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##### Assume a company with a five-year life span

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Assignment 1 Spring 2011;Chapters 1, 2, & 3;Instructions;1.;2.;3.;4.;Study the examples in the notes, chapters, and the student workbook carefully before you attempt the;assignment.;Show the steps for all solutions, and explain whenever necessary.;You may discuss the problems with other students but the submitted solutions must be yours. You;will receive zero for plagiarized answers.;Submit the completed assignment by no later than Monday, Jan 31, 11:55pm (your local time).;1. (5 pts.) Assume a company with a five-year life span that earns the following stream of;expected profit. Assume all profits are received at the end of each year.;Year;2011;2012;2013;2014;2015;Expected Economic profit;$225,000;$325,000;$425,000;$200,000;$100,000;If an annual risk-adjusted discount rate of 15% is applied, what is the maximum price an investor;would be willing to pay for this company in 2011?;PV= NCF/ (1+ r) = 225,000/ (1.15)1 + 325,000/ (1.15)2 + 425,000/ (1.15)3 + 200,000/;(1.15)4 + 100,000/ (1.15)5;= $195,652.17 + $245,746.69 + $279,444.40 + $114,350.65 + $49,717.67 =;$884.911.59;2. (6 pts) During a year of operation, a firm collects $550,000 in revenue and spends $75,000 on;labor expense, and $200,000 in raw materials, rent, and utilities. The firm's owner quit a job that;would have earned him $75,000 annually and invested $750,000 of his own money instead of;putting it in savings account which would earn a 10% interest annually. Answer the following;questions based on the information above.;a.;What is the accounting profit of this firm? Accounting Profit = $275,000 (net Income);b.;What is the implicit cost (the opportunity cost of using owner-supplied resources) of this;firm? Implicit cost= $187,500 (Job revenue gave up $75,000 + Int. X amount owner;invested 0.15 X $750,000);c.;What is the economic profit of this firm? Economic Profit = $88,000;revenue $550,000 - economic cost $462,000);(total;3. (4 pts) Suppose you are a producer and seller of wine. Explain whether the following events;would affect the demand or supply of wine and the price you will receive.;a.;The price of comparable imported wine decreases. Demand Should decrease/ Price will;decrease;b.;many new wineries open in the area. Supply will increase/ Price will also decrease;c.;Researchers discover that wine is good for health. Demand will increase/ Price will;increase;d.;The cost of producing wine increases. Supply will decrease/ Price will increase;4. (6 pts) Suppose that the demand and supply equations for good X are;Qd = 75 - 3P;QS = -20 + 6.5P;Where, Q is the quantity of X and P is the price of X in dollars. Answer the following questions.;Please solve the equations algebraically.;a. What are the equilibrium price and the equilibrium quantity of X?;(+3P) -20 + 6.5P = 75 3P (+ 20);= 9.5P = 95;P = 95/9.5;P = 10;Qd = 75 3(10);Qd = 75 30;Qd = 45;Qs = -20 + 6.5(10;Qs = -20 + 65;Qs = 45;b. Suppose the demand equation changes to Qd = 80 - 6P but the supply equation remains at its;original level, Qs =-20 + 6.5P. What are the new equilibrium P and Q?;(+6P) -20 + 6.5P = 80 6P (+ 20);= 12.5P = 100;P = 100/12.5;P = 8 Equilibrium Price = 8;Qd = 80 6(8);Qd = 80 48;Qd = 32;Qs = -20 + 6.5(8);Qs = -20 + 52;Qs = 32 Equilibrium Quantity = 32;c. Suppose the supply equation changes to Qs = -40 + 12P but the demand equation remains at;its original level, Qd = 75 - 3P. What are the new equilibrium P and Q now?;(+3P) -40 + 12P = 75 3P (+ 40);= 15P = 115;P = 115/15;P = 7.6667 Equilibrium Price = 8;Qd = 75 3(7.6667);Qd = 75 23;Qd = 52;Qs = -40 + 12(7.6667);Qs = -40 +;Qs = 52 Equilibrium Quantity = 52;5. (8 pts.) Suppose you want to find the optimal combination of two activities A and B, which generate;the total benefits presented in the table below. The price of A is $40 and the price of B is $100. You face;expenditure constraint of $780 on the activities of A and B. Find the optimal combination of activity A;and B under this expenditure constraint?;Level of;Activity A;1;Total Benefit;of Activity A;$800;Level of;Activity B;1;Total Benefit;of Activity B;$1,000;2;1,440;2;1,900;3;2,000;3;2,700;4;2,360;4;3,400;5;2,680;5;4,000;6;2,960;6;4,500;7;3,200;7;4,900;8.;3,400;8;5,200;6. (6 pts) Activity A has the following marginal benefit (MB) and marginal cost (MC) functions.;MB = 2,500 -20A;MC = 500 + 30A;Where, MB and MC are measured in dollars.;a. What is optimal level of activity A?;b.;Suppose;TB = 2,500A 10A2;TC = 500A + 15A2;What is the net benefit at the optimal level of activity A?

Paper#31035 | Written in 18-Jul-2015

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