Download Solutions to Odd-Numbered Problems

Solutions to Odd–Numbered Problems
Chapter 3
1. a. 800 caps
b. $10
c. $20
3. b. P = $4.00
5. a. QD = 61,000 – 200P
b, 0, 26,000, 31,000, 36,000
c. $80
7. Supply curve shifts to right and demand curve shifts to left. The combined shifts drastically reduced the world
market price of sugar.
9. a. No, because point elasticity is – 0.625.
b. Yes, although the number of units sold would drop from 12,000 to 10,000, the combined impact of an
inelastic demand and the increase in advertising would raise total revenue from $36,000 to $40,000.
Moreover the incremental revenue is far greater than the $100 increase in advertising expenses.
11. a. P = 25 – 0.1Q
b. P = 9.29 – 0.007Q
c. P = 90 – 2Q
13.
The Problem:
a.
Found in the graph itself and in the equation found in cells A6 and A7: P = 20 – 0.5Q
b.
Found in cell C4. Q = 100
c.
Change A4 from -20 to -10 or -25 and watch what happens to the graph and equations in A6, A7
and C4
a.
b.
One final scenario: Cells D2=200, D3=12.5, D4=-16.
C = $12.50 and D = -16.
P = 25 – 0.0625Q
Chapter 4
1. 0.2/–0.1 = –2
3. a. 1,400
b. 2
c. 2,000
d. 20
e. –0.43
5. a. –0.88
b. –0.58
c. –0.88
7. a. 4,421
b. 2,865
9. Arc price elasticity = –1.36
Arc cross elasticity = –0.85
11.a. negative
b. positive
c. negative
d. probably zero
13. a. Elasticity for Brown’s shoes may be greater than elasticity for all shoes in general. If elasticity for Brown’s
shoes is >/1/, then price decrease could lead to revenue increase.
b. Increase 9 percent.
15. a. –1.4
b. Complementary good; cross elasticity –0.7.
c. Yes, revenues for ice cream and syrup rise, and probably so does profit.
17. a. 1,800
b. $0, $100, $25
c. TR = 100Q – 0.05Q2; MR = 100 – 0.1Q
d. TR = $42,000; MR = $40
e. ε = -2.33
Solutions to Odd-Numbered Problems
7
f. TR = $48,000; MR = $20; ε = -1.5
g. 1,000
19. Elasticity is –0.934
Revenue decreases from £159,750 to £155,400.
21. a. 3
b. E = -0.66; $18,400,000
c. Demand curve is inelastic. Increase in price could increase revenue.
Chapter 5
Demand Estimation
1. Price: average price of furniture or of specific furniture type
Price of related products: competitors’ prices, housing prices
Tastes: advertising expenditure, information about buyers’ age, income, education, etc
Income: per capital disposable income
Credit: an interest rate such as prime rate or rate on short–term U.S. Treasuries
Number of buyers: number of households
3.a. Ep = –1.18, E x= 0.68, EI = 1.62, EA = 0.113, EM = 0.07
b. Very concerned; elasticity is high.
c. Possibily; product is price elastic.
d. About 55%; Significant at 5% level.
5. a. Japanese luxury cars are close substitutes for European luxury cars.
b. Superior product
c. Relatively inelastic; not surprising
Forecasting
1. 16%
3. a. 1,600
b. 320, 400, 500, 380
5. a. 176.667 + 20.5879t; 176.667 + 20.5879 (11) = $403. Past 10 years describe straight line; thus some
confidence that trend will continue.
b. 382 x 0.7 + 353 x 0.3 = 373. Upward trend makes exponential smoothing an inferior forecasting tool; it
underestimates.
7. a. Q = 17,350
b. Q = 17,200, Q = 17,400
c. Q = 17,500
d. Q decreases by 1,200
9. a. 582
b. Other factors should be taken into consideration.
