the manufacturing firm Rebo is considering a new capital investment project. The project will last for five years. The anticipated sales revenue from the project is $3 million in year 1 and $4.2 million in each of years 2 – 5. The cost of materials and labour is 50% of sales revenue and other expenses are $1 million in each year. The project will require working capital investment equal to 20% of the expected sales revenue for each year. This investment must be in place at the start of each year. Working capital will be recovered at the end of the project’s life. The project will require $2.5 million to be spent now on new machinery which will have zero value at the end of the project and will be depreciated each year at 20% of the original cost. The tax rate is 25%. Rebo uses a discount rate of 11% to evaluate its capital investment projects. (i) What is the net income in each year? (ii) What is the free cash flow in each year and the net present value (NPV)? (iii)You discover the following additional information: The project will utilise a building that the firm leases. No other activities take place in it. If this project does not go ahead the firm will terminate the lease in one year’s time if no other use for it has been found. Part of each year’s cash flows from the project will be used to increase the dividend payment to shareholders. For each of these items, explain briefly whether or not you would incorporate the information into your analysis of the project’s value.

Output per month   Price   Total Revenue   Total Cost   Total Profit   Marginal
Revenue*   Marginal Cost*   Average Total Cost   Profit per Unit (Price Minus Average Cost)
0   $ 1,000     $ 0   $ 60,000   -$60,000   -   -   -   -
100   1,000   100,000   90,000   10,000   $ 1,000    $ 300   $900   $100
200   1,000   200,000   130,000   70,000   1,000   400   650   350
300   1,000   300,000   180,000   120,000   1,000   500   600   400
400   1,000   400,000   240,000   160,000   1,000   600   600   400
500   1,000   500,000   320,000   180,000   1,000   800   640   360
600   1,000   600,000   420,000   180,000   1,000   1,000   700   300
700   1,000   700,000   546,000   154,000   1,000   1,260   780   220
800   1,000   800,000   720,000   80,000   1,000   1,740   900   100
900   1,000   900,000   919,800   -19,800   1,000   1,998   1,022   -22
*Note that output levels are calibrated in hundreds in this example; that's why we have divided the change in total costs and revenues from one output level to another by 100 to calculate marginal revenue and marginal cost. Very few manufacturers deal in units of 1.

(a) What were the fixed costs of production for the firm?

$

(b) At what rate of output was profit per computer maximized? (Choose the highest output level.)

computers per month

(c) At what output rate was total profit maximized? (Choose the highest output level.)

computers per month

The manufacturing firm Rebo is considering a new capital investment project. The project will last for five years. The anticipated sales revenue from the project is $3 million in year 1 and $4.2 million in each of years 2 – 5. The cost of materials and labour is 50% of sales revenue and other expenses are $1 million in each year. The project will require working capital investment equal to 20% of the expected sales revenue for each year. This investment must be in place at the start of each year. Working capital will be recovered at the end of the project’s life. UL20/0419 Page 4 of 8 The project will require $2.5 million to be spent now on new machinery which will have zero value at the end of the project and will be depreciated each year at 20% of the original cost. The tax rate is 25%. Rebo uses a discount rate of 11% to evaluate its capital investment projects.

(i) What is the net income in each year?

(ii) What is the free cash flow in each year and the net present value (NPV)?

(iii)You discover the following additional information: • The project will utilise a building that the firm leases. No other activities take place in it. If this project does not go ahead the firm will terminate the lease in one year’s time if no other use for it has been found. • Part of each year’s cash flows from the project will be used to increase the dividend payment to shareholders. For each of these items, explain briefly whether or not you would incorporate the information into your analysis of the project’s value.

Economists working for a computer-manufacturing corporation conclude that the demand function for the corporation’s brand of laptop is

Q = - 700P + 200M – 500S + 0.01A

Where Q equals the quantity of laptops demanded, P is the price of the laptop, M is the per capita disposable income per year, S is the average price of software, and A is the amount the company spends on advertising.

