains the output from the linear regression model. That model indicates

that R2 = .55, or that 55 percent of the variability in the quantity demanded is

explained by price and advertising. In contrast, in Table 3-12 the R2 for the log-linear

model is .40, indicating that only 40 percent of the variability in the natural log of

quantity is explained by variation in the natural log of price and the natural log of

advertising. Therefore, the linear regression model appears to do a better job

explaining variation in the dependent variable. This conclusion is further supported

by comparing the adjusted R2s and the F-statistics in the two models. In the linear

regression model the adjusted R2 is greater than in the log-linear model: .54 compared

to .39, respectively. The F-statistic in the linear regression model is 58.61, which is

larger than the F-statistic of 32.52 in the log-linear regression model. Taken together

these three measures suggest that the linear regression model fits the data better than

the log-linear model. Each of the three variables in the linear regression model is

statistically significant; in absolute value the t-statistics are greater than two. In

contrast, only two of the three variables are statistically significant in the log-linear

model; the intercept is not statistically significant since the t-statistic is less than two

in absolute value. At P = $3.10 and A = $100, milk consumption is 2.029 million

d

gallons per week Qmilk

6.52 1.613.10 .005100 2.029 .

Regression Statistics

Multiple R

0.74

R Square

0.55

Adjusted R Square

0.54

Standard Error

1.06

Observations

100.00

ANOVA

df

Regression

Residual

Total

Intercept

Price

Advertising

2.00

97.00

99.00

SS

132.51

109.66

242.17

MS

66.26

1.13

F

Significance F

58.61

2.05E-17

6.52

0.82

7.92

0.00

-1.61

0.15 -10.66

0.00

0.005

0.0016

2.96

0.00

Lower 95%

Upper 95%

4.89

8.15

-1.92

-1.31

0.00

0.01

Table 3-11

Page 16

Michael R. Baye

Regression Statistics

Multiple R

0.63

R Square

0.40

Adjusted R Square

0.39

Standard Error

0.59

Observations

100.00

ANOVA

df

Regression

Residual

Total

SS

2.00

97.00

99.00

MS

22.40 11.20

33.41 0.34

55.81

F

Significance F

32.52

1.55E-11

-1.99

2.24 -0.89

0.38

-2.17

0.28 -7.86

0.00

0.91

0.37 2.46

0.02

Intercept

ln(Price)

ln(Advertising)

Lower 95%

Upper 95%

-6.44

2.46

-2.72

-1.62

0.18

1.65

Table 3-12

21.

Given the estimated demand function and the monthly subscriptions prices, demand is

d

172,000 subscribers Qsat

152.5 0.950 1.0530 1.1030 . Thus, revenues are

$8.6 million, which are not sufficient to cover costs. Revenues are maximized when

Psat

1 : Solving yields Psat $120.56 . Thus, the

demand is unit elastic .9

217

.

9

P

sat

maximum revenue News Corp. can earn is $13,080,277.76

TR P Q 120.56 217 .9 120.56 1000 . News Corp. cannot cover its costs

in the current environment.

22.

The manager of Pacific Cellular estimated that the short-term price elasticity of

demand was inelastic. In the market for cellular service, contracts prevent many

customers from immediately responding to price increases. Therefore, it is not

surprising to observe inelastic in the short-term. However, as contracts expire and

customers have more time to search for alternatives, quantity demanded is likely to

drop off much more. Given a year or two, the demand for cellular service is much

more elastic. The price increase has caused Pacific to lose more customers than they

initially estimated.

23.

The owner is confusing the demand for gasoline for the entire U.S. with demand for

the gasoline for individual gasoline stations. There are not a great number of

substitutes for gasoline, but in large towns there are usually a very high number of

substitutes for gasoline from an individual station. In order to make an informed

decision, the owner needs to know the own price elasticity of demand for gasoline

from his stations. Since gas prices are posted on big billboards, and gas stations in

cities are generally close together, demand for gas from a small group of individual

stations tends to be fairly elastic.

Page 17

1.

a. The market rate of substitution is

Px

10

0.25 .

40

Py

c. Increasing income to $800 (by $400) expands the budget set, as shown in Figure

4-1. Since the slope is unchanged, so is the market rate of substitution.