Chapter 6
1. a. False
b. True
c. True
3. a. 4 units
b. 1–6, 6–11, 11 and above units of labor
c. 9 workers, reduce to 8, no change because still in Stage II
d. False
5. a. more to Mexico or possibly Taiwan
b. either Mexico or Taiwan (Taiwan has lower MP/P but also lower overhead)
7. a. & b.
Quantity
Variable
Average
Marginal
Factor
Product
Product
0
1
2
3
4
5
6
0.0
7.5
15.6
23.7
31.2
37.5
42.0
7.5
7.8
7.9
7.8
7.5
7.0
7.5
8.1
8.1
7.5
6.3
4.5
7
8
9
10
44.1
43.2
38.7
30.0
6.3
5.4
4.3
3.0
2.1
–0.9
–4.5
–8.7
9. a. log Q = 1.889 + .414 log M
b. Fairly satisfactory, could improve if additional independent variables are included.
c. 2.91, 2.66, 2.51, 2.46, 2.37, 2.22, 2.16
11. a. budget line shifts to right
b. budget line becomes steeper (from X)
c. budget line becomes flatter (from Y)
d. budget line rotates and becomes steeper
e. isoquant shifts to right with bias toward Y
f. parallel shift of isoquant to the left
13. a. CRTS b. CRTS c. IRTS
d. DRTS
e. IRTS
f. IRTS
g. If exponents sum to unity, CRTS. If they are less than unity, DRTS. If they are greater than unity, IRTS.
15. a. 0.75 + 0.3 = 1.05. Increasing
b.
Labor
100r
120
150
00
00
Capital
0
0
75
100
150
Quantity
132.9
161.0
203.5
275.2
421.3
c. 10.5 percent
d. 7.4 percent; decreasing marginal product,
e. 2.9 percent
f. constant returns to scale
Chapter 7
1.
Q
0
1
2
3
4
5
6
7
8
9
TC
120
265
384
483
568
645
720
799
888
993
TFC
120
120
120
120
120
120
120
120
120
120
TVC
0
145
264
363
448
525
600
679
768
873
10
1120
120
1000
AC
X
265
192
161
142
129
120
114.1
111
110.3
112
AFC
X
120
60
40
30
24
20
17.1
15
13.3
AV
C
X
145
132
121
112
105
100
97
96
97
145
119
99
85
77
75
79
89
105
12
100
127
MC
3. If only relevant costs are included, it would be $188 or $9.40 per fish.
5. a. False, decisions are future oriented so managers should use the replacement, not the historical costs of raw
materials.
b. True, this can be explained by the mathematical relationship between marginal and average.
c. True, declining long–run AC means economies of scale and increasing long– run AC means diseconomies of
scale.
d. False, marginal cost can also be used in long–run analysis because even the “fixed” cost varies in the long run.
e. False, the rational firm will operate where profit is maximized. This may not coincide with the point of minimum
average cost because per unit revenue must also be taken into account.
7. a.LRAC = 160 – 20Q + 1.2Q 2
LRMC = 160 – 40Q + 3.6Q 2
b. Because of the particular functional form of the LRAC, we know this firm experiences economies of scale
at about 8 units of output (8.3 to be exact).
9. b. & c. Straight line:
TC = 94.93 + 0.46
R2 = 0.91
t = 8.96
Quadratic:
TC = 106.68 – 0.13Q + 0.005Q2
R2 = 0.99
tb = –1.41; tc = 6.70
Cubic:
TC = 99.5 + 0.51Q – 0.009Q2 + 0.00008Q3
R2 = 0.999
tb = 6.30; tc = –5.07; td = 8.36
Cubic function gives best fit.
11. c. (1) Straight–line function; AVC and MC are constant. (2) TC increases at increasing rate; MC rises. (3) TC
increases at decreasing rate; MC, AVC, and AC decrease.
13. a. & b.
Quantity
1
4
7
10
13
15. a.
b.
c.
d.