At present P = $3,000, M = $13,000, S = $400, and A = 50 million

a. What is the price elasticity of demand for the corporation’s laptop? Is demand elastic, inelastic, unit elastic? What does your result say about the sensitivity of quantity of laptops demanded to price changes?

b. The CEO of the corporation wants to know if the company is maximizing it sales revenue by charging $3000 for its laptop. Is the corporation maximizing it sales revenue? If yes, why? If not, what price should it charge to maximize its revenue?

c. What is the cross-price elasticity of demand between the quantity of laptops demanded and the price of the software? Explain how a 5% decrease in price of the software (S) would affect the demand for the laptop.

d. What is the income elasticity of demand of the laptop? Economists foresee an economic boom for next year. How would a 4% increase in per capita disposable income affect the demand for the laptop?

e. What is the advertising elasticity of demand? If the corporation wants to increase its sales by 5% by changing its ad expenditures, what should it do? Increase or decrease its ad expenditures? By what percentage amount?

34. Which of the following describes a monopoly?

Group of answer choices

any market in which the demand curve to the firm is downsloping.

a standardized product being produced by many firms.

a single firm producing a product for which there are no close substitutes.

a large number of firms producing a differentiated product.

35. Which of the following is true for the marginal revenue curve of a monopolist?

Group of answer choices

is a straight, upsloping curve.

rises at first, reaches a maximum, and then declines.

becomes negative when output increases beyond some particular level.

is a straight line, parallel to the horizontal axis.

37. Which of the following is true for a monopoly?

Group of answer choices

Its marginal revenue is always equal to the price.

Its supply curve is positively sloping.

It produces a product for which there are close substitutes.

Even though it is a price-maker (has much control over the price it charges), it can make losses at its optimal output.

39. A pure monopolist is producing an output such that ATC = $10, P = $12, MC = $5, and MR = $5. This firm is realizing:

Group of answer choices

an economic profit that could be increased by producing more.

an economic profit that could be increased by producing less.

its maximum economic profit.

an economic loss.

40. The demand function of a monopoly is such that it can sell 3 units per week at $8 each, but 4 units per week at $7 each. The marginal revenue of the 4th unit per week is:

Group of answer choices

$8

$7

$6.

$4.

34. Which of the following describes a monopoly?

Group of answer choices

any market in which the demand curve to the firm is downsloping.

a standardized product being produced by many firms.

a single firm producing a product for which there are no close substitutes.

a large number of firms producing a differentiated product.

35. Which of the following is true for the marginal revenue curve of a monopolist?

Group of answer choices

is a straight, upsloping curve.

rises at first, reaches a maximum, and then declines.

becomes negative when output increases beyond some particular level.

is a straight line, parallel to the horizontal axis.

37. Which of the following is true for a monopoly?

Group of answer choices

Its marginal revenue is always equal to the price.

Its supply curve is positively sloping.

It produces a product for which there are close substitutes.

Even though it is a price-maker (has much control over the price it charges), it can make losses at its optimal output.

39. A pure monopolist is producing an output such that ATC = $10, P = $12, MC = $5, and MR = $5. This firm is realizing:

Group of answer choices

an economic profit that could be increased by producing more.

an economic profit that could be increased by producing less.

its maximum economic profit.

an economic loss.

40. The demand function of a monopoly is such that it can sell 3 units per week at $8 each, but 4 units per week at $7 each. The marginal revenue of the 4th unit per week is:

Group of answer choices

$8

$7

$6.

$4.

1.

