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##### Consider the following two projects

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**Question**

1. Consider the following two projects;Project A: Costs $12,000 today. Increases profit by $3000 next year, $7,200 in;two years, and $4000 in three years.;Project B: Costs $7500 today. Increases profit in two years by $8190;Both projects have no value beyond the given time frames. A firm faces a rate to;borrow money of 9% and has the option of investing money with almost no risk at;5%.;a) If the firm has $25,000 on hand, with only these two project to choose from;will they invest in A, B, neither or both? Show the calculations that lead to your;conclusions. Explain whether you answers would be different for either project if;the firm had no money on hand to invest. (1 point);b) Explain, based on your calculations in (a), why the rate of return on project A;must be somewhere between 5% and 9%. Set up (but do not solve) and;equation that would find the rate of interest where the firm is indifferent between;investing in project A, and not investing in project A. (1 point);d) Use the data in (a) to bound the rate of return for project B, then use an;equation like the one in (b) to actually find the rate of return of project B. Verify;that it is consistent with the bound you found. (2 points);2. An economy is currently made up of a firm that produces bread, a firm that;produces butter, and a consumer who consumes both bread and butter. Current;production is 100 units of bread, 50 units of butter which the consumed by the;consumer. If the output changed to 75 units of bread and 60 units of butter, the;profit of the butter firm would go up by $42. The profit of the bread firm would go;down by $76. The consumer prefers 75 bread and 60 butter to 100 bread and 50;butter. It is so much better that the consumer would pay $40 more to have 75;bread and 60 butter rather than have 100 bread and 50 butter. Explain, using the;definition, why you know it is not Pareto Efficient to have the economy produce;100 bread and 50 butter. (1 point);3. A demand curve is given by the following equation: P = -4Q + 160.;i) Calculate the Total Revenue when Q = 25 and when Q = 28.;ii) Calculate the price elasticity of demand between Q = 25 and Q = 28.;Round decimal answers to two places.;Explain why the relation between the numbers in (i) and (ii) makes sense. (1;points;4. A firm is a monopolist and faces the following demand;q;P;q;P;0;148;5;88;1;136;6;76;2;124;7;64;3;112;8;52;4;100;a) It appears the consumers will continue to pay a positive price if the quantity is;greater than 8. Explain why the monopolist will never produce a quantity above;8 no matter what the costs are. (1 point);b) With the costs given below, find where a profit maximizing monopolist with the;demand above will produce and find its profit. (1 point);q;1;2;3;4;TC ($);96;105;115;126;q;5;6;7;8;TC ($);139;155;175;200;5. A market has a demand of P = -4Q + 540. (You may find pictures helpful, but;they are not required for full credit.);a) Assume initially that this market is in LRCE with a market supply P = 2Q + 60.;Find the LRCE price and market quantity. (1 point);b) Now all the little firms that existed in the competitive market have all been;bought by a giant company. The new monopoly has a MC = -2Q + 60. Explain;why it makes sense that the monopolist has a MR = -8Q + 540 and find the;monopoly quantity and price. (1 point)

Paper#18237 | Written in 18-Jul-2015

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