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Economics
Why might demand be upward sloping in used car markets?
In your answer to each part below, include references to specific games discussed in the chapter as appropriate. a. If a game has dominant strategy equilibrium, does it have Nash equilibrium? b. If a
Suppose that a firm finds that its low-productivity workers have a marginal revenue product of $21,000 per year and that its high-productivity workers have a marginal revenue product of $35,000 per
Suppose you work for an insurance company. You know that there are equal numbers of individuals who will get in an accident with probability 0.2 and 0.3 and that the loss from getting in an accident
Consider a small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sundays or whether it will close on that day. If both stores decide
Consider another small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sunday or whether it will close on that day. Monthly payoffs
Suppose you are a purchasing manager for an electronics equipment firm. Your job is to obtain component parts at the best cost from several suppliers and to make sure those parts are received in a
Why are focal points important for firms involved in tacit bargaining? What is the key skill for a tacit bargainer?
Suppose the prices in each segment under perfect information are as shown in the table below.A reservation price is the lowest price a seller will accept. Also assume that buyers are risk-neutral and
Assume that one-third of all used cars are lemons. If the supply of good used cars is upward sloping, then it may be the case that the blended price is lower than the reservation price for some good
To answer Problem 8, complete Problem 7 first. Suppose that all of the information from Problem 7 holds except that the portion of lemons in the population is one-half rather than one-third. In this
An assertion is made in the lemons discussion in this chapter that demand may well be backward bending in a market in which quality is unobservable prior to purchase. Consider the following model:
What is the objective of capital budgeting?
Define beta. How is it used to compute the required rate of return on a company's stock (the equity cost of capital)?
Why is capital rationing not considered to be rational maximizing behavior?
Enumerate causes of business risk.
You are comparing two potential mutually exclusive investment projects. You have calculated the expected NPV of project A to be $3,758 and that of project B to be $3,114. Can you be certain that you
Would a risk-averse person prefer a project whose distribution of potential outcomes can be drawn as a continuous normal curve with a very high peak and a steep decline around the peak?
Define coefficient of variation.
"All our projects are discounted at the same interest rate," says the treasurer of a large company. Would you dispute the advisability of such a procedure?
Why do companies use the RADR method much more frequently than the certainty equivalent method?
Describe and give examples of a. Sensitivity analysis b. Simulation analysis
Why does the use of "real options'" improve capital investment analysis? Under which circumstances would you recommend using real options?
Define the time value of money.
How is NPV calculated? What is the decision rule for NPV? How is the internal rate of return calculated? What is the decision rule for IRR?
Under which circumstances can the NPV and IRR calculations lead to conflicting results? What is the major reason for the difference? Which of the two methods is preferable? Why?
What are the major types of cash flows to be included in a capital budgeting analysis? Describe each.
Why is depreciation important in the analysis of a capital budgeting proposal?
You are analyzing a potential capital investment project involving a new product. As you are compiling the relevant data for your analysis, you are informed of an expenditure that occurred during the
How is the company's optimal capital budget determined? Does the decision-making process in this case resemble- the procedure used in determining the price- and quantity of (output? How?
How is the weighted average cost of capital determined?
Jay Wechsler agrees to purchase a car from a local dealer, the Con Car Co. The purchase price is $15,000. Jay has the cash to pay the entire amount and wants to do So Con's sales manager uses the
A company has a beta of 1.3. The risk-free interest rate today is 8 percent, and the return on a market portfolio of stocks is 14 percent. (Therefore, the market risk premium is 6 percent, the
Two mutually exclusive alternatives, projects C and D, have the following investments and cash flows:a. Calculate the NPV and IRR of each project. The company's cost of capital is 12 percent. b.
