saad karimi (assignment 1)

8/15/2019 Saad Karimi (Assignment 1)

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MANAGERIAL ECONOMICS

ASSIGNMENT # 1CHAPTER 1 & 2

PREPARED BY

SAAD KARIMI (4123541)

DATED: 28TH JAN 21!


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CHAPTER NO 1:

TECHNICAL PROBLEMS:

"$%' 3: Over the next three years, a firm is expected to earn economic profits of $120,000 in the first year,

$140,000 in the second year, and $100,000 in the third year. After the end of the third year, the firm will go out of

usiness.

a. !f the ris"#adusted discount rate is 10 percent for each of the next three years, the value of the firm is $%%%%%%%% .&he firm can e sold today for a price of $%%%%%%% .

b. !f the ris"#adusted discount rate is ' percent for each of the next three years, the value of the firm is $%%%%%%%% .

&he firm can e sold today for a price of $%%%%%%% .

A%*$+:

,) (sing the formula of present value of a series)

*+ -+1 -+2 -+/

1i 1i3 1i

*+ 120000 140000 10000 105,050.50 116,702.47 76,1/1.4' 2--.-24/85

10.1 10.13 10.1

*resent value of firm is $255,524.'6 and the firm can e sold atleast at $255,524.

0) (sing the formula of present value of a series)

*+ -+1 -+2 -+/

1i 1i3 1i

*+ 120000 140000 10000 111,111.11 120,027.4/ 75,/'/.22 31.521/! 10.0' 10.0'3 10.0'

*resent value of firm is $/10,621.78 and the firm can e sold atleast at $/10,621.78.

APPLIED PROBLEMS:

"$%' 1: At the eginning of the year, an audio engineer 9uit his o and gave up a salary of $176,000 per year in

order to start his own usiness, :ound ;evices, !nc. &he new company uilds, installs, and maintains custom audio

e9uipment for usinesses that re9uire high#9uality audio systems. A partial income statement for the first year of

operation for :ound ;evices, !nc., is shown elow<

=evenues

=evenue from sales of product and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $570,000

Operating costs and expenses

>ost of products and services sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... . . . $/66,000

:elling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... . . $166,000

Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... ... . $46,000

&otal operating costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... . $666,000

!ncome from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $416,000

!nterest expense an" loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,000


3/10

?egal expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2',000

>orporate income tax payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $186,000

@et income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $177,000

&o get started, the owner of :ound ;evices spent $100,000 of his personal savings to pay for some of the capita

e9uipment used in the usiness. ;uring the first year of operation, the owner of :ound ;evices could have earned a

16 percent return y investing in stoc"s of other new usinesses with ris" levels similar to the ris" level at :ound

;evices.

a. hat are the total explicit, total implicit, and total economic costs for the yearB

b. hat is accounting profitB

c. hat is economic profitB

d. Civen your answer in part c, evaluate the owners decision to leave his o to start :ound ;evices.

A%*$+:

,) &otal explicit cost Administrative expenses &otal operating costs and expenses ?egal expenses >orporate

income tax payments 46,000 666,000 2',000 186,000 -3.

&otal implicit cost :alary =eturns from stoc"s 176,000 0.16 D 100,000 1-.

&otal economic cost &otal explicit &otal implicit 75/,000 150,000 -83.

0) Accounting profit &otal revenue E Fxplicit cost 570,000 E 75/,000 1.

) Fconomic profit &otal revenue E &otal economic cost 570,000 E 5'/,000 13.

6) &he owner made a economic loss of E$1/,000 with this usiness. whereas, he would have made $150,000 if he

had "ept the o and invested his $100,000 in stoc"s. :o he made a wrong decision to start :ound ;evices.

"$%' 3: hen Gurton >ummings graduated with honors from the >anadian &ruc"ing Academy, his father gave

him a $/60,000 tractor#trailer rig. =ecently, Gurton was oasting to some fellow truc"ers that his revenues were

typically $26,000 per month, while his operating costs fuel, maintenance, and depreciation amounted to only

$1',000 per month. &ractortrailer rigs identical to Gurtons rig rent for $16,000 per month. !f Gurton was driving truc"s

for one of the competing truc"ing firms, he would earn $6,000 per month.

a. How much are Gurton >ummingss explicit costs per monthB How much are his implicit costs per monthB

b. hat is the dollar amount of the opportunity cost of the resources used y Gurton >ummings each monthB

c. Gurton is proud of the fact that he is generating a net cash flow of $7,000 6 $26,000 I $1',000 per month, sincehe would e earning only $6,000 per month if he were wor"ing for a truc"ing firm. hat advice would you give Gurton

>ummingsB

A%*$+:

,) Fxplicit costJs fuel, maintenance, and depreciation are 18. per month. !mplicit costs driving truc"s rent

$16,000 $6,000 2.