Total Cost
$193.5
282.0
397.5
540.0
709.5
Average Total Average
Cost
Variable Cost
$193.50
70.50
56.79
54.00
54.58
$23.50
28.00
32.50
37.00
41.50
Marginal
Cost
$23.50
32.50
41.50
50.50
59.50
c. Marginal cost rises throughout.
CRTS
k=1
LAC(1) = 2
No it would not change. This is due to the fact that the production function has CRTS.
Chapter 8
1. The graph indicates the firm is losing money but is earning enough revenue to cover all its variable cost and
contributes the rest to its fixed cost. In the long run, it would have to drop out of the market unless the market
price increased or the firm is able to reduce its costs.
3. a. Implies a quadratic total cost function (i.e., law of diminishing returns occurs at outset of production).
b. At Q = 1,500, MC = $157.50; At Q = 2,000, MC = $160.00; At Q = 3,500, MC = $167.50
c. MC = $150 + 0.005, Q = $175, Q* = 5,000
d. Supply curve is the portion of the firm’s marginal cost that lies above the shutdown point.
5. a. P* = $1090.
b. The above price would enable a firm to earn a maximum amount of total profit in the short run.
However, it may want to consider charging a higher price if it wanted to position its product as a “premium”
product. It might also want to set a higher price if it suspected that future competition would eventually force all
competitors to lower their price. Without more specific data about these other considerations, it would be difficult
to suggest a specific price that is higher than $1090. As a generalization, we can only say that the firm would set
a higher price if it gives greater priority to goals mentioned above.
c. The firm would want to consider setting a price lower than $1090 if it wanted to increase its revenue
(i.e., market share). As can be seen in the numerical example, if the firm charged $850, its total revenue would be
$850,000 (as compared to $763,000 at the price of $1090). In fact, it could continue lowering its price in order to
increase its revenue up to the point at which MR=0 (not shown in the table).
There may be other reasons for lowering the price. For example, the firm may wish to use the
strategy of “learning curve pricing” (see Chapter 8). It may also choose to be an aggressive price -cutter in an
oligopolistic market.
7. a . $ 63 b . $ 50
9. Setting the derivative of the total cost function equal to the derivative of the total revenue function and solving
for Q yields the same result as setting the total profit function equal to 0 and solving for Q.
Appendix 8B
1. a. 2,000 b. $50,000 c. $15,000 d. 2,500
e. 2,500 = (37,500 + 15,000)/(P – 10); P = $31
3. AVC = $77; TFC = $120,000
a. 120,000/(100 – 77) = 5,217 b. $521,700
c.
Q
Profit
2,000
$–74,000
4,000
–28,000
6,000
18,000
8,000
64,000
10,000
110,000
5. a. 20,000 b. (60,000 + 15,000) / (9 – 6) = 25,000
c. undefined (denominator = 0); 5 d. 3
7. a. 70,000 b. (1) 80,000 (2) 70,000 = 1,200,000 / (P – 5); P = $22.14
c. (1) (Q x 12) – 840,000 = (Q x 14) – 1,200,000 Q = 180,000 Profit = $1,320,000 (2) 1.64; 1.91
(3) No; equal profit reached at 180,000 units.
9. a. 80,000
b. $100,000
c. 125,000
d. $9.50
e. $3.50
f. 125,000
Chapter 9
1. a. At 50–cent intervals starting from $12.50 and decreasing to $8.00, the arc elasticities are –1.96, –1.74,
–1.55, –1.38, –1.24, –1.11, –1, –0.9, and –0.8.
b. $8.75 would be too low for the students. Optimal price is between $12 and $11.50.
c. Students would suffer a loss if the opportunity cost of their venture were included in the total cost.
d. $8.75 may help increase the store’s revenue. It could even be offered to customers as a loss leader.
