Question (Double Marginalization)

Suppose that Michelin is the only producer of tires and Toyota the only producer of cars. The demand function for cars is given by Q = 40 − 4P. Michelin's (constant) cost of production for a set of five tires is 3. The production of one car requires a set of five tires and a bundle of inputs, which Toyota can obtain at a price of 6.
- Suppose first that Michelin and Toyota are just two departments within the same firm.

1. (a) What price would the firm charge for cars and how many cars would it produce?

- Suppose now that Michelin and Toyota are separate firms. Michelin quotes a price w for a set of five tires and Toyota decides how many sets to buy at that price.

2. (b) What price will Michelin set? How many cars will Toyota sell and at what price?

3. (c) Are consumers better off when Michelin and Toyota are an integrated firm [Part (a)] or when they are separate firms [Part (b)]?

Susan is Product Manager for Snuggies Disposable Diapers. Her company is introducing a new line of children’s diapers which are available in designer labels such as Christian Dior and Versace.

As Susan prepares for her sales presentation, she determines several different levels of pricing…first, her price to the buyer at Gymboree, based on her cost and margin requirements. Then, her price and margin based the cash discount she knows Gymboree will ask for, and take!

Finally, she seeks to determine what Gymboree’s margin on their resale of the product will be, based on Snuggies’ suggested retail price.

The cost of one box of "Designer Diaper Duds" is:      $4.00

Snuggies Corporate Gross Margin Requirement is:           45% (.45)

With this cost and margin requirement, what price should Susan charge Gymboree for a box of Designer Diaper Duds?

Susan plans to offer Gymboree a special discount of 5% (0.05). Based on the price you have just calculated, how much will Gymboree's NET price be after the 5% discount? 6.91

Today is 1 July 2018. Matt is 30 years old today. Matt has a portfolio which consists of three Treasury bonds (henceforth referred to as bond A, bond B and bond C). There are 200 units of bond A, 300 units of bond B and 500 units of bond C.

• Bond A is a Treasury bond which matures on 1 January 2027. One unit of bond A has a coupon rate of j2 = 2.95% p.a. and a face value of $100. Matt purchased this Treasury bond on 15 March 2018. The purchase yield rate was j2 = 3.5% p.a. • Bond B is a Treasury bond which matures on 1 July 2023. One unit of bond B has a coupon rate of j2 = 3.15% p.a. and a face value of $100. Matt purchased this Treasury bond on 28 June 2018. The purchase yield rate was j2 = 3.3% p.a. • Bond C is a Treasury bond which matures on 1 January 2021. One unit of bond C has a coupon rate of j2 = 3.35% p.a. and a face value of $100. Matt purchased this Treasury bond on 1 January 2018. The purchase yield rate was j2 = 3.4% p.a.

Calculate • The purchase price of one unit of bond A • The purchase price of one unit of bond B • The purchase price of one unit of bond C

Round your answer to three decimal places. The price of both bond A and bond B should be calculated by using the RBA method. b. [8 marks] Matt decides to sell each of the three bond types today. All the bonds are sold at a yield rate of j2 = 3.25% p.a. Calculate • The sale price of one unit of bond A • The sale price of one unit of bond B

The sale price of one unit of bond C Round your answer to three decimal places. Then calculate the total sale price of the portfolio (round your answer to the nearest dollar). Note that the sale of each bond occurs after a coupon payment. c. [4 marks] Matt plans to use part of the sale proceeds calculated in part b to purchase two bank bills (henceforth referred to as bank bill D and bank bill E) today. Matt will use the remaining part of the sale proceeds for living expense. • Bank bill D is a 180-day $40,000 bank bill. The purchase yield rate is 3.1% p.a. (simple interest rate). • Bank bill E is a 270-day $50,000 bank bill. The purchase yield rate is 3.2% p.a. (simple interest rate). Calculate the purchase price of bank bill D and bank bill E. Round your answer to three decimal places. d. [6 marks] Matt plans to sell both bank bill D and bank bill E on 1 October 2018 and use the sale proceeds to purchase a car. Calculate the sale price of bank bill D and bank bill E. Assume the sale yield rate is 3% p.a. (simple interest rate). Round your answer to three decimal places. e. [5 marks] From Matt’s perspective, draw a carefully labelled cash flow diagram to represent the above financial transactions of parts c and d.