0) Opportunity cost !mplicit costs $16,000 $6,000 2.


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) Gurton >ummings current profit is $26,000 E 1',000. =ather than ma"ing . per month, Gurton can

rent his rig $16,000 per month and drive truc"s for another firm ma"e $6,000 per month. ith this use of his

resources he can earn 2. per month.

"$%' : Fortune magaKine reported that :"yest, an independent regional airline, negotiated a financial

arrangement with ;elta and (nited to provide regional et service for the two maor airlines. -or its part of the deal,

:"yest agreed to paint its ets the colors of ;elta >onnection and (nited Fxpress and to fly routes specified y the

two airlines. !n return, ;elta and (nited agreed to pay :"yest a predetermined profit margin and to cover most ofthe regional airlines costs. Fortune explained that while the deal limited the amount of profit :"yest could earn, it

also insulated the smaller airline from volatility in earnings since ;elta and (nited covered :"yests fuel costs,

increased its load factor the percentage of seats occupied, and managed its tic"et prices. Fortune suggested tha

all :treet li"ed the deal ecause :"yests mar"et valuation increased from $14/ million to $1.1 illion after it

egan its service with the two maor airlines. Fxplain carefully how this arrangement with ;elta and (nited could have

caused the value of :"yest to increase dramatically even though it limited the amount of profit :"yest could earn.

A%*$+:

Fven though the financial arrangement with ;elta and (nited limited the growth in :"yestLs economic profits in

future years, ut the agreement decreased the ris" associated with :"yestLs profits. &he lower level of ris" reduces

the adusted discount rate, and, for a given stream of profits, the value of the :"yest rises.

MATHEMATICAL PROBLEMS:

"$%' 1: (sing a discount rate of 8.6 percent, calculate the present value of a $1,000 profit payment to e

received at the end of)

a. One year

b. &wo years

c. &hree years

A%*$+:

,) *+ -+M1 in $1,000M1.086 -38/-

0) *+ $1,000M1.0863 881/!!

) *+ $1,000M1.086 82/85

"$%' 2: hat is the present value of a firm with a five#year life span that earns the following stream of expected

profitB &reat all profits as eing received at year#end. (se a ris"adusted discount rate of 12 percent.Y$,+ E7$$6 +9'

1 $10,0002 $20,000/ $60,0004 $76,0006 $60,000


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A%*$+:

*+ -+1 -+2 -+/ ............

1i 1i3 1i

*+ 10000 20000 60000 76000 60000

10.12 10.123 10.12 10.12 10.12

$',525 16,544 /6,6'5 47,884 2',/7113!.4-

CHAPTER NO 2:

TECHNICAL PROBLEMS:

"$%' 1: &he general demand function for good A is)Qd 800# 4PA # 0.0/M # 12PB 167 8PE 1.6N

where Qd 9uantity demanded of good A each month, PA price of good A, M average household income, PB price ofrelated good B, 7 a consumer taste index ranging in value from 0 to 10 the highest rating,PE price consumers expect to

pay next month for good A, and N numer of uyers in the mar"et for good A.

a. !nterpret the intercept parameter in the general demand function.b. hat is the value of the slope parameter for the price of good AB ;oes it have the correct algeraic signB hyBc. !nterpret the slope parameter for income. !s good A normal or inferiorB Fxplain.d. Are goods A and B sustitutes or complementsB Fxplain. !nterpret the slope parameter for the price of goodB.

A%*$+:

,) &he intercept parameter in the given demand function is 800 and it is the value of at the point, where the line crossesthe axis.&his means that "eeping all given variales Kero, good A will have a demand of 800 per month.

0) :lope parameter for price of good A is #4. @egagative sign here is showing negative association etween 9uantitydemanded for good A and its price As price increases for good A the demand decreases. Algeric sign is correct in

this regard.) :lope parameter for income of good A is #0.0/. @egagative sign here is showing negative association etween

9uantity demanded for good A and household income As income increases the demand decreases for good A. !t isan inferior good, as the relation etween demand and income is negative.

