The production superintendent of the Holloway Company has proposed that the firm
purchase a new $40,000 grinding machine for use in the plant. The machine is expected
to generate $10,000 per year in pre-tax cash savings (labor and spoilage) for the next 10
years. At the end of 10 years the salvage value of the machine is estimated to be $5,000.
Holloway uses straight-line depreciation and its marginal income tax rate is 40 percent.
The firm’s cost of capital is 12 percent.
(a) What are the net cash inflows after depreciation and taxes for the machine in years
1-10?
(b) What is the net present value for the machine?
(c) What is the internal rate of return for the machine?
(d) Would you recommend purchasing the machine? Why or why not?
NOTE: This problem requires the use of present value tables or a financial calculator.
Public sector investment projects are economically justifiable only when:
a. the discounted social benefits exceed the discounted social costs
b. the internal rate of return exceeds the social discount rate
c. the benefit-cost ratio exceeds zero
d. a and b only
e. a, b, and c
The original Cobb-Douglas function was given as . It was subsequently
rewritten as . What benefit was derived in the revision?
a. the function becomes a non-linear relationship so it would fit to production curves
having an “S” shape
b. returns to scale can be shown in the revision
c. returns to scale become constant
d. a and b only
e. a, b, and c
In determining the optimal capital budget, one should choose those project’s whose
____ exceeds the firm’s ____ cost of capital.
a. internal rate of return, average
b. internal rate of return, marginal
c. internal rate of return, historic
d. average rate of return, marginal
e. none of the above
All of the following are sunk cost investments that precommit an incumbent to
aggressively defend market share and the cash flow prior to threatened entry except
a. reputational investments in company logos (e.g., Beatrice)
b. automobile showrooms
c. retail displays which hold only L’eggs egg-shaped hosiery packages
d. neon signage for an independently owned Krispy Kreme store
e. excess capacity in a declining industry
Which is NOT true about the coefficient of determination?
a. As you add more variables, the R-square generally rises.
b. As you add more variables, the adjusted R-square can fall.
c. If the R-square is above 50%, the regression is considered significant.
d. The R-square gives the percent of the variation in the dependent variable that is
explained by the independent variables.
e. The higher is the R-square, the better is the fit.
The fraudulent delivery of low quality experience goods at high prices is more likely if
a. interest rates decline
b. information about notorious firms is speedily disseminated
c. price premiums for allegedly high quality increase
d. sellers invest in non-transferable reputation
e. none of the above
Which of the statements about price discrimination is (are) false?
a. It must be possible to segment the market.
b. It must be difficult to transfer the seller’s product from one market segment to
another.
c. Public utilities practice first-degree price discrimination.
d. There must be differences in the elasticity of demand from one segment to another.
e. c and d
The Jones Company has the following cost schedule:
Prepare (a) average total cost and (b) marginal cost schedules for the firm.
A ____ total cost function yields a U-shaped average total cost function.
a. cubic
b. quadratic
c. linear
d. a and b only
e. a, b, and c
The approximate probability of a value occurring that is greater than one standard
deviation from the mean is approximately (assuming a normal distribution)
a. 68.26%
b. 2.28%
c. 34%
d. 15.87%
e. none of the above
Superior Metals Company has seen its sales volume decline over the last few years as
the result of rising foreign imports. In order to increase sales (and hopefully, profits),
the firm is considering a price reduction on luranium–a metal that it produces and sells.
The firm currently sells 60,000 pounds of luranium a year at an average price of $10 per
pound. Fixed costs of producing luranium are $250,000. Current variable costs per
pound are $5. The firm has determined that the variable cost per pound could be
reduced by $.50 if production volume could be increased by 10 percent (fixed costs
would remain constant). The firm’s marketing department has estimated the arc
elasticity of demand for luranium to be -1.5. (a) How much would Superior Metals have
to reduce the price of luranium in order to achieve a 10 percent increase in the quantity
sold?
(b) What would the firm’s (i) total revenue, (ii) total cost, and (iii) total profit be before
and after the price cut?
In an open economy with few capital restrictions and substantial import-export trade, a
rise in interest rates and a decline in the producer price index of inflation will
a. raise the value of the currency
b. lower the nominal interest rate
c. increase the volume of trading in the foreign exchange market
d. lower the trade-weighted exchange rate
e. increase consumer inflation.