3. b. The first firm will have the following MR (starting from $10.00 and decreasing to $3.00 at one dollar
intervals): $8.75, $6.75, $4.75, $2.75, $0.75, –$1.25, and –$3.25. The second firms comparable data are
$4.33, $2.33, $.033, –$1.67, –$3.67, –$5.67, and –$7.67.
e. Range would be at where the MR line is vertical.
5. a. Although prices are lower, the costs of goods sold are proportionately even lower and so profit margins are
often higher for private–label goods than for brand name items.
b. Very often the manufacturers of the private products are the same ones that manufacture the brand names. By
selling them as private-label product, they save on the marketing expenses.
7. a. P = $25 b. Demand would fall, economic profit would approach zero.
c. P = $15
d. Price doesn’t change but the equilibrium quantity decreases.
e. The demand in part d represents a decrease in market share for the representative firm.
9. Assume you have decided $250,000 to be the maximum amount you could spend for the new product,
leaving the rest for the other products. You will probably end up spending this maximum amount (this is
the equivalent of a firm charging the lowest possible price).
11. a. This firm controls 40% of the market (this is easily seen given P = $0).
b. The current price is $6, the intersection of followership and non-followership demand.
c. Panel B depicts a market in which niche players have a stronger brand identity.
In Panel A we see that the firm would control the entire market at any price below $2.
In Pane B we see that even at a price of $0, the firm only controls 80% of the market.
One can infer that at least some customers of the alternative varieties are willing to resist switching even at a
very low price in Panel B, but not in Panel A.
13. a. MR has the same intercept and twice the slope as inverse demand so:
MR(Q) = 8 – 2Q
for
Q ≤ 2.
b. MR(Q) = 10 – 4Q
for
Q ≥ 2.
c. MR = MC= 3 occurs at Q > 2 using the MR equation in part E.
But this equation is only true for Q ≤ 2.
d. Similarly, MR = MC = 3 occurs at Q < 2 using the MR equation in part F.
But this equation is only true for Q ≥ 2.
MC = 3 passes through the jump discontinuity in MR.
In this instance, it makes sense for the firm to produce 2 units of output.
If instead MC = $4, then MR = MC occurs at Q = 2 given the MR curve associated with part E.
The firm should maintain a production of 2 units of output.
If instead MC = $2, then MR = MC occurs at Q = 2 given the MR curve associated with part F.
The firm should maintain a production of 2 units of output.
This is an example of “sticky prices”
The idea is that costs can vary and an oligopolistic firm may wish to maintain price (and quantity) in order to
not upset the oligopolistic bargain.
15. a. Monopolistic competition: different prices mean that we have a differentiated product market. LR
equilibrium means no incentive to change and free entry and exit.
b. P=AC in equilibrium; AVC=AC-AFC, AFC=FC/Q=500/100=5 for all firms. Therefore:
Salamandra’s
Genoa’s
Domino’s
Four Star
AVCs=$6.00,
AVCg=$6.00,
AVCd=$4.00,
AVC4=$3.00
c. No, they are not; with LR equal in monopolistic competition, each firm earns zero profits.
d. (P-MC)/P=1/elasticity. Given P and elasticity given we solve for MC in each case:
Salamandra’s
Genoa’s
Domino’s
Four Star
MCs=$6.00,
MCg=$7.00,
MCd=$4.00,
MC4=$3.00
e. If MC<AVC then AVC is decreasing, if MC>AVC then AVC is increasing. Comparing MC and AVC for each
firm we find:
Salamandra: flat; Genoa’s: up; Domino’s: flat;
Four Star: down
f. All four are on the downward part of their AC. In equilibrium, AC is tangent to downward sloping demand in
LRMCE.
g. The Lerner index (also known as the inverse elasticity rule), used in part d above, answers this question.
Based on elasticity, we know that Genova’s has the smallest markup (4/11th=36.4%); Domino’s has the largest
markup (55.6%).