Today is 1 July 2019. John is 30 years old today. He is planning to purchase an apartment with the price of $800,000 on 1 January 2024. John believes that, at the time of purchasing the house, he should have savings to cover 20% of the house price (i.e., $160,000) on 1 January 2024. John has a portfolio which consists of two Treasury bonds and a bank bill (henceforth referred to as bond A, bond B and bank bill C). There are 200 units of bond A, 300 units of bond B and 400 units of bank bill C.

a)

• Bond A is a Treasury bond which matures on 1 July 2030. One unit of bond A has a coupon rate of j2 = 3.95% p.a. and a face value of $100. John purchased this Treasury bond on 15 February 2017. The purchase yield rate was j2 = 3.85% p.a.

• Bond B is a Treasury bond which matures on 1 January 2026. One unit of bond B has a coupon rate of j2 = 3.7% p.a. and a face value of $100. John purchased this Treasury bond on 1 July 2016. The purchase yield rate was j2 = 4.1% p.a.

• Bank bill C is a 180-day bank bill which matures on 1 September 2019. One unit of bank bill C has a face value of $100. John purchased this bank bill on 15 April 2019. The purchase yield rate was 3.05% p.a. (simple interest rate).

Calculate:

• The purchase price of one unit of bond A

• The purchase price of one unit of bond B

• The purchase price of one unit of bank bill C

b. John decides to sell each of the three security types today. Both the bonds are sold at a yield rate of j2 = 3.2% p.a. and the bank bill is sold at 3% p.a. (simple interest rate).

Calculate • The sale price of one unit of bond A

• The sale price of one unit of bond B

• The sale price of one unit of bank bill C

Round your answer to three decimal places. Then calculate the total sale price of the portfolio (round your answer to the nearest dollar). Note that the sale of each bond occurs after a coupon payment.

c. John plans to use $80,000 of the sale proceeds calculated in part b to invest into a fund today. John predicts that the return rate of this fund will be 1 July 2019 to 30 June 2021 j2 = 5.1%, 1 July 2021 to 31 December 2023 j2 = 5.3%. Calculate the accumulated value of John’s fund investment on 1 January 2024.

d. To save for remaining required amount on 1 January 2024 (the difference between the 20% of the house price and the accumulated value from part c), John plans to deposit z% of his annual after-tax salary into a saving account on 1 July of each year from 2019 to 2023 (5 deposits in total). The saving account rates are assumed to be 0.2% per month. Assume that John’s after-tax salary is $90,000 p.a. Find the value of z (expressed as a percentage and rounded to two decimal places).

e. From John’s perspective, draw a carefully labelled cash flow diagram to represent the above financial transactions of parts c and d.

1. Consider a product known as Aguillons.

Note the following two facts:

1. Its PES = 2.5.

2. The product is considered essential by people.

What can we say about the tax burden?

a. The tax burden is paid by only one side of the market

b. The tax burden is determined by who the tax is levied on

c. The tax burden will fall equally on the buyers and sellers

d. The tax burden will fall mostly on the buyers

e. The tax burden will fall mostly on the suppliers

2. Consider the market for new cars. During the Great Recession, demand for this product fell by a lot. From this information, we can infer which of the following about this good’s Income Elasticity of Demand?

a.It is less than zero

b. It equals zero

c.It is greater than zero

d. It is between -0.1 and 0.1

e. There is no such thing as the Income Elasticity of Demand

3. Suppose we have the following information:

P=$22; q=100;

TC=$1,100 for q=0;

AVC=$11.00 for q=100;

MR=$10

What is the profit for q=100?