The Berkshire Resort Hotel has planned several improvement projects. However, it has decided to restrict its capital expenditures to $340,000 during the next year. The following are the projects it
The Quality Office Furniture Company has compiled the year's revenue expectations and their probabilities: Sales
The Learned Book Company has a choice of publishing one of two books on the subject of Greek mythology. It expects the sales period for each to be extremely short, and it estimates profit
15. The Cactus Corporation is considering a 2-year project, project A, involving an initial invest men t of $600 and the following (ash inflows and probabilities:a. Calculate the project's expected
The Grand Design Corporation uses the certainty equivalent approach in making capital budgeting decisions. You are given the following data for a particular projectThe risk-free discount rate is I
Project A has an expected NPV of $500 and a standard deviation of $125. Project B has a standard deviation of $100 and an expected NPV of $300. Which of the two projects would you select? Explain why
Global Industries has calculated the return on assets (ROA) for one of its projects using the simulation method. By simulating the operations 1,000 times, they obtained an ROA of 16.7 percent and a
The Great Pine Forest Corporation is analyzing an expansion project with the following information:Initial investment:........................................$120,000Depreciation
Your firm has an opportunity to make an investment of $50,000. Its cost of capital is 12 percent. It expects after-tax cash flows (including the tax shield from depreciation) for the next 5 years
Sam Parkington has a nontransferable option to mine for gold on a certain piece of land. He has three choices of action: a. He can start mining immediately. b. He can conduct further tests to see
It has been your secret wish to own and operate an amusement park when you can afford to make the investment. That time has now arrived. There is a large empty lot at the outskirts of Phoenix,
You have been offered an investment, which, according to your calculations, has the following possible rates of return: Probability Rate of Return 0.2......................
You own a large collection of fine wines. You now decide that you must liquidate this valuable asset. However, you predict that the value of your collection will rise in the next few years. The
The Glendale Construction Company is considering the purchase of a new crane. Its cost would be $500,000. If it were to make the purchase, the company would sell an old crane, which still has a book
As capital investment analyst for the Parkhurst Printing Corporation, you have been asked to evaluate the advisability of purchasing a new printing press to accommodate projected increases in demand.
The Thunderbird Quick Delivery Company needs a truck and is evaluating two alternatives for meeting its needs for the next 10 years. Choice A: Buy a used Ford truck for $6,000. It will be depreciated
The Colgate Distributing Company has the choice of furnishing its sales representatives with a car or paying a mileage allowance for the use of the representatives' own cars. If the company furnishes
A company's common stock is currently selling at $40 per share, its most recent dividend was $1.60, and the financial community expects that its dividend will grow at 10 percent per year in the
A company has 1,000,000 shares of common stock outstanding, and the current market price is $50 per share. The company has also issued 20.000 bonds (S1,000 maturity value each), which are presently
What is the difference between a futures contract and a forward contract?
A U.S. importer who owes a Belgian company €500,000 payable 30 days from today expects that the US$ will weaken during this period. What would you advise the importer to do? What would happen if
Describe the additional complications facing an MNC compared with a domestic corporation when it is evaluating a capital budgeting project.
Why should an MNC's capital budgeting decision be based on the parent's results rather than those of the subsidiary?
Is an MNC generally faced with incurring double taxation on its profits in the subsidiary's country? Why or why not?
Why should a government be concerned with the pricing of products that a company transfers to an affiliate in another country?
The Great Computer Company, a U.S. corporation, has a subsidiary in the Netherlands. It is deciding whether to invest $2 million of its (the parent's) funds in a 3-year project in the
The XYZ Multinational Corporation has manufacturing facilities in country A and an assembly plant in country B. The company ships manufactured units from its plant in A to its assembly plant in B. a.
Today the- XYZ Corporation shipped goods valued at 61 million to a customer in Belgium. Payment is due in 90 days, and the Belgian firm will make the payment in Euros. Today's spot rate is
What is the rationale for government involvement in the market economy? (Cite the five points presented at the outset of this chapter.)
Define benefit and cost externalities. Explain why situations involving benefit externalities [tend to result in an under-allocation of society's scarce resources, and why situations involving cost
What is the role of government in dealing with benefit externalities with cost externalities?
Suppose a chemical company was fined for violating certain antipollution laws. As the jokes person for the Environmental Protection Agency, how would you explain the economic reasons for these
"The reason the government has to step in and 'internalize' benefit and cost externalities are because people are basically selfish." Do you agree with this statement? Explain.
Briefly discuss the Coase theorem. What does this theory imply about the role of government in dealing with market externalities?
