ECON545 week 3 FULL SOLUTION

1. (TCO A) There is a decrease in the cost of labor for producing bicycles.
(4 pts.) What happens to bicycle supply?
(6 pts.) What happens to bicycle demand? (Points : 10)
  
  

2. (TCO A)  Ceteris paribus, Diet Cola Brand X and Diet Cola Brand Y are substitutes in consumption. The price of Diet Cola Brand Y falls. (4 pts.) a. What happens to the demand for Diet Cola Brand X? (6 pts.) b. What happens to the demand for Diet Cola Brand Y? (Points : 10)

3. (TCO A)  The number of new home sellers in a given market decreases. (4 pts.) What happens to the supply of new homes? (6 pts.) What happens to the demand for new homes? (Points : 10)

4. (TCO A) A market is in equilibrium with equilibrium Quantity of MEQ and equilibrium Price of MEP. (2 pts.) a. What happens to market equilibrium Price (MEP) if there is an increase in Demand? (4 pts.) b. What happens to market equilibrium Quantity (MEQ) if Supply decreases as Demand increase? (4 pts.) c. What happens to market equilibrium Price if there is an increase in Supply followed by a decrease in Demand which if followed by another increase in Supply? (Points : 10)

5. The following table shows part of the demand function for tickets to an outdoor summer concert by a popular singing group: Price (P)...Quantity (Q) 50........... 100 35..........  180 20............300 10............500 a.      (2 pts.) What is demand elasticity in the $10 - $20 price range?  Is demand elastic, inelastic, or of unitary elasticity?  Calculate the value and show all of your work.  Be sure to use the midpoint equation used to determine elasticity.  b.    (4 pts.) Assume demand elasticity is 1.3 in the $35 - $50 price range. In this range of demand, by what percentage would quantity demanded change if price increases by 9 percent?  Show your detailed calculations. c.     (4 pts.) What is the effect of a price decline from $35 to $20 on total revenue for the event?   Does total revenue (TR) increase, decrease, or remain the same?  By how much?  Show your detailed calculations. (Points : 10)

6. (TCO B)  For a given labor supply, would the potential unemployment impact of an increase in the minimum wage be greater in the case of elastic or inelastic demand for labor? Explain why, using hypothetical numbers to illustrate your case. (Points : 10)

7. TCO C)  You have been hired to manage a small manufacturing facility whose cost and production data are given in the table below. No. of workers    Total Labor Cost        Output     Total Revenue            1                       $145                  100             $190            2                         290                  105               380            3                         435                  111               840            4                         580                  120             1320            5                         725                  125             1650            6                         870                  129             1780            7                       1015                  131             1800 (2 points)  What is the marginal product of the fourth worker? (2 points)  What is the marginal revenue product of the fifth worker? (2 points)  What is the marginal cost of the second worker? (4 points) Based on your knowledge of marginal analysis, how many workers should you hire? Explain you answer. (Points : 10)

8. (TCO C)  Answer the next question on the basis of the following cost data for a purely competitive seller:     Total Product       TFC             TVC               0                $70                  $0               1                  70                  70               2                  70                120               3                  70                150               4                  70                220               5                  70                300               6                  70                390 Refer to the above data. If the product price is $75 at its optimal output, exactly how many units should be produced to maximize profits or minimize losses? How much will the profit or loss be? Show all calculations. (Points : 10)

9. (TCO C)  Answer the next question on the basis of the following cost data for a purely competitive seller:        TP          TFC     TVC                          0           $45         $0          1             45       170              2             45       320                 3             45       450                 4             45       620                5             45       800                 6             45       990    Refer to the above data. If the product price is $165 at its optimal output, exactly how many units should be produced to maximize profits or minimize losses? How much will the profit or loss be? Show all calculations. (Points : 10)

10. (TCO C)  A firm has Total Costs (TC) of $10,000 over the next three months (TOTAL for the 3 months - not per month), of which $6,000 are fixed costs (TFC) for rent on its lease that cannot be broken. If it stays in business over those months, then the firm will collect only $5,000 in revenues (TR). So, considering only this information, should they stay in business for those three months or should they close down right now? Provide your reasoning. (Points

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Account Multiple choice Questions answers Solution key

1. Given the following annual net cash flows, determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $750,000.

YEAR NET CASH FLOW

 1 $500,000

 2 $150,000

 3 $250,000

 (Points : 1)

 9%

11%

 13%

 15%

2. Higgins Office Corp. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as follows: debt--8 percent; preferred stock--12 percent; common equity--16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate of return must Higgins Office Corp. earn on its investments if the value of the firm is to remain unchanged? (Points : 1)

12.40 percent

 12.00 percent

 11.12 percent

10.64 percent

3. Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%. The profitability index for Project B is (Points : 1)

 1.55

1.48.

1.39.

1.33.

4. Five Rivers Casino is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Gamblers flotation expense on the new bonds will be $50 per bond. Gamblers marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds? (Points : 1)

8.76%

 8.12%

 7.49%

10.25%

 5. Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%. The net present value for Project A is (Points : 1)

 $12,358.

 $16,947.

 $19,458.

 $26,074.

 6. Project XYZ requires an investment in equipment of $600,000 to replace existing equipment. The existing equipment will produce after-tax salvage value of $70,000. Net working capital requirements are increased by $50,000. What is the total cash outflow at time zero? (Points : 1)

 $720,000

 $650,000

 $530,000

 $580,000

 7. Clothier, Inc. has a target capital structure of 40% debt and 60% common equity, and has a 40% marginal tax rate. If Clothier's yield to maturity on bonds is 7.5% and investors require a 15% return on Clothier's common stock, what is the firm's weighted average cost of capital? (Points : 1)

 7.20%

10.80%

12.00%

 12.25%

 8. Nickel Industries is considering the purchase of a new machine that will cost $178,000, plus an additional $12,000 to ship and install. The new machine will have a 5-year useful life and will be depreciated using the straight-line method. The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $10,000 annually. Nickel's income tax rate is 40%. What is the projected incremental cash flow of the machine for year 1? (Points : 1)

$54,800

 $60,200

 $66,350

 $68,200

 9. PDF Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. PDF's marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life. What is the project's terminal cash flow? (Points : 1)

 $3,000

 $5,000

 $6,000

 $8,000

 10. Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal? (Points : 1)

 increase in accounts receivable

 cost of issuing new bonds if the project is financed by a new bond issue

 installation costs

 none of the above - all are considered

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