Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $100 per unit. Variable expenses are $70 per stove, and fixed expenses associated with the stove total $132,000 per month.

Required:

1. What is the break-even point in unit sales and in dollar sales?

2. If the variable expenses per stove increase as a percentage of the selling price, will it result in a higher or a lower break-even point? (Assume that the fixed expenses remain unchanged.)

3. At present, the company is selling 10,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes.

4. Refer to the data in Required 3. How many stoves would have to be sold at the new selling price to attain a target profit of $75,000 per month?

The market demand function for a good is given by Q = D(p) = 800 − 50p. For each firm that produces the good the total cost function is TC(Q) = 4Q+( Q2/2) . Recall that this means that the marginal cost is MC(Q) = 4 + Q. Assume that firms are price takers. In the short run (with 100 firms), and assume that the government imposes a tax of $3 per unit.

(a) What would be the new equilibrium quantity supplied after the tax is imposed?

(b) What would be the price consumers pay and the price sellers receive with the tax? Explain how the burden of the tax is shared between consumers and producers.

c) Compute consumer and producer surplus before and after the tax. How much government revenue is generated by the tax? How large is the deadweight loss?

(d) What would be the long-run equilibrium quantity in this market with the tax? What are the prices that consumers pay and sellers receive? Compare this to the long-run equilibrium without the tax and determine how much of the burden of the tax is borne by consumers and producers.

Outback Outfitters sells recreational equipment. One of the company’s products, a small camp stove, sells for $100 per unit. Variable expenses are $70 per stove, and fixed expenses associated with the stove total $132,000 per month.

Required: 1. What is the break-even point in unit sales and in dollar sales?

2. If the variable expenses per stove increase as a percentage of the selling price, will it result in a higher or a lower break-even point? (Assume that the fixed expenses remain unchanged.)

3. At present, the company is selling 11,000 stoves per month. The sales manager is convinced that a 10% reduction in the selling price would result in a 25% increase in monthly sales of stoves. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes.

4. Refer to the data in Required 3. How many stoves would have to be sold at the new selling price to attain a target profit of $75,000 per month?

Suppose a closed economy (economy that does not engage in international trade) is described by the following table.

a. What problem will occur in the economy in Year 2 if no policy is pursued?

b. Describe the fiscal policy tools that could be used to combat the problem. Carefully explain all steps in the link between policy and outcomes. What impact will this policy have on the various components of the aggregate expenditures? What will happen to the real GDP and Price level as a result of these policies?

c. Describe the monetary policy tools that could be used to combat the problem. Carefully explain all steps in the link between policy and outcomes. What impact will this policy have on the various components of the aggregate expenditures? What will happen to the real GDP and Price level as a result of these policies?

d. Will your answers to (b) and (c) change if this was an open economy. In what way?

Suppose a closed economy (economy that does not engage in international trade) is described by the following table.

a. What problem will occur in the economy in Year 2 if no policy is pursued?

b. Describe the fiscal policy tools that could be used to combat the problem. Carefully explain all steps in the link between policy and outcomes. What impact will this policy have on the various components of the aggregate expenditures? What will happen to the real GDP and Price level as a result of these policies?

c. Describe the monetary policy tools that could be used to combat the problem. Carefully explain all steps in the link between policy and outcomes. What impact will this policy have on the various components of the aggregate expenditures? What will happen to the real GDP and Price level as a result of these policies?

d. Will your answers to (b) and (c) change if this was an open economy. In what way?

The Regional Greenhouse Gas Initiative (RGGI) is a cap and trade program for controlling emissions of CO2 from electricity generators. Allowances are freely tradable across the RGGI states and unused allowances are bankable to future years. The market for RGGI allowances is competitive. The allowance price is currently $6. Here is a chance to use your understanding of emission markets:

a) Virginia will be under the RGGI cap next year. UVA has decided that next year it will pay to cut its emissions by 100 thousand tons. Half these emission reductions will cost $3 to implement, half will cost $9. Given the current allowance price, explain how to think through what effect these reductions will have on total RGGI emissions and allowance prices.

b) In hot summers, marginal abatement cost (MAC) increases by 50%. In cool summers, MAC falls by 50%. While this summer was a cool one, next summer is expected to be a hot one. What do you think the allowance price will be next summer? Why?

Suppose a profit-maximizing firm can produce 100 units of a hypothetical product, wendals (selling at a price of $1 per unit), by combining labor, land, capital, and entrepreneurial ability in each of the four ways shown in the table below. Assume further that the firm can hire labor at $6 per unit, capital at $4 per unit, and entrepreneurship at $2 per unit.

   TECHNIQUES

3. The total revenue for this firm is________ dollars.

4. The price of land is _________ dollars.

5. The cost of technique B is _______ dollars.

6. The profit for technique C is ________ dollars.

7. The amount of land embedded in technique B is _________ units.

8. The amount of capital embedded in technique C is _________ units.

9. This firm will earn a profit of ______ dollars.

10. If the price of wendals increases to $2, then which technique will this firm use? ____________

Henry is planning to purchase a Treasury bond with a coupon rate of 4.86% and face value of $100. The maturity date of the bond is 15 May 2033.

(a) If Henry purchased this bond on 6 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 4.35% p.a. compounded half-yearly.

(b) If Henry purchased this bond on 6 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 4.35% p.a. compounded half-yearly. Henry needs to pay 27.9% on coupon payment as tax payment and tax are paid immediately. \

(c) If Henry purchased this bond on 6 May 2018, what is his purchase price (rounded to four decimal places)? Assume a yield rate of 4.35% p.a. compounded half-yearly. Henry needs to pay 27.9% on coupon payment and capital gain as tax payment. Assume that all tax payments are paid immediately.

Consider three different US Treasury securities with maturities T = 1, 2 and 3 years, all with principal of $100. As usual convention, today is time t=0.

1. One year Treasury bill trades at price ? = $97. 1

2. Two year Treasury note which pays 4% coupon annually, trades at ? ₂= $100.60

3. Three year Treasury note which pays 5% coupon 5% annually, trades at ? ₃= $101.9

• Compute one period forward rates at times T=1, 2 and 3. Assume that the price of 4 year zero coupon bond price is $0.82.

• You are thinking of starting a business on year two (T=2) when you might need to borrow money. You believe interest rates are low today. What interest rate can you lock in today for borrowing on year two, assuming you want to borrow only for a period of 2 years?