1. If contract promises were not excused because of acts of war, would the clearing and settlements clients of Bank of New York change their behavior? If so, how? What reliance behavior would be considered efficient? What reliance behavior would be considered excessive?
2. Would warehouse operators insist on owning their own trucking companies?
Why or why not? What coordination and control problems and contractual hazards would these companies encounter?
3. What organizational form would warehouse operators and truck hauling companies adopt?
Chapter 16 Problems 4, 6(a, c), 9
4. What are the incentives to innovate for a monopoly firm as compared with a firm in a competitive market if patent protection is not available?
5. The industry demand function for bulk plastics is represented by the following
equation: P = 800 - 20 Q where Q represents millions of pounds of plastic. The total cost function for the industry, exclusive of a required return on invested capital, is TC = 300 + 500 Q + 10 Q2 where Q represents millions of pounds of plastic. (Compute the profit-maximizing level of price and output under these conditions (the industry's total cost function remains unchanged)).
a. If this industry acts like a monopolist in the determination of price and output, compute the profit-maximizing level of price and output.
6. Branding Iron Products, a specialty steel fabricator, operates a plant in the town of West Star, Texas.The town has grown rapidly because of recent discoveries of oil and gas in the area. Many of the new residents have expressed concern at the amount of pollution (primarily particulate matter in the air and waste water in the town's river) emitted by Branding Iron. Three proposals have been made to remedy the problem: Evaluate each of these alternatives from the perspectives of economic efficiency, equity, and the likely long-term impact on the firm.
a. Impose a tax on the amount of particulate matter and the amount of waste water emitted by the firm.
7. A firm has the opportunity to invest in a project having an initial outlay of $20,000. Net cash inflows (before depreciation and taxes) are expected to be $5,000 per year for five years. The firm uses the straight-line depreciation method with a zero salvage value and has a (marginal) income tax rate of 40 percent. The firm's cost of capital is 12 percent.
a. Compute the internal rate of return and the net present value.
b. Should the firm accept or reject the project?
8. The Charlotte Bobcats, a professional basketball team, has been offered the opportunity to purchase the contract of an aging superstar basketball player from another team. The general manager of the Bobcats wants to analyze the offer as a capital budgeting problem. The Bobcats would have to pay the other team $800,000 to obtain the superstar. Being somewhat old, the basketball player is expected to be able to play for only four more years. The general manager figures that attendance, and hence revenues, would increase substantially if the Bobcats obtained the superstar. He estimates that incremental returns (additional ticket revenues less the superstar's salary) would be as follows over the four-year period:
a. Calculate the internal rate of return and the net present value to determine the desirability of this investment.
b. Should the Bobcats sign the superstar
9. The state of Glottamora has $100 million remaining in its budget for the current year. One alternative is to give Glottamorans a one-time tax rebate. Alternatively, two proposals have been made for state expenditures of these funds. The first proposed project is to invest in a new power plant, costing $100 million and having an expected useful life of 20 years. Projected benefits accruing from this project are as follows:
Projected benefits accruing from this project are as follows:
The second alternative is to undertake a job retraining program, also costing $100 million and generating the following benefits:
The state Power Department argues that a 5 percent discount factor should be used in evaluating the projects, because that is the government's borrowing rate. The Human Resources Department suggests using a 12 percent rate, because that more nearly equals society's true opportunity rate.
c. What rate do you believe to be more appropriate?