BUSN6120: Given a linear demand function of the form qxd = 500 – 2px – 3py + 0.01m, find the inverse linear demand function assuming m = 20,000 and py = 10: Managerial Economics Assignment

Subject BUSN6120: Managerial Economics

Multiple Choice Questions:
Use the table below to answer the following questions:

No. Units Produced Total Revenue Total Costs
0 0 0
1 100 50
2 180 110
3 250 180
4 290 270
5 310 380

1) What is the marginal revenue of producing the third unit?
A. 250                              B. 70
C. 0                                   D. 90

2) At what level of output does marginal cost equal marginal revenue?
A. 1                                   B. 2
C. 3                                   D. 4

3) What is the level of net benefits when four units are produced?
A. 0                                  B. 70
C. -70                              D. 20

4) What is the marginal net benefit of producing the fourth unit?
A. -50                              B. 0
C. 60                               D. 40

5) The higher the interest rate:
A. the greater the present value of a future amount.
B. the smaller the present value of a future amount.
C. the greater the level of inflation.
D. None of the statements associated with this question is correct.

6) If the interest rate is 10 per cent and cash flows are $1,000 at the end of year one and $2,000 at the end of year two, then the present value of these cash flows is:
A. $2,562.                           B. $3,200.
C. $439.                              D. $3,000.

7) Which of the following is an implicit cost of going to college?
A. Tuition
B. Cost of books and supplies
C. Room and board
D. Foregone wages

8) The primary inducement for new firms to enter an industry is:
A. increased technology.
B. availability of labour.
C. low capital costs.
D. presence of economic profits.

9) As more firms enter an industry:
A. accounting profits increase.
B. economic profits decrease.
C. prices rise.
D. None of the statements associated with this question are correct

10) If the interest rate is 5 per cent, the present value of $200 received at the end of five years is:
A. $121.34.
B. $156.71.
C. $176.41.
D. $132.62.

11) When dealing with present value, a higher interest rate:
A. does not affect the present value of the future amount.
B. increases the present value of a future amount.
C. decreases the present value of a future amount.
D. None of the statements associated with this question is correct.

12) A firm will have constant profits of $100,000 per year for the next four years, and the interest rate is 6 per cent. Assuming these profits are realized at the end of each year, what is the present value of these future profits?
A. $325,816
B. $376,741
C. $400,000
D. $346,511

13) Suppose the interest rate is 5 per cent, the expected growth rate of the firm is 2 per cent, and the firm is expected to continue forever. If current profits are $1,000, what is the value of the firm?
A. $31,000
B. $30,000
C. $26,500
D. $35,000

14) The behaviour of bidders in an auction is an example of:
A. consumer-consumer rivalry.
B. consumer-producer rivalry.
C. producer-producer rivalry.
D. None of the statements associated with this question are correct.

15) Which of the following is (are) true?
A. Accounting costs generally understate economic costs.
B. Accounting profits generally overstate economic profits.
C. In the absence of any opportunity costs, accounting profits equal economic profits.
D. All of the statements associated with this question are correct.

16) If the interest rate is 5 per cent, $100 received at the end of seven years is worth how much today?
A. 100/(0.05)7
B. 100/(1 + 0.05)7
C. 100/(1 + 5)7
D. 100

17) To an economist, maximizing profit is:
A. maximizing the value of the firm.
B. maximizing the current year’s profits.
C. minimizing the permanent total costs.
D. minimizing the future profits.

18) Which of the following is the incorrect statement?
A. The marginal benefits curve is the slope of the total benefits curve.
B. dB(Q)/dQ = MB.
C. The slope of the net benefit curve is horizontal where MB = MC.
D. The difference in the slope of the total benefit curve and the total cost curve is maximized at the optimal level of Q.

19) Suppose the growth rate of the firm’s profit is 5 percent, the interest rate is 6 per cent, and the current profits of the firm are $80 million. What is the value of the firm?
A. $89.2 million
B. $1,413.3 million
C. $8,480 million
D. None of the statements associated with this question is correct.