1. Discuss the conditions for profit maximization for the perfectly competitive firm in the short run. In addition to the basic criteria, describe the cost and revenue situations on either side and why, in terms of cost and revenue, the firm will move toward that optimal point. Consider an avocado farmer operating as such a firm. He owns four acres of land on which to plant a single crop. To plant one acre of avocados, he must pay $30 in seeds, $60 in fertilizer, $150 in gasoline, and $10 in labor. He owes $500 for mortgage on the land, and $750 for the lease of the tractor. He expects to gain $800 per acre of avocados in revenue. Given the small size of the farm, assume that marginal productivity is constant. Provide the total and average revenues, costs, and profits when he plants all four acres. Consider now that the farmer has the option to plant tomatoes instead of avocados. Planting an acre of tomatoes comes with the following costs: $15 in seed, $70 in fertilizer, $50 in gasoline, and $65 in labor. He can expect to earn $850/acre for planting tomatoes instead of avocados. What will the farmer choose to plant? Why? Include the difference in economic and accounting profit in your discussion. Provide an example of a short run decision that might be made to reduce costs.

2. Discuss the average and marginal cost curve structure of a perfectly competitive firm in the short run. Include any pertinent minima, cross points, and relationships between curves.

10. A profit maximizing firm in a competitive market produces chairs. The firm, which is a price-taker, faces a price of $35 for its product. Its average variable cost is $24 and its average fixed cost is $9 at the quantity where marginal cost equals marginal revenue. In the short run, the firm
A. should raise the price of its product.
B. should lower the price of its product.
C. will experience losses but will continue to produce chairs.
D. will shut down and incur the total loss of its fixed costs.
E. will be earning both economic and accounting profits.

11. Profit maximizing firms enter a competitive market when they observe that
(x) price exceeds average total cost for existing firms in the market.
(y) total revenue for existing firms in the market exceeds their short-run variable costs.
(z) average revenue is more than average total cost for existing firms in the market.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (y) only

12. If all firms have the same cost structure in a competitive market with free entry and exit, then
A. the price of the product will differ across firms.
B. all firms will operate at their efficient scale in the short run.
C. all firms will operate at their efficient scale in the long run.
D. Both A and C are correct.
E. Both B and C are correct

1. Which of the following best describes the objective of the perfect price discriminator? a) Charge each consumer a higher price than s/he is willing to pay b) Charge different prices based on characteristics of consumers that are correlated with willingness to pay c) Charge all consumers the price that the last consumer is willing to pay d) Charge each consumer the price that s/he is willing to pay e) None of the above

2. Which of the following best describes the break-even point of the firm? a) Quantity at which average cost is at its lowest level b) Price at which quantity demanded equals quantity supplied c) Quantity at which marginal revenue equals marginal cost d) Quantity at which marginal cost equals marginal product e) None of the above

3. Which of the following best describes a firm that has increasing marginal cost? a) Increasing returns to scale b) Inefficient relative to other firms in the market c) Decreasing marginal product d) A price maker e) A firm that is a perfect price discriminator

4. Which of the following best describes how a competitive firm determines how much output to supply to the market? a) Produce the quantities at which price is greater than average cost b) Produce the quantity at which marginal revenue equals average product c) Produce all quantities at which price is greater than average product d) Produce the quantity at which price equals marginal cost e) Produce the quantity at which marginal revenue equals average cost

A monopolist seller faces two buyer A and B. Each buyer has his own incremental reservation price for 1, 2, 3, or 4 units of Widgets as shown on the table below.

So for example, the A buyer has a total reservation price of 15 for 3 units of Widgets.

1) Suppose the seller cannot separate the buyers, and must charge the same per unit price to both of them. (Perhaps the seller cannot tell them apart) What price maximizes the sellers revenue?

To answer this first fill in the table below. You may restrict attention to the prices in the table ( price range 2-8) and state how many units of widgets each buyer would demand for each of these prices.

Second calculate the revenue the seller would earn at each of those prices, and determine the best price.

2) Now suppose the seller can distinguish the A buyer from the B buyer, and furthermore can charge them different prices. ( Perhaps the widgets are protected by import/export regulations, so the buyers in different countries are forced to pay their local prices) What two prices should the seller set to the two buyers to maximize revenue? For this problem consider and price in the range of( 1-14)