Question A

Part 1

Suppose there is a technological advance that reduces the cost of producing computer chips. Use supply and demand curves to analyse the effects in the following markets:

a.market for computers.[5marks]
b.market for computer software.[5marks]
c.market for typewriters.[5marks]

Part 2

Explain with the aid of an example, the law of demand and the law of supply[4 marks]

b.Outline four factors which affect price elasticity of demand[4marks]
c.The price elasticity of demand for coca cola has been calculated at -3.8. Using your knowledge of elasticity, explain the economic meaning of this figure.[2marks].

Part 3
The demand for pocket calculators is given by the function:P = 6 – 0.5Qd; and the supply is given by the function:6=Qs-P; where =Qd= quantity demanded,Qs=quantity supplied and P= price.

a.What is the equilibrium condition?[1mark]

b.Solve for the equilibrium price and quantity in this market.[5marks]
c.Calculate the demand and supply for calculators if the market price is $15per barrel. What problem exists in the economy? What would you expect to happento price?[4marks]

d.Calculate the demand and supply for calculators if the market price is $4per barrel. What problem exists in the economy? What would you expect to happen to price?[4marks]

Part 4
When the price of a plane ticket rises from $200 to $250, the number of business travellers per month falls from 2000 to 1900. At the same time, the number of vacationers per month falls from 800 to 600.

a.Calculate the price elasticity for (i) business travellers and (ii)vacationers.[6marks]

b.State whether the elasticities for (i) business travellers and (ii) vacationers are

elastic or inelastic.[2 marks]

c.Analyse why there is a difference between price elasticities for business

travellers and vacationers.[3marks]

At the beginning of 20X1, Monterey Company purchased a new piece of equipment at a cost of $50,000. The equipment was expected to have a ten-year life and no salvage value. Unfortunately, the bookkeeper at Monterey erroneously recorded the purchase of the equipment with a debit to maintenance expense. This error was not discovered until the 20X6. The company had planned to use the Straight-line method of depreciation for both financial statement and tax reporting purposes. The company is in a 40 percent tax bracket.

REQUIRED:
1.   Prepare the journal entry needed to record the correction of the error.

2. What is the amount for depreciation expense in 20X6 (the current year)?

3. What is the amount for depreciation expense in 20X7 (the following year)?

In a random sample of 60 computers, the mean repair cost was $120 with a standard deviation of $30. Construct the 95% confidence interval for the population mean repair cost.

If merchandise inventory is being valued at cost and the price level is decreasing, which of the three methods of costing - FIFO, LIFO, or Weighted Average cost - will yield

a. the highest inventory cost

b. the lowest inventory cost

c. the highest gross profit

d. the lowest gross profit

please explain the answer thoroughly.

"A firm is considering purchasing a computer system.
-Cost of system is $176,000. The firm will pay for the computer system in year 0.
-Project life: 6 years
-Salvage value in year 0 (constant) dollars: $17,000
-Depreciation method: five-years MACRS
-Marginal income-tax rate = 37% (remains constant over time)
-Annual revenue = $121,000 (year-0 constant dollars)
-Annual expenses (not including depreciation) = $85,000 (year-0 constant dollars)
-The general inflation rate is 2.8% during the project period (which will affect all revenues, expenses, and the salvage value but not depreciation).
-The firm borrows the entire $176,000 at 11.9% interest to be repaid in 2 annual payments. The debt interest paid and the principal payment SHOULD NOT be changed by the inflation rate. Lending agencies set the interest rate of borrowing to account for the inflation rate.
Calculate the effects of borrowing and include the debt interest paid and the principal repayment into the income statement and cash flow statement. Determine the INFLATION-FREE IRR' of the computer system. Enter your answer as a percentage between 0 and 100."

Correct Answer (Between 4.671711282 and 6.071711282)

Part 1:

The cost of capital is affected by some factors that are under the firm’s control and some that are not. What are the factors the firm can and cannot control and what will be the impact of these factors on company's average cost of capital (WACC)?

Part 2:

Use the Internet to research two (2) mutually exclusive investment projects to compare. The projects may involve any kind of investment, as long as the time frame for one (1) of the investments is a maximum of one (1) year (short term) and the time frame for the other investment is five (5) years minimum (long term). Be prepared to discuss this.

How is the cost of administrative medicine different in the U.S. than in Canada or any other country you chose? How much of the U.S. health care dollar is devoted to administrative medicine? What alternatives can you suggest to reign in the cost of administrative medicine

The following are the job cost related accounts for the law firm of Colaw Associates

And their manufacturing equivalents:

Law firm accounts

Supplies

Salaries and Wages Payable

Operating Overhead

Service Contracts in Process

Cost of Completed Service Contracts

Manufacturing Firm Accounts

Raw Materials

Factory Wages Payable

Manufacturing Overhead

Work in Process

Cost of Goods Sold

Cost data for the month of March follow.

1. Purchased supplies on account $1800

2. Issued supplies $1200 (60% direct and 40% indirect)

3. Assigned labor costs based on time cards for the month which indicated labor costs of $70,000 (80% direct and 20% indirect)

4. Operating overhead costs incurred for cash totaled $40,000

5. Operating overhead is applied at a rate of 90% of direct labor cost.

6. Work completed totaled $75,000

Instructions

1. Journalize the transactions for March. (Omit explanations.)

2. Determine the balance of the Service Contracts in Process account. (Use a T-account)

Hints: This is a little different than what we did in lecture as this is for a service company, not a manufacturer. Use the following accounts to make your entries and answer (b)  

• Cash

• Supplies

• Accounts Payable

• Service Salaries and Wages Payable

• Service Contracts in Process (Replaces the Work In Process Account)

• Operating Overhead ( Replaces Manufacturing Overhead)

• Cost of Completed Service Contracts (COGS) – This is related to the last transaction

Ture or False.

1. In addition to the fact the opportunity cost of using a commodity as the medium of exchange is substantially greater than the opportunity cost of using a commodity as the medium of exchange is substantially greater than the opportunity cost of using fiat money, the monetary authority in an economy in which the medium of exchange is fiat money has greater discretion in its pursuit of monetary policies that deliver price stability.

2. According to fisher equation, if expected inflation increase by x percent the nominal interest rate will also increase by x percent but th real interest rate will not be affect.

3. The demand curve for loanable funds reflects the behavior of deficit spending units while the behavior underlying the bond demand curve is that of surplus spending units.

4. The ex-post real interest rate is most useful for planning purposes while the ex-ante real interest rate is more useful for ecaluating results of prior decisions.

5.A fundamental problem with yield curves based on corporate bonds is that differing degrees of default risk among corporate bonds would make it difficult to unambiguously assign responsibility for observed yield differentials to variation in length of time to maturity.