NAME: ________________________________________________
FNR 407
Examination No. 1, 2010
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1.
For a specified production process of a given firm, explain why the portion of the marginal cost
(MC) curve that lies below the average variable cost (ATC) is not part of its short-run supply
curve. Be certain to explain the relevance of ATC, including the meaning of ATC and how it’s
calculated.
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2.
Assuming that a for-profit firm has been operating for a number of years and its overall
operations are fairly stable, what is the advantage to the firm of making management decisions
using marginal analysis? (Don’t say to maximize profit, that’s a given.)
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3.
A firm conducts a discounted cash flow analysis for the purchase of a new machine. They
calculate an NPV using a discount rate of 6%, the average rate of return for the firm’s capital
investments. The NPV is $1.0 million on a $150 million investment. The boss then calls and
says that the firm’s average rate of return was recalculated to be 5%. The boss wants to know
immediately whether or not this investment would cover a 5% rate of return.
What do you the boss?
What’s you basis for this answer?
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NAME: ________________________________________________
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4.
Assume a firm is evaluating an investment opportunity that will have a 10 year payback. They
have the cash to make the investment so they don’t have an interest cost for borrowed funds.
Is there an opportunity cost for this investment?
How would they include this cost in their analysis of whether or not the investment should be
made?
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5.
How is the price of money (capital) measured?
Explain what would make this price go up and what would make it go down.
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6.
7.
Within the context of a single tree, what are the economic/financial implications of the tree
being both the thing producing the product (machine) and the product produced (output)?
A monopoly exists when there is only one firm providing a good or service to more than one
consumer (purchaser).
Why can’t the monopolist charge whatever they want for the good or service they produce?
If not how do they determine the price to sell their goods or service at once they’ve equated MC
and MR to determine the profit maximizing level of production?
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NAME: ________________________________________________
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8 .In the figure below if the current price is P1 would you expect this price to continue for very
long? What adjustments would occur by producers and by consumers? Show on the graph
what you think the long-run market equilibrium price would be.
P
P1
Supply
curve
Demand
curve
Q
Why don’t sunk costs matter when a firm is making decisions about how to improve their
financial performance by changing how they do something?
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9.
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10. If a firm sells into a very competitive market and the market price is in the $10 to $12 range,
what should the firm use as their MR.
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NAME: ________________________________________________
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11. If a firm raises its price and its total revenue goes down, is it selling in an elastic or inelastic
market?
If a firm knows that its price elasticity of demand is -1 and it wants to maximize total revenue
should it decrease, increase, or not change it price?
There are only two firms producing widgets in a given market area. Their MC’s are given in the
table along with the associated level of output. What is the supply curve for this market area?
(Fill in the empty columns)
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Firm A’s Q
500
600
700
800
900
1,000
1,100
1,200
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Firm A’s MC
$200
$400
$600
$900
$1,300
$2,000
$5,000
$7,000
Firm B’s Q
Firm B’s MC
100
200
300
400
500
600
700
800
$400
$600
$900
$1,300
$2,000
$5,000
$9,000
12,000
Market Q
Range in
Market price
$200
$400
$600
$900
$1300
$2000
$5000
$9000
13. An investor can purchase a warehouse room full of 5 year old wine in oak casks for $500,000.
The seller estimates that after bottling the wine in the casks will be worth $1,500,000 in 4 years.
What rate of return would the investor earn if he made this investment and the value estimated
by the seller came true?
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NAME: ________________________________________________
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14. For the situation shown in the graph below describe this firm’s net revenue (profit) level for
each of the three price levels shown.
$
Marginal cost
Total average
cost
P1
P2
P3
Q
P1 –
P2 –
P3 -
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15. A timberland owner expects to earn an 8 percent rate of return on her investments. She owns a
25 year old stand of pine that could be sold today for $600 per acre as pulpwood. If she waits 5
years the stand could be sold for $900 per acre as sawtimber. Should she sell the stand now or
wait 5 years?
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NAME: ________________________________________________
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16. The Acme Lumber Company produces pallet lumber that it sells into a highly competitive
market. Its average sales price is $120 per MBF cash-and-carry on the dock at their mill. Its
fixed costs total approximately $15,000 per month. Its marginal cost is currently running at
$135 per MBF, shown on the graph. Given the marginal cost curve below should Acme
increase or decrease its output?
$’s
MC
$135
Q1
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Q
17. Why is the typical production function [output = f(inputs)] sinusoidally shaped?
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