20)Compute the present value of a perpetual bond that pays a MONTHLY cash flow of $1,000 at an ANNUAL interest rate of 12 per cent.
A. $8,333.33
B. $9,333.33
C. $100,000
D. $101,000

21) Which of the following statements is incorrect?
A. As the population rises, the market demand curve shifts to the right.
B. As a greater fraction of the population becomes elderly, the demand for medical services will tend to increase.
C. Changes in the composition of the population affect the demand for a product.
D. None of the statements associated with this question is incorrect.

22) Which of the following is a linear demand function?
A. Qxd = α0 + αXPX + αYPY + αMM + αHH.
B. Qxd = αPXαX PYαY MαM HαH.
C. Qxd = α0 + αXPX2 + αYPY2 + αMM2 + αMH2.
D. Qxd = α + αX log PX + αY log PY + αM log M + αM log H.

23) Suppose the demand for X is given by Qxd = 100 – 2PX + 4PY + 10M + 2A, where PX represents the price of good X, PY is the price of good Y, M is income and A is the amount of advertising on good X. Based on this information, we know that good X is a
A. substitute for good Y and a normal good.
B. complement for good Y and an inferior good.
C. complement for good Y and a normal good.
D. substitute for good Y and an inferior good.

24) Suppose the demand for X is given by Qxd = 100 – 2PX + 4PY + 10M + 2A, where PX represents the price of good X, PY is the price of good Y, M is income and A is the amount of advertising on good X. If advertising on good X increases by $10,000, then the demand for X will
A. decrease by $20,000.
B. decrease by $100,000.
C. increase by $100,000.
D. increase by $20,000.

25) Given a linear demand function of the form QXd = 500 – 2PX – 3PY + 0.01M, find the inverse linear demand function assuming M = 20,000 and PY = 10.
A. PX = 500 – 2QX – 3PY + 0.01M.
B. PX = 335 – 0.5QX.
C. PX = 335 – 2QX.
D. PX = 500 – 2QX.

26) If the price of pork chops falls from $8 to $6, and this leads to an increase in demand for apple sauce from 100 to 140 jars, what is the cross-price elasticity of apple sauce and pork chops at a pork chop price of $6?
A. -1.17
B. 2.71
C. 0.42
D. -0.86

27) Suppose the demand function is given by Qx d = 8Px0.5 Py 0.25 M0.12 H. Then the cross-price elasticity between goods x and y is:
A. 4.00.
B. 0.25.
C. 0.50.
D. 8.33.

28) Suppose the demand function is given by Qx d = 8Px 0.5 Py 0.25 M0.12 H. Then good x is:
A. a normal good.
B. an inferior good.
C. a complement for a goody.
D. is perfectly inelastic.

29) Suppose the demand function is given by Qx d = 8Px 0.5 Py 0.25 M0.12 H. Then the demand for good x is:
A. inelastic.
B. unitary.
C. elastic.
D. perfectly elastic.

30) If the short-term own price elasticity for transportation is estimated to be -0.6, then long-term own price elasticity is expected to be:

A. -0.6.
B. greater than -0.6.
C. less than -0.6.
D. neither greater than, less than, nor equal to -0.6.

Short and Long Question:
1. Suppose that the total benefit and total cost from an activity are, respectively, given by the following equations: B(Q) =100+36Q-4Q 2 and C(Q)=80+12Q.

a) Write out the equation for the net benefits.
b) What are the marginal net benefits when Q=2? Q=6?
c) What level of Q maximizes net benefits?
d) At the value of Q that maximizes net benefits, what is the value of marginal net benefits?

2. What is the value of a government bond that pays a perpetual dividend of $320 at the end of each year when the interest rate is 8 per cent?

3. Microsoft is considering moving 1,000 employees from a help-desk call centre in Seattle to Bombay. The total after-tax cost of a Seattle worker is $50,000 per year and the total after tax cost of a Bombay worker is $30,000 per year. The move would require paying an upfront severance package worth $40,000 after taxes per former Seattle employee.