Budget Set

Y

25

20

15

Increase

in income

10

0

0

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

Figure 4-1

2.

a. Since the slope of the line through point A is

20

1 and the price of good X

20

b. If the consumer spends all her income on good X she can purchase 20 units. Since

these units cost $5 each, her income must be $100.

c. At point A, the consumer spends ($5)(10) = $50 on good Y, which means that the

remaining $100 - $50 = $50 is being spent on good X. Since good X costs $5 per

unit, point A corresponds to 10 units of good X.

d. The price of good Y decreased to $2.50. The consumer achieves a higher level of

satisfaction at point B.

Page 1

3.

solving for Y results in Y 25 0.5 X .

b. See in Figure 4-2.

c. When the price of X increases to $10, the budget line becomes

$250 $10 X $10Y , which is equivalent to Y 25 X (after rearranging and

simplifying terms). This is shown in Figure 4-2. The market rate of substitution

P

P

5

1

10

changes from x to x 1 .

10

2

Py

Py

10

Budget Set

Y

30

25

20

15

10

5

0

0

10

15

20

25

30

35

40

45

50

Figure 4-2

4.

This is not always the case. For instance, if the consumer was initially consuming

more of the inferior good than a gift certificate would purchase, then less of the

inferior good will be consumed when given a gift certificate.

5.

A half-price sale cuts the price of each and every unit in half. In contrast, a buy-one,

get-one-free deal does not change the relative price of any units between 0 and 1 unit.

Furthermore, it makes the price of units purchased between 1 and 2 units purchased

zero.

Page 2

Michael R. Baye

6.

a. Px $50 , Py $100 and M = $300.

b.

M 300

3 units.

Py 100

f.

g.

M 300

6 units.

Px

50

1 unit (since the $50 gift certificate will purchase exactly one unit of good X).

M $50 350

7 units.

Px

50

D , B, C, A.

Normal.

a.

b.

c.

d.

Consumption of good X will decrease and consumption of good Y will increase.

Nothing will happen to the consumption of either good.

Consumption of good X will increase and consumption of good Y will decrease.

c.

d.

e.

7.

8.

Substitution) and Property 4-2 (More is Better).

Page 3

9.

a. The initial budget set is depicted in Figure 4-3.

Y

125

Figure 4-3

250

b. Doubling all income and price leaves the budget set unchanged. The increase in

income is sufficient to offset the price increases. The market rate of substitution is

unchanged.

c. The consumers income is $500, the price of X is $2 per unit and the price of Y is

$4 per unit.

10.

11.

Page 4

b. Since the worker is always willing to trade $12 dollars of income for one hour of

leisure, the workers indifference curve does not exhibit diminishing marginal rate

of substitution; the worker always trades between the two goods at the same rate.

These preferences do not exhibit a diminishing marginal rate of substitution since

consumers are always willing to substitute the same amount of store-brand sugar for

an additional pound of producer-brand sugar. When store-brand sugar is $1 per pound

and producer-brand sugar is $2 per pound, the consumer will purchase 10 pounds of

store-label sugar and no producer-brand sugar. After the change, the consumer will

purchase no store-label sugar and 10 pounds of producer-brand sugar.

Michael R. Baye

12.

See Figure 4-6. When there is no food stamp program, the market rate of substitution

is 0.5. The Food Stamp program leaves the market rate of substitution unchanged,

and a consumer can purchase $170 of food without spending her income. A dollarfor-dollar exchange of food stamps for money further expands a consumers

opportunity set, potentially making her better off.

Budget Constraint with and without Food Stamps

Other

80

Goods

Budget line when food stamps are sold on black market for $170

70

60

50

Budget line with $170 in food stamps

40

30

20

Initial budget line

10

0

0

10 20 30 40 50 60

Food

Figure 4-6

13.

See Figure 4-7. The offer expands the consumers budget set and allows her to

purchase more tires.

Budget Set with and without Buy 3, Get 4th Free Offer

Income Spent on

Other

600

Goods

Budget line with "Buy 3, get the 4th Free Offfer"

500

400

300

200

Initial budget line

100

0

0

10

11

Tires

Figure 4-7

Managerial Economics and Business Strategy, 7e

Page 5

14.

See Figure 4-8. The initial market rate of substitution is 0.5. Since, after the price

P

decrease, the MRS 1 0.625 EM (where PEM is the price of electronic media

PT

and PT the price of travel) equilibrium has not been achieved. To reach equilibrium,

the business should increase its use of electronic media and decrease travel.

