Exam 1: The Fundamentals of Managerial Economics

You are a strong advocate for a one-year investment project that would cost your firm $10,000 today,but generate virtually certain earnings of $15,000 at year-end.Those in your firm's financial group concur that the investment is virtually risk-free,but nonetheless your boss is concerned about the firm's cash flow problems.In fact,the problems are so severe that the firm's bank currently charges it 20 percent on one-year loans.Convince your boss to undertake the project.

You are the manager of a firm that plans to expand the human resource base of its operation by hiring additional business school graduates over the next few years.You recently read an article in The Wall Street Journal that reports that enrollments in business schools have declined as students are moving into the "hard sciences." That same article reports that the shakeup of upper management is over at U.S.firms,and that over the next decade there will be a nationwide surge in the demand for MBAs.How will these events affect your firm's ability to expand its own base of MBAs?

If you put $1,000 in a savings account at an interest rate of 10 percent,how much money will you have in one year?

Incentive plans imply:

Accounting profits are:

What is the total benefit associated with producing four units of the control variable,Q (identify point A in the table)? Control Variable Total Benefits Total Costs Net Benefits Marginal Benefit Marginal Cost Marginal Net Benefit Q B(Q) C(Q) N(Q) (Q) (Q) MNB(Q) 0 0 0 0 -- -- -- 1 900 100 800 900 100 800 2 1,700 300 C 800 200 600 3 2,400 600 1,800 700 E 400 4 A 1,000 2,000 600 400 200 5 3,500 1,500 2,000 500 500 F 6 3,900 2,100 1,800 D 600 -200 7 4,200 2,800 1,400 300 700 -400 8 4,400 B 800 200 800 -600 9 4,500 4,500 0 100 900 -800 10 4,500 5,500 -1,000 0 1,000 -1000

Delta Software earned $10 million this year.Suppose the growth rate of Delta's profits and the interest rate are both constant and Delta will be in business forever.Determine the value of Delta Software when: a.The interest rate is 10 percent and profits grow by 4 percent per year. b.The interest rate is 10 percent and profits grow by 0 percent per year. c.The interest rate is 10 percent and profits decline by 4 percent per year. d.The interest rate is 10 percent and profits grow by 12 percent per year.(This part of the question is tricky.)

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.

If the interest rate is 7 percent,$500 received at the end of nine years is worth how much today?

Which of the following is the incorrect statement?

If the annual interest rate is 0 percent,the present value of receiving $1.10 in the next year is:

When MB = 171 − 8Y and TC = 5Y² + 108,the optimal level of Y is:

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 7 percent,what is the net present value of purchasing the tractor?

If the interest rate is 4 percent,the present value of $500 received at the end of four years is:

Producer−producer rivalry functions:

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

Marginal benefit refers to:

Which of the following are signals to the owners of scarce resources about the best uses of those resources?

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

If you put $700 in a savings account at an interest rate of 3 percent,how much money will you have in one year?