Chapter 10
1. TC = 6 + 10Q; TR = 15X – 0.5Q 2; Profit = –0.5Q 2 + 5Q –6; Maximum profit = 6.5, at Q = 5 and P =
12.5
3. a. (1) Schedule: Q = 7–8, P = $340–360; Equation: Q = 7.5, P = $350
(2) Schedule: Q = 12–13, P = $240–260; Equation: Q = 12.5, P = $250
(3) Schedule: Q = 10, P = $300
b (1) Same as above. (2) Same as above. (3) Q = 9, P = $320
c. In the Baumol model, a change in TFC affects price and quantity.
5. $67.50
7. When TC = $15,000, profit = $21,000, strawberries = 1,800 flats, melons = 1,200 cartons.
When TC = $25,000, profit = $29,000, strawberries = 2,700 flats, melons = 1,800 cartons.
9. Authors would favor highest possible revenue; that would take place at a price lower than when profits are
maximized. Students would be on side of authors.
11. a. –4
b. 33.3%
13. a.
(x*,y*) = (16, 32)
b.
pX = $584 and pY = $308
c.
d.
TRY/x is the loss in revenue generated in y by having to charge a lower price for each y sold when x
sales increase by one unit. In this instance, TRY/x = -$64. By contrast, TRX/y is the loss in revenue
generated in x by having to charge a higher price for each x sold when y sales increase by one unit. In this
instance, TRX/y = -$48.
15. As the cross-product effect went from negative to zero to positive, the profit maximizing production of that
product increased. If one product harms the other’s sales, then you will do less of it, if it helps sales, you will do
more. Smallest was in Problem 13 (due to the cross-product coefficients of -3 and -2) and the largest is in
Problem 12 (due to the cross-product coefficients of 3 and 1).
Chapter 11
1. a. Any dominant strategy equilibrium is also a Nash equilibrium. This is discussed in Tables 11.1 and 11.2
b. A game may have a Nash equilibrium even if it does not have a dominant strategy equilibrium. This is
discussed in Tables 11.1 and 11.2
c. Yes a firm can determine from the options available to the other firm that some strategies are more likely than
others. If an opponent has a dominant strategy then it is likely that the firm will choose that strategy. As a result,
the opponent can use that information to determine the optimal strategy. This is discussed in Table 11.2.
d. No, a dominant strategy equilibrium means that one strategy is dominant for each player. Therefore there can
be only one DSE – and it only exists if all players have a dominant strategy.
3. a. The leader is Gray. Under all circumstances except when it is closed and White is open on Sunday, Gray has
higher profits and in this instance it has equal profit.
b. Gray does not have a dominant strategy. If White chooses to remain open then Gray should also remain
open. If White decides to close, then Gray should also close. Therefore, Gray’s choice depends on what White
does – Gray has no dominant strategy.
c. Gray should stay open on Sundays. By analyzing what White is likely to do the appropriate strategy for Gray
becomes clear. Regardless of Gray’s choice, staying open dominates for White. White is therefore likely to remain
open. Based on the expectation that White will remain open, Gray should remain open as well.
d. No this is not a prisoners’ dilemma. Consider the closed/closed solution as the starting point (since this is joint
profit maximizing). Although White has an incentive to cheat and open, Gray does not. Therefore both firms do not
have an incentive to cheat on the “don’t confess/don’t confess” outcome as is the case in a prisoners’ dilemma.
5. If negotiations cannot be explicitly agreed to (perhaps for legal reasons), then there is a greater need to have a
recognizable outcome – or a focal point solution. The key skill is in formulating the problem so that the seemingly
natural outcome is the one that is most advantageous to you.
7. a. If all good cars are sold then all cars are sold so the fraction is 1. 1/3 are lemons.
b. If half of good used cars are sold then half are not. Since 1/3 of all cars are lemons, 2/3 are good so half of
these are sold. The other half are not sold. This means that 2/3 of all used cars are sold. The portion that is lemons
is NOT 1/3 but rather 50% since all lemons are sold.
c. If one quarter of good used cars are sold then 3/4 are not. Since 1/3 of all cars are lemons, 2/3 are good so
1/4 of these are sold. The other 3/4 are not sold.