Budget Set

Quantity

of Travel

7

6

5

4

3

2

1

0

0

10 Quantity of

Electronic Media

Figure 4-8

Page 6

Michael R. Baye

15.

The impacts on the consumers budget sets are illustrated in Figure 4-9. As is shown

in the diagram, if the consumer has a strong preference for other goods (so that the

preferred quantity of other goods is greater than 7 units), the cash is preferred even

though it is taxed. Otherwise, the non-taxable, employer-sponsored health insurance

program allows an employee to achieve a higher indifference curve.

Budget Line with Employer Sponsored Health Insurance

Other Goods

equivalent health insurance benefit

8

7

6

5

insurance benefit

4

3

2

1

0

0

Quantity of

Health Insurance

Figure 4-9

16.

Under the existing plan, a worker that does not goof off produces 3 copiers per hour

and thus is paid $9 each hour. Under the new plan, each worker would be paid a flat

wage of $8 per hour. While it might appear on the surface that the company would

save $1 per hour in labor costs by switching plans, the flat wage would be a lousy

idea. Under the current plan, workers get paid the $9 only if they work hard during

the hour and produce 3 machines that pass inspection. Under the new plan, workers

would get paid $8 an hour regardless of how many units they produce. Since your

firm has no supervisors to monitor the workers, you should not favor the plan.

Page 7

17.

As shown in Figure 4-10, the budget line when more than 10 dozen bagels are

purchased annually under the frequent buyer program is always greater than the

budget line when the firm sells each dozen bagels at a 3 percent discount. However,

the budget line for consumers who purchase fewer than 10 dozen bagels per year is

greater under the 3 percent per dozen discount.

Income Spent

on Other Goods 160

140

120

100

Budget line under the

frequent buyer program

80

60

discount

40

20

0

0

10

15

20

25

30

Quantity of

Bagels (dozens)

Figure 4-10

18.

Page 8

Yes. Since pizza is an inferior good, if the consumer is given $30 in cash she will

definitely spend it entirely on CDs just as she would if given a $30 gift certificate at

a local music store.

Michael R. Baye

19.

Figure 4-11 illustrates a consumers budget line when a firm offers a quantity

discount. A consumer will never purchase exactly 8 bottles of wine, since at this

kink in the opportunity set the consumer would always be better off by buying more

or less wine.

Quantity of

Other Goods

110

100

90

80

70

60

50

40

30

20

10

0

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Quantity

of Wine

Figure 4-11

Page 9

20.

Figure 4-12 contains profit as a function of output. Output when managers are

compensated based solely on output is 25 units and profits are zero. In contrast, when

managers compensation is based solely on profits, output is 12.5 units and profits are

$156.25. When managers compensation is based on a combination of output and

profit, output ranges between 12.5 and 25 units and profit will be between zero and

$156.25. The exact combination of output and profit depends on how these variables

are weighted.

Profit ($) 180

160

140

120

100

80

60

40

20

0

0

2.5

7.5

10

12.5

15

17.5

20

22.5

25

27.5

Output (Q)

Figure 4-12

Page 10

Michael R. Baye

21.

Figures 4-13a and 4-13b, respectively, illustrate Alberts and Sids opportunity sets.

Since there are 24 hours per day, at the new wage rate of $18 per hour Albert will

supply 12 hours of labor per day (24-12), and Sid will supply 8 hours of labor per day

(24-16). This seemingly contradictory result is explained by decomposing the wage

change into the substitution effect and income effect. The diminishing marginal rate

of substitution between income and leisure implies that the substitution effect will

increase the amount of leisure consumed by each worker (decrease the amount of

labor supplied). Since after the wage change Albert is observed consuming less

leisure (supplying more labor), the income effect dominates the substitution effect. In

contrast, the substitution effect dominates the income effect for Sid; since Sid is

observed consuming more leisure (supplying less labor) after the wage change.

Income

480

432

12

14

24

Leisure

Figure 4-13a

Income

480

432

14

16

24

Leisure

Figure 4-13b

Managerial Economics and Business Strategy, 7e

Page 11

22.

Gift cards are not merely a fad. Retailers experience significant benefits from gift

cards since they minimize product returns; independent of whether the good is normal

or inferior. Gift cards can also benefit consumers. A gift card does not impact the

amount purchased for one good (say the good on the Y axis), but shifts out the budget

constraint for the other good (the good on the X axis) by the face value of the gift

card. The expanded budget constrain permits the consumer to reach a higher

indifference curve; resulting in greater utility.

