1. The owner of a firm calculates that next year's profit will be $1,000. Each successive year profit will increase by 10% (i.e. year 2: $1100; year 3: $1210 and so on.) At the end of the 5th year the firm could be sold for $20,000.
A) if the appropriate discount rate is 15%, what is currently the value of the firm?
B) if the owner presently receives an offer of $15050 for the firm and accepts it, what does that imply about his discount rate?
2. A typist is considering giving up her $30,000 per year job to start her own typing business. She expects that revenue during her first year will be $200,000, while her expenses are going to be: $90,000 for hired help; $40,000 for supplies; $ 5,000 for utilities; and $18,000 to service her 10% bank loan. Furthermore she plans to use office space she owns, which currently rents for $20,000 per year, and invest $50,000 of her own savings, which is currently earning 10% interest. Calculate:
a) Explicit costs
b) Implicit costs
c) Business profit
d) Economic profit
Should she open the business? Why?
3. Suppose the following inverse demand and supply functions:
P = 2.50 - 0.25 QD, P = 0.25 + 0.125 QS
a) Calculate Equilibrium Price
b) Calculate Equilibrium Quantity
c) Explain what will happen if a price floor of $1.50 is imposed.
d) Explain what will happen if a price ceiling of $0.50 is imposed.
4. Use the following demand and supply equations to construct a table that has the following columns: i) price, ii) quantity supplied, iii) quantity demanded, iv) shortage or surplus, v) pressure on price, and vi) quantity transacted. Make sure you include the equilibrium price as well as a couple of prices above and below equilibrium.
QD = 80 - 10 P, QS = 20 + 10 P
Discuss how equilibrium is reached, what characterizes it, and how does quantity transacted behave.
5. Better Buys, Inc., is a leading discount retailer of wide-screen digital and cable-ready plasma HDTVs. Revenue and cost relations for a popular 55-inch model are:
TR = $4,500Q - $0.1Q2
TC = $2,000,000 + $1,500Q + $0.5Q2
A. Calculate output, marginal revenue, marginal cost, average cost, price, and profit at the profit-maximizing activity level.
6. The Sharper Edge, Inc. is a leading retailer of Yingsu Knives, a set of kitchen cutlery, which it markets on a nationwide basis. SEI knife sets are either sold directly to the public through national television marketing programs, or given away as promotional items. Operating experience during the past year suggests the following demand function for its knife sets:
Q = 4,000 - 4,000P + 10,000N + 0.25I + 0.4A
Where Q is quantity, P is the price ($), N is the average Nielson rating of television programs during which SEI advertises Yingsu Knives, I is average disposable income per household ($), and A is advertising expenditures ($).
A. Determine the demand curve faced by SEI in a typical market where P = $35, N = 18.5, I = $44,000, and A = $500,000. Show the demand curve with quantity expressed as a function of price, and price expressed as a function of quantity.
B. Calculate the quantity demanded at prices of $40, $35, and $30.
C. Calculate the prices necessary to sell 264,000, 292,000, and 320,000 sets of knives.
7. The San Diego Zoo is contemplating a stuffed panda bear advertising promotion. Annualized sales data from local shops marketing the "Can't Bear it When You're Away" bear indicate that:
Q = 50,000 - 1,000P
where Q is Panda bear sales and P is price.
A. How many pandas could the zoo sell at $30 each?
B. What price would the zoo have to charge to sell 25,000 pandas?
C. At what price would panda sales equal zero?
D. How many bears could be given away?
E. Calculate the point price elasticity of demand at a price of $10.
8. The Real Kool Toys Company manufactures and sells educational toys. An empirical demand function for one of the firm's products has been estimated over the last 21 quarters using regression analysis. The estimated demand function is:
QY = -8,000 - 5,000PY + 192A + 120I + 2,000PX
(6,000) (1,000) (120) (80) (800)
R2 = 91%
Here QY is quantity (measured in units) of Product Y demanded in the current period, A is hundreds of dollars of advertising ($00), I is thousands of dollars of disposable income per capita ($000), and PX is the price ($) of another toy manufactured by a competitor, ABC Toys. The terms in parentheses are the standard errors of the coefficients.
A. How would you characterize the ability of this empirical demand function to explain demand for product Y?
B. Currently, PY is $8, advertising is $25,000, disposable income per capita is $50,000 and PX is $7. What are expected sales of Y in this period?
C. What is the demand curve currently facing Real Kool for Product Y? (Note: Be careful to properly account for the units in which advertising and income appear in the estimated demand function.)
D. What is the point price elasticity of demand for Y at the current price?
E. Given the current price elasticity of demand, would a price reduction increase Real Kool profits? Explain.
F. What demand curve would Real Kool face for Product Y if it raised advertising expenditures to $37,500?
9. The following table shows annual sales data for Stuff Happens, Inc., over the ten-year 1998-2008 period:
Year Sales
($ Millions)
1998 $2.0
1999 2.2
2000 2.4
2001 2.6
2002 2.8
2003 3.0
2004 3.2
2005 3.5
2006 3.8
2007 4.1
2008 4.3
A. Calculate the 1998-2008 growth rate in sales using the constant rate of change model with annual compounding.
B. Calculate the 1998-2008 growth rate in sales using the linear model
C. Forecast sales for the years 2011 and 2013 under the two models. Comment.
10. What are the sources of variation (i.e. components) of a time series? What are the methods used to forecast these components? What are the advantages and