Total sold are therefore 1/3 + ¼∙2/3 = 1/3 + 1/6 = ½. This means that half of all used cars are sold. The
portion that is lemons is NOT 1/3 but rather 2/3 since all lemons are sold.
d. The fraction sold is 1/3 + G∙(2/3).
The fraction that are lemons is: (1/3)/(1/3 + G∙(2/3)) = 1/(1+2G).
These equations work for all G between 0 and 1.
e. No, the weighted average price in this instance is $8,333 = 1/3·$5,000 + 2/3·$10,000. The problem in this
instance is that some of the good used car owners have a higher marginal valuation than $8,333. (In fact, given the
uniform distribution assumed, 2/9 do.) As a result, the adverse selection problem results.
f. Given the full information prices and fraction of lemons sold derived in D we have:
PB(G) = (1/(1+2G))·$5,000 + (2G/(1+2G))·$10,000.
g. Inverse supply is a reservation price, PS(G). This can be set equal to PB(G) to obtain the market clearing price:
(1/(1+2G))·5000 + (2G/(1+2G))·10000 = 6000 + 3000G.
First divide both sides by 1000 to make the numbers more manageable.
(1/(1+2G))·5 + (2G/(1+2G))·10 = 6 + 3G.
Next multiply both sides by 1+2G to remove the denominator on the left hand side:
5 + 20G = (6 + 3G)·(1 + 2G)
Expanding we have:
5 + 20G = 6G2 + 15G + 6.
Placing all terms on the right hand side we have the following quadratic:
0 = 6G2 – 5G + 1.
This may be factored as:
6G2 – 5G + 1 = (3G –1)·(2G – 1).
Therefore we have the solution: G = 1/3 or G = ½.
When G is between 1/3 and ½ the weighted average price is at least as high as marginal valuation
(reservation price).
The least distorted market occurs when G is as large as possible, therefore G = 0.5 is the solution we will
work with. Half the good used cars are sold, half are not.
From part B we know that in this instance, the portion of lemons is 50%. Therefore the market clearing
price is $7,500. This same price may be derived from either formula, the inverse supply formula or the weighted
average price formula.
9. a. This is a constant elasticity demand function. The price elasticity of demand is -2 and the quality elasticity of
demand is +4.
b. A(0) = 0; A(5000) = 100/3 = 33.3; A(10000) = 50; A(15000) = 60; A(20000) = 66.6.
c. Average quality increases at a decreasing rate as price increases.
d. X(5000) = 790; X(10000) = 1000; X(15000) = 922; and X(20000) = 790. Each of these answers is obtained
using the CED function substituting the value of A(P) derived in part B in each instance.
e. Since demand at a price of $10,000 is more than at $5,000 or $15,000 the demand curve must be backward
bending somewhere between $5K and $15K. Formally, the price must be more than $5,000 and less than $15,000
at the point where it turns from being upward sloping to downward sloping (as price increases).
f. Take the total derivative of demand and set equal to zero.
dX/dP = X/P + X/A∙dA/dP.
Note: The easy way to write derivatives with a CED function is to note that each partial is simply the exponent
times X divided by the variable (in this instance P or A).
This means we can write the derivative as: dX/dP =-2X/P + (4X/A)∙dA/dP.
But dA/dP = ((P + 10000)∙100 – 100P))/(P + 10000)2 = 1,000,000/(P + 10000)2, so:
dX/dP =-2X/P + (4X/A)∙1,000,000/(P + 10000)2
Substituting A(P) into the above we have:
dX/dP =-2X/P + (4X∙(P+10000)/100P)∙1,000,000/(P + 10000)2
Simplifying we obtain:
dX/dP =-2X/P + (4X∙10,000)/(P + 10000).