23.

AOG

Flat-Rate Plan

Old Plan

AOG

A

1,499

43,200

1,499

43,200

Under the Old Plan, consumers consumed 1,499 of online monthly minutes for

$14.99. The budget line under the Flat-Rate Plan, however, is significantly different.

Consumers can choose to now spend all their income on all other goods (AOG),

represented by point A on the AOG axis or consume the same about AOG and any

amount of online minutes up to the maximum number of minutes in a month.

Optimizing consumers will choose the corner solution represented by the same

number of units of AOG as the Old Plan and 43,200 online monthly minutes. Thus,

UK consumers are necessarily better off (assuming no busy signals). AOL UK,

however, gains no additional revenues and presumably must increase it network

capacity. Therefore, AOL UK may earn lower profit (ignoring other factors).

Page 12

Michael R. Baye

1.

a. When K = 16 and L = 16, Q 16

0.75

0.25

1. When K = 16 and L = 81, Q 16 81 8 3 24 . Thus, APL =

0.75

0.25

24/81 = 8/27.

3 4

b. The marginal product of labor is MPL 2 L . When L = 16,

MPL 2 16

3 4

3 4

2 / 27 . Thus, as the

number of units of labor hired increases, the marginal product of labor decreases

MPL 16 1/ 4 2 / 27 MPL 81 , holding the level of capital fixed.

c. We must equate the value marginal product of labor equal to the wage and solve

equal to the wage of $25 gives 200 L

quantity of labor is L = 16.

3/ 4

3/ 4

200 L

3/ 4

. Setting this

Page 1

(1)

(2)

(3)

(4)

Marginal

Product of

Capital

MP K

(5)

Average

Product of

Capital

AP K

(6)

Average

Product of

Labor

AP L

(7)

Value Marginal

Product of

Capital

VMPK

Capital

Labor

Output

0

1

2

3

4

5

6

7

8

9

10

11

20

20

20

20

20

20

20

20

20

20

20

20

0

50

150

300

400

450

475

475

450

400

300

150

-50

100

150

100

50

25

0

-25

-50

-100

-150

-50

75

100

100

90

79.17

67.86

56.25

44.44

30

13.64

-2.50

7.50

15

20

22.50

23.75

23.75

22.50

20

15

7.50

-100

200

300

200

100

50

0

-50

-100

-200

-300

Table 5-1

a. Labor is the fixed input while capital is the variable input.

b. Fixed costs are 20($15) = $300.

c. To produce 475 units in the least-cost manner requires 6 units of capital, which

cost $75 each. Thus, variable costs are ($75)(6) = $450.

d. Using the VMPK = r rule, K = 5 maximizes profits.

e. The maximum profits are $2(450) $15(20) $75(5) $225 .

f. There are increasing marginal returns when K is between 0 and 3.

g. There are decreasing marginal returns when K is between 3 and 11.

h. There are negative marginal returns when K is greater than 7.

3.

experienced when input usage increases, holding all other inputs constant. In contrast,

the law of diminishing marginal rate of technical substitution is a property of a

production function stating that as less of one input is used, increasing amounts of

another input must be employed to produce the same level of output.

4.

a. FC = 50.

2

3

b. VC 10 25 10 30 10 5 10 $8, 250 .

c. C 10 50 2510 3010 510 $8,300 .

$50

d. AFC 10

$5 .

10

VC 10 $8, 250

$825 .

e. AVC 10

10

10

f. ATC 10 AFC 10 AVC 10 $830 .

2

2

Page 2

Michael R. Baye

w

, the firm is not using the cost minimizing combination of labor

r

and capital. To minimize costs, the firm should use more labor and less capital since

MPL 50 MPK 75

the marginal product per dollar spent is greater for labor:

.

6

12

w

r

5.

Since MRTS KL

6.

