Managerial Economics – HW 1
Name:_____________________ Must Show Work for Full or Partial CreditSection 1: Use present value or net present value to answer the following questions in Section 1.Part A: You are debating between signing to play with the Pittsburgh Steelers or the Detroit Lions. TheSteelers guarantee if you sign with them they will pay you 1 million dollars in ten years. The Lionsoffer will pay you $350,000 today. The annual interests rate is 10%. All you care about is making themost money, use the present value to determine where you should sign?
Part B: You are asked to make a recommendation to your supervise if your company, Standard Oil,should start selling gasoline rather than dump it into the Cuylohoga River. The company would need toinvest in $20,000 in new equipment to store and sell the gasoline that is a byproduct of makingkersione. The projected revenue is $4,000 a year for the next 6 years. You predict the interest rate forthe first 2 years will equal 12% and for the remaining 4 years be 8%. Use net present value to explainwhy the company should or should not make the investment.
Part C: The city council is building a new football stadium. The stadium will take five years to buildand cost 2 million dollars to build, due at the start of construction. The NFL football team offers toprovide 1 million dollars towards construction at the start of the project or will provide 3 milliondollars after the stadium has been built. The interest rate is 8%. Use net present value to figure outwhich contribution from the NFL team the town should accept
Section 2: Use the following demand and supply equations to answer the questions in section 2.Demand for Provost Lane Posters = Q = 600-8Pposter-25Pbobble head+5Pblanket-10YSupply for Provost Lane Posters = Q=10+12Pposter-4PinkWhere Pposter = Price of Provost Lane Poster; Pbobble head = Price of Prof. Csaplar bobble head;Pblanket = Price of Prof. Straub Blanket; Pink = Price of ink; Y=Income
Part A: Mathematically prove if beer and cookies are a compliment or a substitute. What changeswould you expect in demand for juice if each were to increase in price?
Part B: Assume the following: Pbobble head = 4 Pblanket = 5 Pink = 16 Y=20Graph supply and demand. Identify where each curve intercepts the x and y axis. What is theequilibrium price and quantity supplied? Mark and label the equilibrium point in your graph.
Part C: Add to your graph from part B a new demand curve using the same demand equation exceptnow income equals to 50. Calculate the new price and the new quantity consumed. Indicate ifprice and quantity increase or decrease and by how much.
Part D: Using the assumptions from Part B, calculate and graph below the new equilibrium price andquantity when the government imposes a 40 dollar per unit tax upon the supplier. (Extra Credit:How much did the tax increase or decrease consumer and producer welfare?)
Section 3: ElasticitiesPart A: What is the elasticity when a 62% decrease in price results in a 31% decrease in sales?Is that an elastic, inelastic, or a unit elastic point? How/will total revenue change if the pricedecreased.
Part B: What is the elasticity when a 16% increase in price results in a 48% decrease in sales?Is the good elastic, inelastic, unit elastic, substitute, compliment, normal or inferior? How/willtotal revenue change if the price increased.Part C: What is the cross-elasticity when a 22% increase in price of a related good results in a 2%increase in sales? Is the good elastic, inelastic, unit elastic, substitute, compliment, normal orinferior?
Part D: What is the equilibrium price elasticity coefficient of Provost Lane Posters from section 2 partB? Is the elasticity of the at equilibrium point elastic, inelastic, unit elastic, substitute,compliment, normal or inferior??
Part E: What is the equilibrium cross price elasticity coefficient of Prof. Csaplar bobble head fromsection 2 part B? What is the income coefficient elasticity from section 2 part B?