Assignment:
1. George's T-Shirt Shop produces 3,000 custom-printed T-shirts per month. George's fixed costs are $9,000 per month. The marginal cost per T-shirt is a constant $10.
2. Suppose an initial investment of $100 will return $55/year for three years (assume the $55 is received each year at the end of the year).
At a discount rate of 30%, this investment is or is not profitable?
3. Perhaps the most important kind of capital is human capital. For example, most lawyers spend years learning to practice law. Lawyers are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work.
Suppose the government nationalizes the market for legal services, resulting in lower compensation for lawyers. Assume lawyers cannot easily move to other countries.
True or False: The investment in human capital for lawyers is subject to post-investment hold-up.
4. A university spent $2 million to install solar panels atop a parking garage. These panels will have a capacity of 300 kilowatts (kW) and have a life expectancy of 20 years. Suppose that the discount rate is 10%, that electricity can be purchased at $0.10 per kilowatt-hour (kWh), and that the marginal cost of electricity production using the solar panels is zero.
5. Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $5.50 million in a plastic injection molding machine (which can be sold for $5 million immediately) and $200,000 in plastic injection molds specifically for the toy (not valuable to anyone else). The cost of labor and materials necessary to make each truck runs about $10. This year, a competitor has developed a similar toy, significantly reducing demand for the toy truck. Now, the original manufacturer is deciding whether it should continue production of the toy truck.
If the estimated demand is 100,000 trucks, the break-even price is per truck.
6. In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will be able to sell only 10,000 room-nights, which cost $70 per room per night to service. You spent $20.00 million on the hotel in 2008, and your cost of capital is 25%. The current going price to sell the hotel is $15 million.
If the estimated demand is 10,000 room-nights, the break-even price is per room, per night. (Hint: Remember that the cost of capital is the opportunity cost, or true cost, of making an investment.)
7. firm sells 1,000 units per week. Suppose the average variable cost is $15, and the average cost is $70.
In the short run, the break-even price is
In the long run, the break-even price is
Suppose the firm charges a price of $75 per unit.
Use the following table to indicate whether the firm will shut down or continue to produce in the short run and the long run.
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Time
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Continue to Produce
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Shut Down
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Short Run
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Long Run
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