(1)

(2)

(3)

(4)

(5)

(7)

(8)

Average

Fixed Cost

(6)

Average

Variable

Cost

Quantity

Fixed Cost

Variable

Cost

Total Cost

Average

Total Cost

Marginal

Cost

FC

VC

0

100

200

300

400

500

600

10,000

10,000

10,000

10,000

10,000

10,000

10,000

0

10,000

15,000

30,000

50,000

90,000

140,000

TC

AFC

AVC

ATC

MC

10,000

20,000

25,000

40,000

60,000

100,000

150,000

-100

50

33.33

25

20

16.67

-100

75

100

125

180

233.33

-200

125

133.33

150

200

250

-100

50

150

200

400

500

Table 5-2

Page 3

7.

a. For a quadratic multi-product cost function, economies of scope exist if

f aQ1Q2 0 . In this case, f 75 and a 0.25 , so economies of scope exist

since f is fixed cost, which is always nonnegative.

b. Cost complementarities exist since a 0.25 0 .

c. Since a 0.25 0 , the marginal cost of producing product 1 will increase if the

division that produces product 2 is sold.

8.

Fixed costs are associated with fixed inputs, and do not change when output changes.

Variable costs are costs associated with variable inputs, and do change when output

changes. Sunk costs are costs that are forever lost once they have been paid.

9.

a. When K = 2 and L = 3, Q = 4 units.

b. The cost-minimizing mix of K and L that produce Q = 4 is K = 2, L = 1.

c. Since K and L are perfect complements in the production process, the costminimizing levels of K and L do not depend on the rental rates of K and L.

Therefore, the cost-minimizing levels of K and L do not change with changes in

the relative rental rates.

10.

a. With K = 2 and L = 3, Q = 16.

b. Since the MRTSKL is 2, that means a company can trade two units of capital for

every one unit of labor. This production function does not exhibit diminishing

marginal rate of technical substitution. The perfectly substitutability between

capital and labor means that only input will be utilized. Since

MPL MPK

4

2

w

r

30 10

c. The company should hire only labor.

11.

An investment tax credit would reduce the relative price of capital to labor. Other

w

things equal, this would increase , thereby making the isocost line more steep. This

r

means that the cost-minimizing input mix will now involve more capital and less

labor, as firms substitute toward capital. Labor unions are likely to oppose the

investment tax credit since the higher capital-to-labor ratio will translate into lost

jobs. You might counter this argument by noting that, while some jobs will be lost

due to substituting capital for labor, many workers will retain their jobs. Absent the

plan, automakers have an incentive to substitute cheaper foreign labor for U.S. labor.

The result of this substitution would be a movement of plants abroad, resulting in the

complete loss of U.S. jobs.

12.

Since MRTS KL

Page 4

w

, the firm was not using the cost minimizing combination of labor

r

and capital. To achieve the cost minimizing combination of inputs, the previous

Michael R. Baye

manager should have used fewer units of capital and more units of labor, since

MPL 100 MPK 100

.

w

r

8

16

13.

The profit-maximizing level of labor and output is achieved where VMPL w . Here,

VMPL 2 $100 4

1/ 2

1 2

$400 L

1/ 2

firms fixed costs are $10,000, its variable costs are $100(16) = $1,600, and its total

revenues are $200(16) = $3,200. Profits are $3,200 $11,600 = $8,400. The firm is

suffering a loss, but the loss is lower than the $10,000 that would be lost if the firm

shut down its operation.

12

12

14.

The higher wage rate in Europe induces Airbus to employ a more capital intensive

input mix than Boeing. Since Airbus optimally uses fewer workers than Boeing, and

profit-maximization entails input usage in the range of diminishing marginal product,

it follows that the lower quantity of labor used by Airbus translates into a higher

marginal product of labor at Airbus than at Boeing.

15.

Table 5-3 provides some useful information for making your decision. According to

the VMPL = w rule, you should hire five units of labor and produce 90 units of output

to maximize profits. Your fixed costs are ($10)(5) = $50, your variable costs are

($50)(5) =$250, and your revenues are ($5)(90) = $450. Thus, your maximum profits

are $450 - $300 = $150.

(1)

(2)

(3)

(4)

Marginal

Product of

Labor

MP L

(5)

Average

Product of

Labor

AP L

(6)

Average

Product of

Capital

AP K

(7)

Value Marginal

Product of

Labor

VMPL

Labor

Capital

Output

0

1

2

3

4

5

6

7

8

9

10

11

5

5

5

5

5

5

5

5

5

5

5

5

0

10

30

60

80

90

95

95

90

80

60

30

-10

20

30

20

10

5

0

-5

-10

-20

-30

-10

15

20

20

18

15.8

13.6

11.3

8.9

6

2.7

-2

6

12

16

18

19

19

18

16

12

6

-50

100

150

100

50

25

0

-25

-50

-100

-150

Table 5-3

16.

