Exam 1: The Fundamentals of Managerial Economics

Suppose the growth rate of the firm's profit is 5%, the interest rate is 6%, and the current profits of the firm are 100 million dollars.What is the value of the firm?

You are the manager of a 24-hour copy shop that is closed on Sundays.You lease a building for $2,000 per month and hire three employees who each work eight-hour shifts at a wage of $10.00 per hour.The markets for labor and office space are tight in your area.To acquire the lease and hire workers, you signed contracts requiring you to give 12 months advance notice before abandoning your lease or laying off workers (if you fail to comply, the contracts force you to fully compensate your landlord and workers for the income they otherwise would have earned over the 12-month period).Paper costs you $.02 per sheet.You currently sell 500,000 color copies per year at a price of $.10 per copy and 1,000,000 black and white copies per year at a price of $.05 per copy.Because of your high volume, each of your two copiers has a useful life of only one year.You just received a call from an employee who informs you that your color copier just broke down.The good news is that your black and white copier is brand-new; the bad news is that a new color copier will cost $30,000.Should you purchase a new color copier? Assume that customers who want color copies are unwilling to substitute black and white copies.

-Suppose total benefits and total costs are given by B(Y) = 150Y - 10Y² and C(Y) = 5Y².Then marginal benefits are:

Individuals who choose to attend school have made a decision to invest in human capital.Use the terminology of net present value analysis to explain why you are attending school.

Suppose total benefits and total costs are given by B(Y) = 100Y - 8Y² and C(Y) = 10Y².Then marginal costs are:

The higher the interest rate:

A farm must decide whether or not to purchase a new tractor.The tractor will reduce costs by $2,000 in the first year, $2,500 in the second and $3,000 in the third and final year of usefulness.The tractor costs $9,000 today, while the above cost savings will be realized at the end of each year.If the interest rate is seven percent, what is the net present value of purchasing the tractor?

If the interest rate is 10% and cash flows are $1,000 at the end of year one and $2,000 at the end of year two, then the present value of these cash flows is

New firms have incentive to enter an industry when there is

A firm will have constant profits of $100,000 per year for the next four years and the interest rate is six percent.Assuming these profits are realized at the end of each year, what is the present value these future profits?

The behavior of bidders in an auction is an example of:

Producer-producer rivalry functions:

Suppose the growth rate of the firm's profit is 5%, the interest rate is 6%, and the current profits of the firm are 80 million dollars.What is the value of the firm?

The primary inducement for new firms to enter an industry is:

Trade will take place:

A new manager recently was given an assignment to create two possible wage schemes for a design firm.The manager came up with the following packages: (1) Each employee will start at $15 per hour and will work eight hours per day; (2) each employee will receive $8 per hour and one-tenth of 1 percent of profits (expected profits are $80,000 per day if everyone puts out maximum effort).Which program will motivate the employees more? Which program would you choose? Why?

Compute the present value of a preferred stock that pays, in perpetuity, an annual cash flow of $200 at an annual interest rate of 5 percent.

Suppose total benefits and total costs are given by B(Y) = 100Y - 8Y² and C(Y) = 10Y².Then marginal benefits are:

The opportunity cost of an action is the

Property owners move scarce resources towards the production of goods most valued by society because