An increase in the quantity demanded could be caused by:
a. an increase in the price of substitute goods
b. a decrease in the price of complementary goods
c. an increase in consumer income levels
d. all of the above
e. none of the above
The practice by telephone companies of charging lower long-distance rates at night than
during the day is an example of:
a. inverted block pricing
b. second-degree price discrimination
c. peak-load pricing
d. first-degree price discrimination
e. none of the above
European Union labor costs exceed U.S. and British labor costs primarily because
a. worker productivity is lower in the EU
b. union wages are higher in the EU
c. layoffs and plant closings are more restrictive in the U.S. and Britain
d. the amount of paid time off is higher in the EU
e. labor-management relations are better in the EU
In cost of capital calculations, the flotation cost on new debt is usually ignored because
the flotation cost percentage for large debt issues is relatively low.
a. true
b. false
Electricity pricing that varies in its billing expense throughout the day is called
a.full pricing
b. marginal cost pricing
c.dynamic pricing
d. variable pricing
e. full cost pricing
Complete the following table.
Exhibit 15A-1
Suppose GM and Nucor Steel seek to develop jointly a new sheet metal and auto body
stamping machine, and each party knows the payoffs in the following table of
equi-probable outcomes but cannot independently verify one another’s costs. Both GM
and Nucor can cancel the project and both will then earn $0 if the cost revelations give
early warning of losses.
Note: The figures in parentheses represent costs associated with the Low and High cost
realizations, and all figures are in millions. The joint profit payoffs are the difference
between $180 and the sum of the cost realizations.
Part B: What are the expected net profits to each partner under the incentives contract?
Using demand and supply curves for the Japanese yen based on the $/Â¥ price for yen,
an increase in US INFLATION RATES would
a. Decrease the demand for yen and decrease the supply of the yen.
b. Increase the demand for yen and decrease the supply of the yen.
c. Increase the demand and increase the supply of yen.
d. Decrease both the supply and the demand of yen.
e. Have no impact on the demand or supply of the yen.
What are the expected net profits to Johnson & Johnson in a pharmaceutical R&D joint
venture with Amgen given the following joint profit payoffs. The joint profit payoffs
are the difference between $180 and the sum of the cost realizations. Assume that the
three columns are equally likely to occur, each row is equally likely to occur. Both
Johnson and Johnson and Amgen can cancel the project and both will then earn $0 if
the cost revelations give early warning of losses.
The figures in parentheses represent costs associated with the Low, Moderate and High
cost realizations, and all figures are in millions.
What’s true about both the short-run and long-run in terms of production and cost
analysis?
a. In the short-run, one or more of the resources are fixed
b. In the long-run, all the factors are variable
c. The time horizon determines whether or not an input variable is fixed or not
d. The law of diminishing returns is based in part on some factors of production being
fixed, as they are in the short run.
e. All of the above
Exhibit 13-1
Consider the information below when answering the following question(s):
(Note: Payoffs in the upper right corner go to Pizza Spinners and payoffs in the lower
left go to Harry’s).
In choosing whether to deliver to six or seven neighborhoods, Harry’s Pizzeria has to
take into account not only its own costs but the delivery area response of its competitor
Pizza Spinners. If the payoffs per week from delivering in six and seven neighborhoods
are as displayed in Exhibit 13-1, what will Harry’s Pizzeria choose and why?
In the following sequential marketing game, is a threat by the manufacturer (Man) not
to advertise a newly updated product unless the retailer (RET) promotes it a credible
threat?
In this problem, demonstrate your knowledge of percentage rates of change of an entire
demand function (HINT: %ΔQ = EPº%ΔP + EY°%ΔY). You have found that the
price elasticity of motor control devices at Allen-Bradley Corporation is -2, and that the
income elasticity is a +1.5. You have been asked to predict sales of these devices for
one year into the future. Economists from the Conference Board predict that income
will be rising 3% over the next year, and AB’s management is planning to raise prices
2%. You expect that the number of AB motor control devices sold in one year will:
a. fall .5%.
b. not change.
c. rise 1%r.
d. rise 2%.
e. rise .5%.
Sealed bids can be used in multiple rounds. How is this done?a. The winner of the first
round automatically wins all future rounds.
b. The winner’s price in the first round is the reservation price in the next round. If
higher prices come in the next round, the highest price is the new reservation price for
round three, and so forth.
c. The second best price in the first round is the winner.
d. Bidding continues in more and more rounds until someone yells ‘œuncle.’