1. (Time Value of Money) You can borrow and lend money at 18% in the market. You have $200,000. You are considering entering into a perfectly competitive market by starting a business today. You will need to pay $120,000 as your fixed costs for an equipment which will become obsolete in two years. Your variable costs are given as TVC(Q) = 4Q + Q^2/14000/14,000. Market price is $15 per Q. All costs are due at the beginning of the production. All revenue will be collected at the end of two years.
Given the above information, would you start this business today?
2. (Negative Externalities) A firm, operating in a perfectly competitive environment, produces mobile phones. You have the following information about the production structure of the firm:
Total Cost = 100 + .4Q2 where Q is the number of phones produces.
a. If the market price of a mobile phone is $40, how many phones will this profit maximizing firm produce?How much profit will it earn?
An unintended consequence of mobile phone production is that the firm dumps 2 pounds of chemicals into the river for every phone it produces. The river water goes downstream where cute children swim. There are 200 children who swim in the water and the probability that a child getting sick in dirty water equals: Probability each child gets sick = .001*Pounds of Chemicals Dumped in the River
Note that probabilities cannot exceed 1.
b. Let $F represent the dollar equivalent of the damage a sick child suffers. Write out the algebra of the aggregate externality that the phone company imposes on the children.
c. If we consider the private as well as the social costs of this business, should we shut down the jean factory?