Following are brief answers to each of the end-of-chapter problems. These are typically numerical, to allow you to verify your methodology and calculations. Note that your answers may differ slightly due to rounding. In other cases, you may find that I have made a mistake. If so, please let me know, so that I can correct it as soon as possible. You can write to me at Bentley College, Waltham, MA 02254. Your help will be greatly appreciated!
CHAPTER 1
1-1. (a) $9,856,300.
(b) $10,057,600 at 12%, $9,664,400 at 16%.
1-2. (a) $1,681.
1-3. (a) $273,115.
1-4. (a) Company A: $36,039; company B: $36,278.
(b) Company A: $35,286; company B: $35,122.
1-5. (a) $2,960, minus your opportunity cost (using daily discount rates.)
1-6. (a) $75,108.
(b) $103,233.
(c) $178,341.
(d) No more than the NPV. In terms of your ODR.
1-7. (a) Project A: $67,736; project B: $76,357.
1-8. (a) Product A: $32,964; product B: $11,814.
1- 9. (a) $39,500.
(b) $36,672.
(c) $36,523.
1-10. (a) Rebuild: $36,750; buy new: $37,600.
(c) Rebuild: $34,288; buy new: $33,128.
CHAPTER 2
2- 1. (a) Minor face-lift: expected value is $34,000; standard deviation is 24,580; coefficient of varia¬
tion is 0.723. New model: EV = $34,000; SD = 60,530; CV = 1.78.
622 Appendix C
(b) EV criterion ranks them equally; CV and maximin criteria both favor minor face-lift.
(c) Minor face-lift.
2-2. (a) Hot dogs: EV = $212.50, CV = 0.356; ice cream: EV = $213.75, CV = 0.583. Risk averters, unless only very slightly risk averse, will choose hot dogs. Your certainty equivalent will indicate your degree of risk aversion.
2-3. (a) Regular store: EPV = $327,650; superstore: EPV = $137,150.
2-4. (a) Lease: EPV = $12,401; buy: EPV = $11,834.
(b) Lease: SD = 7,185; buy: SD = 6,637.
(c) EV favors lease; CV favors buy; maximin favors lease; CE is ambiguous, depending on risk return trade-off. Is management willing to accept $547 more risk along with $567 more expected return?
2-5. (a) Project A: EPV = $1,044,980, SD = 1,042,376; project B: EPV = $1,294,310, SD =
$1,541,660.
2-6. (a) High: EPV = $1,505; medium: EPV = $3,806; low: EPV = $-292.
(b) No, EPV of bond alternative is zero.
(c) High, low, medium.
<d) Medium, high, low.
(e) Not for a risk averter.
2-7. (a) Assuming daily cash flows, necktie A: EPV = $20,446; MIN = $413; CV = 0.496. Necktie
B: EPV = $31,776; MIN = $2,355; CV = 0.562. Necktie C: EPV = $38,313; MIN = $4,297; CV = 0.647.
2-8. (a) Product A: EPV = $38,316, SD = 27,757; product B: EPV = $68,713, SD = 126,313;
product C: EPV = $54,411, SD = 44,036.
2- 9. (a) Christmas trees: EPV = $173,915, SD = 249,519; fast food: EPV = $180,161, SD =
146,543.
2- 10. (a) Plan A: EPV = $36,006; plan B: EPV = $61,672.
(b) Plan A: SD = 32,874; plan B: EPV = 49,162.
CHAPTER 3
3- 1. (a) The budget line will swing inward, restricting the consumer to a lower indifference curve
and fewer units of the product.
3-2. (a) Ceteris paribus allows us to isolate the impact of one variable at a time. First the budget line
swings outward, then it shifts outward, and finally the indifference curves become flatter. 3-3. (a) An advertising campaign may improve consumer perceptions of the product, thus shifting
the efficiency frontier outward, and may also change tastes in favor of the attributes embodied in product X, thus steepening indifference curves. Both effects will cause the consumer to buy more, prior to a price increase. A price increase would then cut sales back, but quantity demanded would be higher than it would have been without the prior advertising campaign.
3- 4. (a) Mr. A’s indifference curves will be flatter than Ms. B’s, and his demand curve will be more
elastic in the relevant range.
3-5. (a) The consumers’ ch ices will depend on their marginal rates of substitution between power
and economy.
3-6. (a) About 97 cents.
(b) All consumers previously buying brand A, as well as some previously buying brand B, will switch to Norbert. Only those with MRS > 6.2 will continue to buy brand B.
(b) The market share data tells us something about the distribution of the slopes of consumers’ indifference curves. Repositioning into a heavier part of this distribution will mean more customers are gained than lost. It is not clear that Snackers can do this without a price increase or a higher nutrient-calorie ratio.
(a) The efficiency frontier is linear across product rays B, D, and C. Plan A involves repositioning into a relatively crowded part of the market. Plan B looks more promising.
(a) Sportscar A. (Hint: Set the value of reliability equal to 1.)
(b) Sportscar A.
(c) Sportscar B. using the EV criterion, but sportscar A is favored by the minimax, CV, and CE criteria.
(a) More convenient Phoneshop.
(b) Either the more convenient or the less convenient Phoneshop, depending on the curvature (MRS) of the consumers indifference curve.