Questions:
1. Present vs Future Values
a) A firm is expected to earn $100,000 per year forever. If the annual discount rate is 10 percent, what is the present value of the firm? Show all work.
b) If the firm is only expected to live for 25 years, perform the same calculation and compare your results. Comment on what you find.
2. FV & PV
Fred is considering the purchase of a lease that will allow him to operate a restaurant at the local airport for a period of 3 years. The lease will cost $22,000 annually along with monthly operation costs of 6,000. Fred anticipates monthly revenues of $18,000. Calculate the PV of the expected profits of the investment? Assume r = 0.072 or 7.2%
3. Supply and Demand
Assume that the demand and the supply in a market are represented by the following equations:
Qd = 200- 3P
Qs = 2P - 100
(i) Compute and illustrate (i.e. show with a graph - make sure it is labeled) the market equilibrium in this case.
(ii) Find the CS and PS in the market and interpret what the values mean.
(iii) Bonus: If the government were to introduce an excise tax of $1 per unit of output, what would the new equilibrium be? Illustrate this result graphically as well as solve quantitatively.
4. Cost & Benefit Analysis - Marginal Analysis
a. Given the following chart explain what the optimal Q is. Use both the total and marginal approach to verify your result.
|
Q
|
TB (Q)
|
TC (Q)
|
|
0
|
0
|
0
|
|
5
|
200
|
200
|
|
10
|
500
|
500
|
|
15
|
900
|
600
|
|
20
|
1400
|
800
|
|
25
|
1700
|
1100
|
|
30
|
1900
|
1500
|
b. Suppose you are given that fact that TB(Q) = 1000 + 26Q - 4Q2 ,TC(Q) = 200 +2Q + 2Q2
i. Find MB and MC. Show all your work.
ii. Write the expression for NB and MNB.
iii. Find the optimal Q and calculate the NB associated with that Q. Verify that it is indeed the optimal NB using MB and MC.