econ exam 1
Suppose market demand and supply are given by Qd = 100 − 2P and Qs = 5 + 3P. If the government sets a price floor of $30 and agrees to purchase all surplus at $30 per unit, the total cost to the government will be:
$1,650
compute the present value of a perpetual bond that pays a monthly cash flow of $1,000 at an annual interest rate of 12%
$100,000
if the interest rate is 5%, the present value of $200 received at the end of 5 years is:
$156.71
Suppose market demand and supply are given by Qd = 100 − 2P and Qs = 5 + 3P. The equilibrium price is:
$19
Suppose the interest rate is 5 percent, the expected growth rate of the firm is 2 percent, and the firm is expected to continue forever. If current profits are $1,000 which are going to be paid out as dividends, what is the value of the firm?
$34,000
A firm will have constant profits of $100,000 per year for the next four years, and the interest rate is 6 percent. Assuming these profits are realized at the end of each year, what is the present value of these future profits?
$346,511
Suppose the interest rate is 5 percent, the expected growth rate of the firm is 2 percent, and the firm is expected to continue forever. If current profits are $1,000, what is the value of the firm?
$35,000
if the interest rate is 5%, what is the present value of $10 received one year from now?
$9.52
when you're trying to decide whether to undertake a project...
...DO IT if economic profit is greater than 0
advertising...
...almost always increases demand for a good
demand function...
...describes how many units will be purchased at different prices for good X, different prices of a related good Y, different levels of income, and other factors that affect the demand for good X
when you're trying to decide which project to choose out of multiple options...
...do whichever one would give you the greatest economic profit
total opportunity cost includes...
...implicit and explicit costs of a good
opportunity cost of money....
...interest
a typical firm's objective is to...
...maximize profits
a consumer's reservation price for a good or service is...
...the highest price at which they would be willing to purchase the good or service -not what you would like to pay; it's the most you would be willing to pay -can change based on preferences, time, income, quantity, etc
Suppose market demand and supply are given by Qd = 100 − 2P and Qs = 5 + 3P. If a price floor of $30 is set, what will be size of the resulting surplus?
55
Suppose market demand and supply are given by Qd = 100 − 2P and Qs = 5 + 3P. The equilibrium quantity is:
62
PVperpetuity
CF / i
net present value formula
FV1 / (1+i)^1 + FV2 / (1+i)^2 +...+ FVn / (1+i)^N - C0
continue increasing quantity until
MB = MC -this will automatically maximize your net benefit
Given a linear supply function of the form Q = −10 + 5P, find the inverse linear supply function.
P = 2 + 0.2Q
present value formula
PV = FV / (1+i) ^n
present value of a stream of future values
PV = FV1 / (1+i) ^1 + FV2 / (1+i)^2 +...+ FVn / (1+i)^n
valuing a firm (no dividends) simplified equation
PVfirm = π0 ((1+i) / (i-g))
valuing a firm (no dividends) equation
PVfirm = π0 + (π0 (1+g)^1 )/ (1+i)^1 + π0 (1+g)2 / (1+i)^2 +...
valuing a firm with dividends equation
PVfirm ^ex-div = PVfirm - π0
valuing a firm with dividends simplified equation
PVfirm ^ex-div = π0 ((1+g) / (i-g))
should i consume / produce one more unit?
YES if MB is >= 0 NO if MB < MC
if good A is an inferior good, an increase in income leads to: -an increase in the demand for good A -a decrease in the demand for good A -no change in the quantity demanded for good A -a decrease in the demand for good B
a decrease in the demand for good A
the manager
a person who directs resources to achieve a stated goal -directs the efforts of others -purchases inputs used in the production of the firm's output -directs the product price or quality decisions
NPV > 0
accept project
revenue - explicit costs =
accounting profits
the law of demand states that, holding all else constant:
as price falls, quantity demanded rises
NPV is ______ when the interest rate is _______
bigger, lower (and vice versa)
3 main players in the economy
buyers (consumers) sellers (producers) government
change in quantity demanded
changing only price leads to changes in quantity demanded -movement along a demand curve
three rivalries in economic transactions
consumer-producer consumer-consumer producer-producer
when dealing with present value, a higher interest rate:
decreases the present value of a future amount
change in demand
demand changes when demand increases because of changes in factors other than price
the buyer side of the market is known as the:
demand side
explicit costs - implicit costs =
economic profits
scarce resources are ultimately allocated toward the production of goods most wanted by society because: -firms attempt to maximize profits -consumers demand inexpensive goods and services -they are most efficiently utilized in these areas -managers are benelovent
firms attempt to maximize profits
which of the following is an implicit cost to a firm that produces a good or service? -costs of renting or buying land for a production side -labor costs -foregone profits of producing a different good or service -costs of operating production machinery
foregone profits of producing a different good or service
which of the following is an implicit cost of going to college? -tuition -room and board -foregone wages -cost of books and supplies
foregone wages
Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. If ay is positive, then:
goods y and x are substitutes
which of the following pairs of goods are probably complements? -televisions and roller skates -steak and chicken -frozen yogurt and ice cream -hamburgers and ketchup
hamburgers and ketchup
law of demand
holding other factors constant, as the price of a good falls, the quantity demanded of the good increases -the quantity demanded decreases as price rises -the demand curve is downward sloping
opportunity costs
includes the foregone benefits you could have received by taking an alternative action -only consider the next best alternative
M =
income
demand shifters
income price of related goods advertising and consumer preferences population consumer expectations
inferior goods
increase in income leads to a decrease in demand
normal goods
increase in income leads to an increase in demand
complements
increase in price of complement leads to a decrease in the demand for Y
substitutes
increase in price of substitute leads to an increase in the demand for Y
managerial economics: -is the study of how to get rich in the stock market -has little to say about day-to-day decisions -is valuable to the coordinator of a shelter for the homeless -is not relevant for managers of not-for-profit groups
is valuable to the coordinator of a shelter for the homeless
suppose both supply and demand increase. what effect will this have on the equilibrium quantity?