The $1,200 per month that could be earned by renting out the excess rental space.

Page 5

17.

Had she not spent the $6,000 on advertising but instead collected the $65,000 refund,

her total loss would have been limited to her sunk costs of $10,000. Her decision to

spend $6,000 on advertising in an attempt to fetch an extra $5,000 was clearly

foolish. However, the $6,000 is a sunk cost and therefore irrelevant in deciding

whether to accept the $66,000 offer. She should accept the $66,000 offer because

doing so makes her $1,000 better off than obtaining the $65,000 refund.

18.

total cost, so this is the optimal facility for South-Florida. Facility M produces 2

million kilowatt hours of electricity at the lowest average total cost, so this is the

optimal facility for the Panhandle. There are economies of scale up to about 3 million

kilowatts per hour, and diseconomies of scale thereafter. Therefore, facility M will

be operating in the range of economies of scale while facility L will be operating in

the range of diseconomies of scale.

19.

To maximize profits the firm should continue adding workers so long as the value

marginal product of labor exceeds the wage. The value marginal product of labor is

defined as the marginal product of labor times the price of output. Here, output sells

for $50 per panel, so the value marginal product of the third worker is $50(290) =

$14,500. Table 5-4 summarizes the VMPL for each choice of labor. Since the wage is

$7,000, the profit maximizing number of workers is 4.

Machines

5

5

5

5

5

5

5

0

0

1

600

600 $30,000 $7,000

2

1,000

400 $20,000 $7,000

3

1,290

290 $14,500 $7,000

4

1,480

190 $9,500 $7,000

5

1,600

120 $6,000 $7,000

6

1,680

80

$4,000 $7,000

Table 5-4

20.

Page 6

r MPK P .5 950,000 475,00 . Therefore, the marginal product of labor is

MPL

0.5

0.0014 cars per hour, which is found by solving

. Costs are

1,330 475,000

minimized when the marginal rate of technical substitution is 0.0028.

Michael R. Baye

21.

Given the tightly woven marine engine and shipbuilding divisions, economies of

scope and cost complementarities are likely to exist. Eliminating the unprofitable

marine engine division may actually raise the shipbuilding divisions costs and cause

that division to become unprofitable. For this argument to withstand criticism, you

must show the CEO that the quadratic multi-product cost function exhibits cost

complementarities and economies of scope, which occurs when

a 0 and f aQ1Q2 0 , respectively, and compare profitability under the different

scenarios.

22.

Taking into account both implicit and explicit costs, the total fixed cost from

operating the kiosk is $6,000; the $2,000 in rent plus the $4,000 in forgone earnings.

Total variable costs are $1.23 per gallon. The cost function is C Q 6,000 1.23Q .

dC Q

$1.23 ; the wholesale price. The average

The marginal cost is MC Q

dQ

C Q 1.23Q

variable cost is AVC Q

Q

Q

$6000

AFC Q

. The entrepreneur will earn a profit when revenues exceed costs,

Q

which occurs when 2Q 6,000 1.23Q . Solving for Q implies the entrepreneur earns

a profit when she sells Q > 8571.43 gallons, or 8572 gallons. The average fixed cost

$6000

of selling Q = 8572 is AFC 8572

$0.70 .

8572

23.

Assuming that the optimal mix of unskilled and semi-skilled labor were being utilized

at the time the legislation passed, in the short run, a higher minimum wage paid to

unskilled labor implies that to minimize costs the retailer should increase its use of

semi-skilled worker and decrease its use or unskilled workers. In the longer run, the

retailer may want to consider substituting capital for labor (invest in some machines

to automate a portion of your boxing needs). Obviously, additional information

would be required to conduct a net present value analysis for these long-run

investments, but it is probably worth getting this information and running some

numbers.