6) Cood A and G are sustitutes ecause as price for good G increases the demand for good A decreases. here as forcomplement goods the relationship is in same direction. &he slope parameter for good G is #12, showing negativerelation with demand of good A.

"$%' 2: >onsider the general demand function<Qd ',000 # 18P 0.76M /0PR

a. ;erive the e9uation for the demand function when M $/0,000 and PR $60.

b. !nterpret the intercept and slope parameters of the demand function derived in part a.c. :"etch a graph of the demand function in part a. here does the demand function intersect the 9uantity#demandedaxisB here does it intersect the price axisBd. (sing the demand function from part a, calculate the 9uantity demanded when the price of the good is $1,000 and when the price is $1,600.e. ;erive the inverse of the demand function in part a. (sing the inverse demand function, calculate the demand pricefor 24,000 units of the good. Cive an interpretation of this demand price.

A%*$+:,) Nd ',000 # 18* 0.76 /0*=


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:o)Nd '000 E 18* 0.76/0000 /060Nd /2,000 E 18*.

0) Nd /2,000 E 18*.Here /2,000 is the y intercept, which means that if * is Kero the demand will e /2,000. here as #18 is the slopeparmater, which shows a negative relationship etween demand and price for price of $1 the demand will decreasey 18.

) P intercept will e /2,000 whereas it will interscet price axis at 2000.

0 500 1000 1500 2000 25000

10000

20000

30000

40000

Demand

price

quantity

6) Nd /2,000 E 18*. Nd /2,000 E 181000 1!.

Nd /2,000 E 18*.Nd /2,000 E 181600.

8.

$) Nd /2,000 E 18*.* /2,000 E Nd /2,000 E 24,000 5 18 18

"$%' -: &he following general supply function shows the 9uantity of good X that producers offer for sale Qs<Qs 15 20Px # 10PI 8T # /2Pr # 20Pe 6F


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where Px is the price of X, PI is the price of laor, T is an index measuring the level of technology, Pr is the price of agood R that is related in production, Pe is the expected future price of good X , and F is the numer of firms in theindustry.a. ;etermine the e9uation of the supply curve for X when PI ', T 4, Pr 4, Pe 6, and F 47. *lot this supplycurve on a graph.b. :uppose the price of laor increases from ' to 5. -ind the e9uation of the new supply curve. *lot the new supplycurve on a graph.c. !s the good related in production a complement or a sustitute in productionB Fxplain.

d. hat is the correct way to interpret each of the coefficients in the general supply function given aoveB

A%*$+:,) Ns 15 20*x # 10*! 8& # /2*r # 20*e 6-

Ns 15 20*x E 10' 84 E /24 E 206 647"% 13 ; 2P7

0 1 2 3 4 50

100

200

300

supply

PRICE

QUANI! #UPP$!

0) Ns 15 20*x E 105 84 E /24 E 206 647"% 14 ; 2P7


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0 0%5 1 1%5 2 2%5 3 3%5 4 4%50

50

100

150

200

250

supply

c) Qs 15 20Px # 10PI 8T # /2Pr # 20Pe 6F As price of related good increases the supply of good Q decreases, so it is sustitute good.

6) Ns 15 20*x # 10*! 8& # /2*r # 20*e 6-

!f all variales are Kero the suppy 9uantity of good Q will e 15. *rice of good Q and firms in industry have positiveassociation with supply 9uantity. *! is the price of laor, *r is the price of a good = that is related in production, *e is

the expected future price of good Q, these variales have negative association with 9uantity supplied for good Q,

increase in any of these variales will cause decrease in 9uantity supplied.

"$%' 13: :uppose that the demand and supply functions for good X areQd 60 # 'PQs #17.6 10Pa. hat are the e9uilirium price and 9uantityBb. hat is the mar"et outcome if price is $2.76B hat do you expect to happenB hyBc. hat is the mar"et outcome if price is $4.26B hat do you expect to happenB hyB

d. hat happens to e9uilirium price and 9uantity if the demand function ecomes Qd 65 # 'PBe. hat happens to e9uilirium price and 9uantity if the supply function ecomes Qs #40 10P demand is Qd 60 # 'PB

A%*$+:,) Nd 60 # '* , Ns #17.6 10*

60 # '* #17.6 10*

1'* 87.6

P 3/5


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saad karimi (assignment 1)

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