Problem 4: Heat Included? Should landlords or tenants pay for heat? If landlords pay for heat, they pay $100 for heat and $600 in other costs. In this case, tenants get $1000 value from the apartment (minus rent).

If tenants pay for their own heat, they’d heat apartment less and get only $980 value and pay $60 for heat. The landlord now only pays the $600 in costs.

1. a) If the competitive price of rent with heat included is $850, what is the tenant’s net benefit from the apartment? What is the landlord’s net benefit from the apartment?

2. b) If the competitive price of rent with no heat included is $760, what is the tenant’s net benefit from such an apartment? What is the landlord’s net benefit from such an apartment?

3. c) Does a law requiring landlords to pay for heat improve efficiency?

4. d) If tenants and landlords were to vote on such a law, what would be the outcome? Does it matter if they vote “ex-ante” (before they know if they’re landlords or tenants) or “ex-post” (after they know)? Explain briefly.

50-1/1

Assuming competitive markets with typical supply and demand curves, which of the following statements is correct?

• An increase in demand with no change in supply will result in an increase in sales.

• An increase in supply with no change in demand will result in an increase in price.

• An increase in supply with a decrease in demand will result in an increase in price.

• An increase in supply with no change in demand will result in a decline in sales.

53.1/1

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. The marginal propensity to consume in economy (1) is

• 0.7.

• 0.5.

• 0.3.

• 0.8.

How much does a sleeping bag cost? Let's say you want a sleeping bag that should keep you warm in temperatures from 20°F to 45°F. A random sample of prices ($) for sleeping bags in this temperature range is given below. Assume that the population of xvalues has an approximately normal distribution.

(a) Use a calculator with mean and sample standard deviation keys to find the sample mean price x and sample standard deviation s. (Round your answers to two decimal places.)

(b) Using the given data as representative of the population of prices of all summer sleeping bags, find a 90% confidence interval for the mean price μ of all summer sleeping bags. (Round your answers to two decimal places.)

How much does a sleeping bag cost? Let's say you want a sleeping bag that should keep you warm in temperatures from 20°F to 45°F. A random sample of prices ($) for sleeping bags in this temperature range is given below. Assume that the population of x values has an approximately normal distribution.

105 75 85 80 65 50 30 23 100 110
105 95 105 60 110 120 95 90 60 70

(a) Use a calculator with mean and sample standard deviation keys to find the sample mean price x and sample standard deviation s. (Round your answers to two decimal places.)
x = $
s = $

(b) Using the given data as representative of the population of prices of all summer sleeping bags, find a 90% confidence interval for the mean price μ of all summer sleeping bags. (Round your answers to two decimal places.)
lower limit $
upper limit $

Galactic Empire Ltd. has two divisions. Division A is located in Canada where the income tax rate is 40%. Division B is located in India where the income tax rate is 30%. Division A produces an intermediate product at a variable cost of $100 per unit and transfers the product to Division B where it is finished and sold for $500 per unit. Variable costs in Division B are $80 per unit. Fixed costs are $75,000 per year in Division A and $90,000 per year in Division B. Assume 1,000 units are produced and transferred annually and the minimum transfer price allowed by the Canadian tax authorities is the variable cost. Also assume operating income in each country is equal to taxable income.
Required:
1) What transfer price should be set for the Galactic Empire to minimize its total income taxes? Show your calculations.
2) If Galactic Empire desires to minimize its total income taxes, calculate the amount of tax liability in each country.

Campfire Products sell camping equipment. One of the ocmpany's products, a camping lantern, sell for $100 per unit. Variable expenses are $65 per lantern, and fixed expenses associated with the lantern total $140,000 per month. a. Comopute the company's break even point in number of lanterns and in total sales dollars. b. At present, the company is selling 8,000 lanterns per month. The sales manager is convinced that at 10% reduction in the selling price will result in a 25% increase in the number of lanterns sold each month. Prepare two contribution income statements, one under present operating conditions, and one as operations would appear after theproposed changes. Show both total and per unit data on your statement and determine if the proposed changes will be beneficial to the company's net operating income. c. Refer to the data in (c) above. How many lanterns would have to be sold at the new selling price to yield a minimum net operating income of $72,000 per month

4. You are the CEO of Valu-Added Industries, Inc. (VAI). Your firm has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. There is no debt; thus, the “market value” balance sheet of VAI looks like:

VAI Market Value Balance Sheet
Assets $1,000,000 Equity $1,000,000

You then discover an opportunity to invest in a new project that produces positive cash flows with a present value of $210,000. Your total initial costs for investing and developing this project are only $110,000. You will raise the necessary capital for this investment by issuing new equity. All potential purchasers of your common stock will be fully aware of the project’s value and cost, and are willing to pay “fair value” for the new shares of VAI common.

• What is the Net Present Value of this project?

• How many shares of common stock must be issued (at what price) to raise the required

  capital?

• What is the effect of this new project on the value of the stock of the existing shareholders, if any?

Campfire Products sells camping equipment. One of the company's products, a camping lantern, sells for $100 per unit. Variable expenses are $65 per lantern, and fixed expenses assoiciated with the lantern total $140,000 per month.

A) Compute the company's break-even point in number of lanterns and in total sales dollars.

B) At present, the company is selling 8,000 lanterns per month. The sales manager is convinced that a 10% reduction in the selling price will result in a 25% increase in the number of lanterns sold each month. Prepare two contribution income statements, one under present conditions and one as operations would appear after the proposed changes. Show both total and per unit data on your statements and determine if the proposed changes will be beneficial to the company's net operating income.

C) Refer to the data in b above. How many lanterns would have to be sold at the new selling price to yield a minimum net operating income of $72,000 per month?

Next Year’s Sales Projections:

Inventories:

Direct Materials:

Direct Material Costs:

Labor Requirements:

Overhead is applied at $10 per direct labor hour

prepare:

A/ Sales Budget

B/ Production Budget

C/ Purchasing Budget

D/ Direct Labor Budget

E/ Total Production Cost per Unit of each product.

4. You are the CEO of Valu-Added Industries, Inc. (VAI). Your firm has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. There is no debt; thus, the “market value” balance sheet of VAI looks like:

VAI Market Value Balance Sheet
Assets $1,000,000 Equity $1,000,000

You then discover an opportunity to invest in a new project that produces positive cash flows with a present value of $210,000. Your total initial costs for investing and developing this project are only $110,000. You will raise the necessary capital for this investment by issuing new equity. All potential purchasers of your common stock will be fully aware of the project’s value and cost, and are willing to pay “fair value” for the new shares of VAI common.

What is the Net Present Value of this project?

How many shares of common stock must be issued (at what price) to raise the required

capital?

What is the effect of this new project on the value of the stock of the existing shareholders, if any?