We further simplify this by finding a common denominator for the two terms:
dX/dP =(-2X∙(P + 10000) + (4X∙10,000))/(P∙(P + 10000)).
Further simplifying we obtain:
dX/dP =(2X∙(-P - 10000 + 20,000)/(P∙(P + 10000)).
dX/dP =(2X∙(10000 – P))/(P∙(P + 10000)).
Equation ***
We wish to set dX/dP = 0. If a fraction equals zero, the numerator must equal zero. Since X > 0,
the other term in the numerator must equal zero: 10000 – P = 0. This implies that dX/dP = 0 when P = $10,000.
We also see from Equation *** that
dX/dP > 0 when P < $10,000
and dX/dP < 0 when P > $10,000.
g. This is most easily accomplished by programming A(P) and Q(P,A(P)) into Excel. The graphs act exactly as
expected. Average quality increases at a decreasing rate as price increases. Demand is backward bending: for
prices below $10K, demand is upward sloping; for prices above $10K, demand is downward sloping; and at P =
$10K, demand is vertical.
11. a. Full coverage aimed at high risk individuals will pay out $4,000 with probability 0.3 so AFI would be $1,200.
Given a 5% premium over AFI we would wish to charge $1,260 for full coverage insurance. 30% coinsurance
aimed at low risk individuals will pay out $1,200 = $4,000·0.3 with probability 0.2 so AFI would be $ $240 =
$1,200·0.2 for this coinsurance. Given a 5% premium over AFI we would wish to charge $252 for 30%
coinsurance.
b. This pair of policies WILL screen individuals. Low risk individuals prefer coinsurance to full high to no
insurance:
EU(Coins.,Low) = 1743.5 > U(Full-High) = 1655.3 > EU(No ins.,Low) = 1600.
High risk individuals prefer full high to coinsurance to no insurance:
U(Full-High) = 1655.3 > EU(Coins.,High) = 1647.3 > EU(No ins.,High) = 1400.
Chapter 12
1. Buyer must make monthly payments, thus decreasing balance in savings account, and interest earnings
will be lower.
3.Sell at end of year 4,
5.Operating cash flows (after taxes)
Year 1
$27,000
Years 2, 3, and 4, each
36,000
Year 5
24,000
PV of operating cash flows
$114,927
PV of salvage (after taxes)
3,404
Additional working capital
–15,000
PV of returned working capital
8,511
Original investment
–150,000
NPV
$–38,158
Do not make investment.
7. Net present value cost of furnishing car is $13,402. Net present value cost of paying mileage is $11,982.
Company should pay mileage.
9. Bonds
+0.28 x 0.066
0.0185
Equity
0.72 x 0.14
0.1008
Weighted cost
0.1193 = 11.9%
11. a.
NPV
IRR
Project C
10,355
23.0%
Project D
9,237
25.0
b. Select C; NPV is higher.
13.a. $320 b. $30.98 c. 0.097
15.a. NPV = 295; σ = 115; CV = 0.3898
b. Relative risk is about equal, but B’s NPV is higher; thus, B could be selected.
17.CV of A = 0.25, CV of B = 0.33. A is preferred.
19. a.NPV = $870
b.NPV = $25,415
c.NPV = $–23,379
21. a. NPV = –$51,737; not acceptable
b. NPV = $21,671; acceptable
Value of option = $73,408.
Chapter 13
1. a. €1,692,740
b. $–147,049
c. Do not accept.
3. a. $1,400,000 b. $1,380,000 c. $1,390,000 d. gain
Review of Mathematical Concepts
1. a. Q = 75 – 0.5P b. P = 150 – 2Q
3. a. AVC = 300 – 25Q + 1.5Q2
AC = 1,500/Q + 300 – 25Q + 1.5Q2
MC = 300 – 50Q + 4.5Q2
AVC = 300 + 25Q
AC = 1,500/Q + 300 + 25Q
MC = 300 + 50Q AVC = 300
AC = Q + 300
MC = 300