(a) Explain why the marginal cost curve above the average variables cost curve is referred to as the firm’s short run supply curve? ( use both verbal and diagram analysis)

A. The (before-tax cost of debt/after-tax cost of debt) is the interest rate that a firm pays on any new debt financing.

B. Perpetualcold Refrigeration Company (PRC) can borrow funds at an interest rate of 11.10% for a period of four years. Its marginal federal-plus-state tax rate is 45%. PRC’s after-tax cost of debt is (6.11%/7.03%/5.80%/6.72%) (rounded to two decimal places).

C. At the present time, Perpetualcold Refrigeration Company (PRC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,278.41 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If PRC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)?

a. 3.87%

b. 3.48%

c. 4.45%

d. 4.64%

1. A monopolist produces good y at a cost c(y) = 10y, so that marginal cost is a constant €10 per unit. Two distinct groups of consumers, A and B, have demands for y as follows:

            y_A(p_A) = 120 - p_A

            y_B(p_B) = 200 - p_B

1. First assume that the firm can practice third-degree price discrimination and so can set a different price for each group, p_A and p_B. Write the inverse demand functions for each group of consumers. Find the firm's optimal choice of y_A and y_B, and the associated prices for each group, p_A and p_B.
2. Now assume that the firm is not able to practice price discrimination and must set one price p for the whole market. Write total demand for the market as a whole. Write the inverse demand curve for the market as a whole. Find the firm's optimal choice of y, and the associated price p. Show that the firm does better under price discrimination as in 3.1 than under a single price as in 3.2.

COST & PRODUCTION FUNCTIONS

In order to reduce unit cost, the CEO of ABC Corporation has to decide whether to increase or decrease total production. A marketing analyst has reported the following information about ABC Corporation’s cost and production structure:

1.Use Ordinary Least Squares Method (OLS) to estimate the ABC Corporation’s total cost function; that is, TC =β +βQ;

2. What is ABC Co’s marginal cost?

3. What is ABC Co’s fixed cost?

4. Calculate the scale elasticity at the mean of the data

5. In order to reduce the unit cost would you recommend an increase or a decrease in total production? Why?

A firm is a natural monopoly. Its marginal cost curve is flat, and its average cost curve is downward sloping (because it has a fixed cost). The firm can perfectly price discriminate. Show that a monopoly might shut down if it can only set a single price but will operate if it can perfectly price discriminate.

Why does retained earnings have an opportunity cost? Shouldn't these be cost free funds for the firm to invest? Explain.

Which of the following statements about a firm’s cost structure are correct?

(a) Average cost measures the firm’s cost of producing one additional unit.

(b) Both average costs and average variable costs are always upward sloping.

(c) If marginal cost is above average cost, then average cost is increasing

Define the Average Cost of Capital (Weighted Average Cost of Capital) and explain why a company should earn at least its weighted average cost of capital in new investments.

What are the financial implications if it does not?

Prime cost worksheet (figure %, cost & sales to two decimal places)

Open and use the following chart below for the “prime cost” quiz. 10 questions for boxes A - J

Cost of sales + cost of Labor = Prime cost

Prime cost – cost of labor = cost of sales

Prime cost – cost of sales = cost of labor

Prime cost ÷ sales = prime cost %

Prime cost x PC% = Sales

Sales X PC% = prime cost

A

B

C

D

E

F

G

H

I

J