it will rise
Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. From the law of demand we know that ax will be:
less than 0
which of the following is probably NOT a normal good? -macaroni and cheese -designer dresses -expensive automobiles -lobster
macaroni and cheese
MB represents
marginal benefit
The additional benefits that arise by using an additional unit of the managerial control variable is defined as the:
marginal benefit
marginal net benefit =
marginal benefit - marginal cost
MC represents
marginal cost
the additional cost incurred by using an additional unit of the managerial control variable is defined as the:
marginal cost
MNB represents
marginal net benefit
to maximize profits, a firm should continue to increase production of a good until:
marginal revenue equals marginal cost
all else held constant, as additional firms enter an industry:
more output is available at each given price
NB represents
net benefit (aka "profit" for firms)
managers can use ___________ to properly account for the timing of receipts and expenditures
present value analysis
Px =
price of good X
Py =
price of good Y
demand shifters do NOT include the: -consumer's tastes and preferences -consumer's expectations about future prices of the good -price of the other related goods -price of the good
price of the good
profit principle
profits are a signal to resource holders where resources are most highly valued by society
which of the following are signals to the owners of scarce resources about the best uses of those resources? -the accounting cost of those resources -government regulations -profits of businesses -economic indicators (ie. GDP growth)
profits of businesses
Qx =
quantity demanded of good X
NPV < 0
reject project
for a steel factory, a decrease in the cost of electricity to the plant will cause the supply curve to:
shift to the right
perpetuity
some decisions promise to give you the exact same cash flow each period, forever
econometrics
statistics specialized in analyzing economic data
macroeconomics
studies entire economy
microeconomics
studies individual agents and markets
marginal benefit
the change in total benefit arising from a tiny increase in quantity
marginal cost
the change in total cost arising from a tiny increase in quantity
economic profit
the difference between total revenue and the total opportunity cost of producing goods or services
the opportunity cost of receiving $10 in the future as opposed to getting that $10 today is:
the foregone interest that could be earned if you had the money today
Q represents
the optimal quantity -something that you can directly control
net present value
the present value of the income stream generated by a project minus the current cost of the project
when quantity demanded exceeds quantity supplied:
the price is below the equilibrium price
managerial economics
the study of how to direct scarce resources in the way that most efficiently achieves a managerial goal -usually to maximize profits, but not always
valuing a firm (no dividends)
the value of a firm with current profits π0, with no dividends paid out and expected constant profit growth rate of g (assuming g <i)
Suppose market demand and supply are given by Qd = 100 − 2P and Qs = 5 + 3P. If a price ceiling of $15 is imposed:
there will be a shortage of 20 units
porter's 5 forces
threat of entry bargaining power of customers substitutions & complements competitive rivalry within industry bargaining power of suppliers
accounting profit
total amount of money taken in from sales (total revenue) minus the explicit cost of producing goods or services
B represents
total benefit -this can be measured as "revenue" for a firm or as "utility" (happiness) for a consumer
net benefit =
total benefit - total cost
C represents
total cost
economic profits are:
total revenue minus total opportunity cost
an excise tax of $1.00 per gallon of gasoline placed on the suppliers of gasoline would shift the supply curve:
up by $1.00
the economic principle that producers are willing to produce more output when the price is high is depicted by the:
upward slope of the supply curve
valuing a firm (with dividends)
when dividends are immediately paid out of current profits, the present value of the firm (at ex-dividend date)