Page 7

- Managerial Economics & Business Strategy, Answers, chapter 1Uploaded byjiemina
- Managerial Economics Michael Baye Chapter 8 answersUploaded byneeebbbsy89
- Solution-Manual-for-Managerial-Economics-Business-Strategy-9th-Edition-By-Baye.pdfUploaded bya552780734
- Managerial Economics by Baye (Chap4 Solutions)Uploaded bySorryUsernameCreate
- MANAGERIAL ECONOMICS & BUSINESS STRATEGY Chap014 SolutionsUploaded byAbhi
- Managerial Economics Questions and AnswersUploaded bynisajames
- Chapter 2 Complete SolutionsUploaded byVictor
- Chap 005Uploaded bydt8302
- Solutions Managerial Economics Chapter 3Uploaded byPuji Hikmah
- Chap006 SolutionsUploaded byAbhi
- chap007sUploaded byNguyen Ngoc
- chap009sUploaded byÖnder Barlas
- Solution Manual for Managerial Economics 7th Edition AllenUploaded byradislamy-1
- Managerial Economics and Business Strategy, 8E Baye Chap. 2Uploaded bylove
- Chap 010Uploaded bydt8302
- Chap 011Uploaded bydt8302
- Solutions Manual Managerial Economics 7th Edition Samuelson MarksUploaded byDigitalSolutions
- Managerial Economics and Business Strategy, 8E Baye Chap. 3Uploaded bylove
- Managerial Economics 1Uploaded byChitrakalpa Sen
- Solutions ME Chapter 1Uploaded byPuji Hikmah
- Chap 012Uploaded bydt8302
- Chap 013Uploaded byguystuff1234
- Solution Manual for Managerial Economics 6th Edition Paul KeatUploaded byalifertekin
- Chapter 3 Complete SolutionsUploaded byVictor
- Fundamentals of Managerial Economics Answers Chapter 9Uploaded byneeebbbsy89
- Managerial EconomicsUploaded byPratibhaVijaykumarBale
- Chap 002Uploaded bySari Desu
- Managerial Economics and Business Strategy, 8E Baye Chap. 9Uploaded bylove
- Managerial Economics and Business Strategy, 8E Baye Chap. 8Uploaded bylove
- SampleExam1Uploaded bywestsider

- Spa Club Action Plan 2017-2018Uploaded byMay Joie Jayme Alcaraz
- HSDK Lesson 6 the Fruit of the HSUploaded byGo Chun Shi
- Urdu DictionaryUploaded bycrazythyname
- Cultivation Analysis PresentationUploaded byBrandon James Fletcher
- FEMYSO - Annual Report 2014Uploaded byFEMYSO
- 110121 Nadine - FBI - Letter Asking for HelpUploaded byNadine Hays
- Indiana Wing - Oct 2008Uploaded byCAP History Library
- UT Dallas Syllabus for ba3361.521.07u taught by David Ritchey (davidr)Uploaded byUT Dallas Provost's Technology Group
- Sumário de Símbolos - Alonzo GaskillUploaded byGustavo Rodrigues
- Problems Cap3Uploaded bySharon Osorio Calderon
- DC1-WeaponChartsUploaded byapi-3801402
- Service ContractUploaded byMarian Santos
- SIDERI_THEOHARISUploaded byconsulus
- n Mun Delegate Prep GuideUploaded byemanuelariobimo
- The Magic Cafe Forums - Review: The Chess GambitUploaded byHendri Alam
- Thomas Aquinas's Conception of Image in Summa Theologica - Louis ChammingsUploaded byCACOETHES SCRIBENDI
- SolarWall Case Study - Fort Smith Recreation Complex - (solar air heating system)Uploaded byconserval
- CSM-007Uploaded byKhuda Buksh
- Kalpataru Immensa BrochureUploaded byLokesh Bangalore
- 10000026173Uploaded byChapter 11 Dockets
- Ccnav6.Com-CCNA Security v20 Chapter 1 Exam AnswersUploaded byIbrahim Elghawil
- PREP-C Consent FormUploaded byJeffreyWeiss44
- 3C Evidence Part 2Uploaded byTricia Aguila
- apis-php-enUploaded byRigel Sven
- Pico Iyer, 1957--Uploaded byKristin Winet
- Fortich v. Corona, G.R. No. 131457, August 19, 1999Uploaded byVicoMuñozBondoc
- Priestley v. Fowler (1837) and the Emerging Tort of NegligenceUploaded bySukriti Singh
- Sacramentary of the RCUploaded byKalvaster René
- What is Being AssertiveUploaded byjrg.rodriguez
- Hebner PPTUploaded bySirisha N

## Much more than documents.

Discover everything Scribd has to offer, including books and audiobooks from major publishers.

Cancel anytime.