Based on the competitive challenges that Microsoft faces from Google, do you think it still "monopoly powers"? Explain,
Discuss the economic justification for a merger. In particular, how might these reasons apply to companies now merging in the following industries: oil, automobiles, telecommunications, electric
Define economics. Explain briefly how the economic way of thinking-in terms of rational, self interested people responding to incentives- relates to each of the following situations. a. A student
Which of the following predictions appear(s) to follow from a model based on the assumption that rational, self-interested individuals respond to incentives? a. For every 10 exam points Myrna must
Consider two models for estimating, in advance of an election, the shares of votes that will go to rival candidates. According to one model, pollsters' surveys of a randomly chosen set of registered
Write a sentence contrasting positive and normative economic analysis.
Based on your answer to Problem 1-12, categorize each of the following conclusions as being the result of positive analysis or normative analysis. a. A higher minimum wage will reduce employment
Consider the following statements, based on a positive economic analysis that assumes that all other things remain constant. For each, list one other thing that might change and thus offset the
Some people claim that the "economic way of thinking" does not apply to issues such as health care. Explain how economics does apply to this issue by developing"model" of an individual's choices.
Does the phrase "unlimited wants and limited resources" apply to both a low-income household and a middle-income household? Can the same phrase be applied to a very high-income household?
In a single sentence, contrast microeconomics and macroeconomics. Next, categorize each of the following issues as either a microeconomic issue, a macroeconomic issue, or not an economic issue. a.
One of your classmates, Sally, is a hardworking student, serious about her classes, and conscientious about her grades. Sally is also involved, however, in volunteer activities and an extracurricular
Recently, a bank was trying to decide what fee to charge for "expedited payments"-payments that the bank would transmit extra-speedily to enable customers to avoid late fees on cable TV bills,
Explain, in your own words, the rationality assumption, and contrast it with the assumption of bounded rationality proposed by adherents of behavioral economics.
Why does the assumption of bounded rationality suggest that people might use rules of thumb to guide their decision making instead of considering every possible choice available to them?
Under what circumstances might people appear to use rules of thumb, as suggested by the assumption of bounded rationality, even though they really were behaving in a manner suggested by the
Explain which the independent variable is and which the dependent variable is for each of the following examples. a. Once you determine the price of a notebook at the college bookstore, you will
For each of the following items, state whether a direct or an inverse relationship is likely to exist. a. The number of hours you study for an exam and your exam score b. The price of pizza and the
Review Figure A-4 on page 19, and then state whether each of the following paired observations is on, above, or below the x axis and on, to the left of, or to the right of the y axis. a. (-10, 4) b.
State whether each of the following functions specifies a direct or an inverse relationship. a. y = 5x b. y = 10 - 2x c. y = 3 + x d. y = −3x
Given the function y = 5x, complete the following schedule and plot the curve.
Given the function y = 8 - 2x, complete the following schedule and plot the curve.
Define opportunity cost. What is your opportunity cost of attending a class at 11:00 a.m.? How does it differ from your opportunity cost of attending a class at 8:00 a.m.?
Senator Borman interjects the following comment after the statements by Senators Creighton and Long reported in Problems 2-8 and 2-9: "In fact, both of my esteemed colleagues are wrong, because an
A nation's residents can allocate their scarce resources either to producing consumption goods or to producing human capital-that is, providing themselves with training and education. The following
Like physical capital, human capital produced in the present can be applied to the production of future goods and services. Consider the table in Problem 2-11, and suppose that the nation's residents
You can wash, fold, and iron a basket of laundry in two hours and prepare a meal in one hour. Your roommate can wash, fold, and iron a basket of laundry in three hours and prepare a meal in one hour.
Based on the information in Problem 2-13, should you and your roommate specialize in a particular task? Why? And if so, who should specialize in which task? Show how much labor time you save if you
Using only the concept of comparative advantage, evaluate this statement: "A professor with a Ph.D. in physics should never mow his or her own lawn, because this would fail to take into account the
Country A and country B produce the same consumption goods and capital goods and currently have identical production possibilities curves. They also have the same resources at present, and they have
If you receive a ticket to a concert at no charge, what, if anything is your opportunity cost of attending the concert? How does your opportunity cost change if miserable weather on the night of
Recently, a woman named Mary Krawiec attended an auction in Troy, New York. At the auction, a bank was seeking to sell a foreclosed property: a large Victorian house suffering from years of neglect
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