Assignment
1. Suppose you are considering the purchase of an established business that has the expected profit stream noted below. If want a 20% return on you investment, what is the maximum amount you should pay for the property? (Show you work)
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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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$4,000
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$4,100
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$4,800
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$5,200
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$6,000
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2. Suppose you are faced with demand P=20-.5Q and your current production (supply) is 10. What price should you charge to sell all your product? (Show your work)
3. A coffee retailer (PlanetBuck's)has the following daily demand equation.
Q = 10,000-900(P)+ 600(Pc) + 0.4(A)
Where P is the price of PlanetBuck's coffee, Pcis the price of Starbuck's coffee, andAis PlanetBuck's advertising expense. Currently PlanetBuck's and Starbuck's Coffee are priced at $2.00 per cup, and PlanetBuck's spends $10,000 for advertising.
1. What isPlanetBuck's current daily sales? (Show your work)
2. What happens to PlanetBuck's sales ifprice increases to $3.00 (all else equal)? (Show your work)
3. If PlanetBuck's price remains $2.00 but Starbucks price is now $1.00, how will this impact PlanetBuck's daily sales? (Show your work)
4. Show PlanetBuck's continue to spend $10,000 on advertising? (Show your work)
4. Suppose you have the generic demand curve Q = 2,000 - 600P - 30P1 + 20P2 + 0.005M
Where P is the price of the good, P1 and P2 are prices of related goods and M is income.
Currently P is $1.00, P1 is $0.50, P2 is $1.50 and M is $50,000.
1) Calculate demand using the current market conditions. (Show your work)
2) Is P1 a substitute or complement? (Why)
3) Is P2 a substitute or complement? (Why)
4) Is this product normal or inferior to Income? (Why)
5) Under current market conditions calculate the price elasticity for this product. (Show your work)
6) What conclusions can be made from the elasticity you calculated in question 5?
5. Growing Christmas trees can be a profitable use for marginally productive farmland. Though more labor-intensive than other tree crops, a Christmas tree crop can return a profit in as little as six years. In addition, Christmas tree production requires little up-front capital investment. Most production operations require only hand tools or common farm machinery. Most industry experts predict that Christmas tree markets will remain strong for at least the next few years. However, there is a surplus of Christmas trees in many regions of the United States. In order to be competitive, growers must efficiently produce high-quality trees of the species that consumers demand.
Only White Pine and Virginia Pine are going to be considered this season. But other species, such as Scotch pine and Fraser fir, also can be grown profitably in some locations in the South.
The table below illustrates total benefit from planting White Pine trees or Virginia Pine trees on an increasing number of acres using the most effective practices to grow Christmas trees in the southern United States. The cost per acre for planting White Pine is $100 and for Virginia Pine is $150.
Total benefit of planting White Pine and Virginia Pine on an acre of land
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Acres
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White
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Virginia
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MP
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MP
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MP/P
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MP/P
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0
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0
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0
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1
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1000
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1200
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2
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1800
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2400
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3
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2500
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3300
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4
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3000
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3900
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5
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3300
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4200
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6
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3400
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4500
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As a good Kentucky farmer having five acres of marginal land and a $600 budget to plant Christmas trees, what combination of tree types will maximize resources? (show your work).