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##### Eco304 homework 5

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Question;ECO 304K;INTRO MICRO;Fall 2014;Hickenbottom;HOMEWORK #5;(Due November 19th at 11am);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 $40 more to have 75 bread and 60 butter rather than have 100 bread and 50;butter. Explain, using the definition;why you know it is not Pareto Efficient to have the economy produce 100 bread;and 50 butter. (1 point);3. A demand curve is given by the following;equation: P = -4Q + 160.;i);Calculate the Total Revenue when Q = 25 and when Q = 28.;ii);Calculate the price elasticity of demand between Q = 25 and Q = 28. Round decimal answers to two places.;Explain;why the relation between the numbers in (i) and (ii) makes sense. (1 points;4. A firm is a monopolist and faces the;following demand;q P q P;0 148 5 88;1 136 6 76;2 124 7 64;3 112 8 52;4 100;a) It appears the consumers will continue to pay;a positive price if the quantity is greater than 8. Explain why the monopolist will never;produce a quantity above 8 no matter what the costs are. (1 point);b) With the costs given below, find where a;profit maximizing monopolist with the demand above will produce and find its;profit. (1 point);q TC ($) q TC ($);1 96 5 139;2 105 6 155;3 115 7 175;4 126 8 200;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)

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