Reference no: EM132584360

Question 1. During a year of operation, a firm collects $175,000 in revenue and spends $80,000 on labor expense, raw materials, rent, and utilities. The firm's owner has provided $500,000 of her own money instead of investing the money and earning a 14 percent annual rate of return.
a. (1.5 pt)The explicit costs of the firm are $_______. The implicit costs are
$ _______________. Total economic cost is $_____________.

b. (1.0 pt)The firm earns economic profit of $___________________________.

c. (1.0 pt) The firm's accounting profit is $_____________________________.

d. (1.0 pt) If the firm's costs stay the same but its revenue falls to $____________, only a normal profit is earned.

e. (1.0 pt) If the owner could earn 20 percent annually on the money she has invested on the firm, the economic profit of the firm would be __________ (when revenue is $175,000).

Question 2. What is the present value of a firm with a five-year life span that earns the following stream of expected profits? (Treat all profits as being received at year- end.) Use risk adjusted discount of 12 percent.

Year Expected Profit
1 $10,000
2 20,000
3 50,000
4 75,000
5 50,000

Question 3. The National Enquirer reported that, in their divorce settlement, Burt Reynolds offered Loni Anderson $10 million spread evenly over 10 years but she instead demanded $5 million now. If the appropriate discount rate is 8 percent, which alternative is better for Burt and which for Loni?

Question 4. The generalized demand and supply functions for a certain good are determined to be:

Qd = 800 - 2P - 0.01M + 16P_R
Qs = 50 + 4P - 40PI + 51F

a. Good X is a(n)_________good. Goods X and R are _____.

b. Suppose income is initially $20,000, the price of good R is $10, the price of the input (PI) $25, the number of firms producing good X (F) is $20. Write the equations for demand and supply curves, where P is the only independent variable. Graph the demand and supply curves.

c. Find the equilibrium price and quantity.

Question 5. Suppose the market demand and supply curves are given by Qd = 20 - 3P and Qs = P, respectively. Suppose the government imposes a price ceiling of $2:

a. Calculate the magnitude of the resulting shortage.
b. Calculate the resulting full economic price. That is, the maximum price consumers are willing to pay to avoid waiting in line.

Question 6. Smith Company produces and sells racquet balls. Its total revenue is given as

TR = 1,000Q - 0.1Q2

The company has estimated a functional relationship between total output produced and the total cost. The annual cost of producing racquet balls in dollars is:

TC = 40,000 - 200Q + 0.4Q2

a. Determine the profit maximizing level of output.

b. What is the level of maximum profit?

Question 7. The Appalachian Coal Mining believes that it can increase labor productivity and therefore, net revenue by reducing air pollution in its mines. It estimates that the marginal cost function for reducing pollution by installing additional capital equipment is:
MC = 40P
Where P represents a reduction of one unit of pollution in the mines. It also estimates that for every unit of pollution reduction the marginal increase in revenue (MR) is:
MR = 1,000 - 10P

How much pollution reduction should Appalachian Coal Mining undertake?

Question 8. Suppose you collected data from 1986 to 2005 to estimate the following demand function:
QX = b0 + b1 PX + b2 PR + b3 M

Assume R is a substitute and X is a normal good. The estimation results are reported below:

a Conduct t tests to see if the coefficients are statistically significant at the 5% level of significance. Disregard the intercept. Use the p-values. A simple yes or no is not enough. Explain

b. Conduct an F- test to see if the equation, as a whole, is statistically significant at the 5%. Use the p-value. A simple yes or no is not enough. Explain.

c. Interpret the value of R-square.

Question 9. The following table shows the marginal benefit of activity X and Y. The price of X is $4 and the price of Y is $2.

a. Calculate the marginal benefits per dollar for each activity and put the values in columns 3 and 5 of the above table.

b. If the total budget is $20, the optimal levels of activity X and Y are _____ and ____ units, respectively.

c. If the total budget is $26, the optimal levels of activity X and Y are ____ units and _____units, respectively.