a. -$50

b. $0

c. $50

d. $100

e. Not enough information

4. Suppose we have a market where there are 100 firms and the economic profit to each firm is $10,000. If the market is competitive, what we do know will happen in the long run?

a. Five firms will exit the market

b. There will be more than 100 firms in this market

c. The market price will increase even further

d. The quantity produced by each firm will not change

e. The market will transform into a monopoly

Workers and managers in the XYZ Company have negotiated a wage agreement under the expectation that the inflation rate will be zero over the period of the contract. In order to protect workers against unpredictable inflation, however, the contract states that at the end of each year, the wage rate will increase by the same percentage as the increase in the consumer price index (CPI). At the beginning of the contract, the CPI is 428 and the wage rate is set at $12.00 an hour. At the end of the first year the CPI is 450, and at the end of the second year the CPI is 468. What will the new wage rate become at the end of the first year? The second year?

For each of these problems, please use first a mathematical formula to solve the problem. Second use Excel spreadsheet to also solve the problem.

You are thinking about leasing a car. The purchase price of the car is $30,000. The residual value (the amount you could pay to keep the car at the end of the lease) is $15,000 at the end of 36 months. Assume the first lease payment is due one month after you get the car. The interest rate implicit in the lease is 6% APR, compounded monthly. What will your lease payments be for a 36-month lease?

Valquez Manufacturing Company combines its operating expenses for budget purposes in a selling and administrative expense budget. For the first quarter of 2016, the following data are developed:

1.   Sales: 20,000 units; unit selling price:                       $35

2.   Variable costs per dollar of sales:

            Sales commissions                                                6%

            Delivery expense                                                   2%

            Advertising                                                             4%

3.   Fixed costs per quarter:

            Sales salaries                                                $24,000

            Office salaries                                                  17,000

            Depreciation                                                       5,000

            Insurance                                                           1,000

            Utilities                                                               2,000

Instructions

Prepare a selling and administrative expense budget for the first quarter of 2016.

Oaktree Company purchased new equipment and made the following expenditures: Purchase price $ 50,000 Sales tax 2,700 Freight charges for shipment of equipment 750 Insurance on the equipment for the first year 950 Installation of equipment 1,500 The equipment, including sales tax, was purchased on open account, with payment due in 30 days. The other expenditures listed above were paid in cash. Required: Prepare the necessary journal entries to record the above expenditures. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

For the Week 5 Problem Set, show all work in an Excel book, labeling each item by the problem number. Save the file in the format flastname_Unit_5_Learning_Activity.xlsx, where flastname is your first initial and your last name, and submit it to the appropriate Dropbox. For full credit, be sure to use appropriate formulas to solve each exercise or problem.

Chapter 7 (page 149)

1. Calculate the present value (PV ) of a cash inflow of $500 in one year, and a cash inflow of $1,000 in 5 years, assuming a discount rate of 15%.

2. Calculate the present value (PV ) of an annuity stream of 5 annual cash flows of $1,200, with the first cash flow received in one year, assuming a discount rate of 10%.

3. What is the present value of a perpetual stream of annual cash flows of $100, with the first cash flow to be received in one year, assuming a discount rate of 8%?

4. What is the present value of a perpetual stream of annual cash flows, with the first cash flow of $100 to be received in one year, and with all subsequent cash flows growing at a rate of 3%, assuming a discount rate of 8%?

Additional Problems

A1. If you deposit $12,000 in a bank account that pays 10% interest annually, how much will be in your account after 7 years?

A2. What is the present value of a security that will pay $10,000 in 20 years at an interest rate of 8%?

A3. Find the future value of the following ordinary annuities: a. $600 per year for 10 years at 10% b. $300 per year for 5 years at 5% c. $600 per year for 5 years at 0%

A4. Find the present value of the following ordinary annuities: a. $600 per year for 10 years at 10% b. $300 per year for 5 years at 5% c. $600 per year for 5 years at 0%

Foerster, S. (2014) Financial Management: Concepts and Applications. Prentice Hall. VitalBook file.