Assume for this analysis that the cost savings would last forever and that Microsoft’s cost of capital is 20%.

a) Should the project be accepted based on the NPV rule?
b) Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.

Internal rate of return is used to evaluate the attractiveness of a project or investment.

What is the IRR of the project?

4. You have just been hired as a consultant to help a firm to decide which of three options to take to maximize the value of the firm over the next three years. The following table shows year-end profits for each option. Interest rates are expected to be stable at 8 percent over the next three years.

Option Profit in Year 1 Profit in Year 2 Profit in Year 3
A $70,000.00 $80,000.00 $90,000.00
B $50,000.00 $90,000.00 $100,000.00
C $30,000.00 $100,000.00 $115,000.00

a. Discuss the difference in the profits associated with each option. Provide an example of real-world options that might generate such profit streams.

b. Which option has the greatest present value?

5. Use the accompanying graph to answer these questions.

a. Suppose demand is D and supply is S0. If a price ceiling of $6 is imposed, what are the resulting shortage and full economic price?
b. Suppose demand is D and supply is S0. If a price floor of $12 is imposed, what is the resulting surplus? What is the cost to the government of purchasing any and all unsold units?
c. Suppose demand is D and supply is S0 so that the equilibrium price is $10. If an excise tax of $6 is imposed on this product, what happens to the equilibrium price paid by consumers? The price received by producers? The number of units sold?
d. Calculate the level of consumer and producer surplus when demand and supply are given by D and S0 respectively.
e. Suppose demand is D and supply is S0. Would a price ceiling of $2 benefit any consumers? Explain.

6. Consider a market where supply and demand are given by Qx d = 92 − 2Px and Qx s = Px − 16. Suppose the government imposes a price floor of $40, and agrees to purchase any and all units consumers do not buy at the floor price of $40 per unit.
a. Draw a diagram and show you this case graphically.
b. Determine the cost to the government of buying firms’ unsold units.
c. Compute the lost social welfare (deadweight loss) that stems from the $40 price floor.

7. You are a manager in charge of monitoring cash flow at a company that makes photography equipment. Traditional photography equipment comprises 40 per cent of your revenues, which grow about 2 percent annually. You recently received a preliminary report that suggests consumers take three times more digital photographs than photos
with traditional film, and that the cross-price elasticity of demand between digital and disposable cameras is -0.3. In 2012, your company earned about $600 million from sales of digital cameras and about $400 million from sales of disposable cameras. If the own price elasticity of demand for disposable cameras is -2, how will a 4 percent decrease in
the price of disposable cameras affect your overall revenues from both disposable and digital camera sales?

8. The demand curve for a product is given by Qxd=1200-3Px-0.1Pz where Pz= $300.
a. What is the own price elasticity of demand when Px=$140? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price below $140?
b. What is the own price elasticity of demand when Px= $240? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price above $240?
c. What is the cross-price elasticity of demand between good X and good Z when Px=$140? Are goods X and Z substitutes or complements?

9. You are a division manager at Toyota. If your marketing department estimates that the semiannual demand for the Highlander is Q=150,000-1.5P, what price should you charge in order to maximize revenues from sales of the Highlander?

10. Let demand and supply for good X be Qd =60-6P and Qs =4+2P.
a. Find equilibrium quantity and price which clear market?
b. What is the price elasticity of demand (PED) at P=4?
c. What is the price elasticity of supply (PES) at equilibrium?
d. Which quantity and price (on demand equation) make maximum total revenue for producer of X?
e. What is the size of the consumer surplus at equilibrium?
f. What is the cost of production at equilibrium?
g. If income increases by 20%, the demand shifts to Qd =70-4P, what is the income elasticity? Also, what kind of good is X with this income elasticity?
h. If price of good Y increases by 10%, the demand shifts to Qd =44-8P, what is the cross elasticity? Also, what is the economic term used for a good with this cross elasticity?

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