Discussion/ Problem
1. If the interest rate is 7% and cash flows are $4,000 at the end of year one and $6,000 at the end of year two, then the present value of these cash flows is
a. $9,246.
b. $8,979.
c. $9,615.
d. $10,691.
e. None of the above
Show all work. The use of the time line is useful in explaining your answer.
2. If the interest rate is 6.5%, what is the present value of $500 received in one year?
a. $303.
b. $469.
c. $532.
d. $577.
e. None of the above
Show all work. The use of the time line is useful in explaining your answer.
3. Pears and oranges are substitutes. A freeze in Florida destroys most of the orange crop. What would you expect to happen to the market (price and quantity) for each of the following:
(Hint: Use the demand curve and supply curve to draw conclusion with respect to the impact on the price and quantity following the freeze).
a. Oranges?
b. Pears?
c. Orange juice?
4. Suppose market demand and supply are given by Qd = 30 - 3P and QS = 5 +2P.
a) Solve for the equilibrium price and quantity. Show your work!
b) Draw the demand and supply curve and show the equilibrium values obtained in part a) Show Work!
5. In a competitive market, the market demand is Qd = 96 -10P and the market supply is Qs = 14p. A price ceiling of $5 will result in a shortage of
a. 36 units
b. 24 units
c. 16 units
d. None of the above
Show your work! Using market demand and Market supply diagram!
6. Graphically, a report indicating the health defects from consuming extra ounces of whole grains per day increases the chances of cancer by 30% will cause the demand curve for grains to:
a. Shift rightward c. Shift leftward
b. Become flatter d. Become steeper
Show your work using the tools of demand and supply curves!
7. Consumer surplus is the difference between the
a. Market price and the minimum price required to induce production
b. The maximum willingness to pay of consumers and the market price
c. Quantity demanded and the quantity supplied at the market price
d. Full economic price and the minimum price required to induce production
Show your work!
8. a) What is scarcity? Can it be eliminated? Explain
b) Why does scarcity exist? How can it be resolved? Explain
c) IS there such a thing as a free lunch? If yes, explain and offer examples. If No, explain and give examples.
9. What is market equilibrium? Does the market always achieve equilibrium? If so, why? If not, why? Explain. Illustrate with examples and graphs where necessary
10. The movement along a given demand curve is the same as a shift in the demand curve. True False. Explain
11. If the income elasticity for designer jeans is 2.5, a 10% increase in income will lead to a
a. 25% rise in demand for designer jeans.
b. 0.25% drop in the demand for designer jeans.
c. 0.25% rise in demand for designer jeans.
Show your work
12. Which of the following increases the potential for sustainable long-run industry profits?
a. Entry.
b. The availability of multiple substitutes.
c. Absence of complements.
d. Presence of complements
Explain your choice
13. If firms in the pizza industry are earning negative economic profits, which of the following will most likely occur in the future?
a. Some firms will exit the market.
b. The economic profits of the firms in the industry will rise.
c. The market price for pizza will rise.
d. All of the responses are correct.
Explain your choice
14. You are the manager of a popular hand bag company. You know that the advertising elasticity of demand for your product is 2.5. How much will you have to increase spending on advertising in order to increase demand by 4%?
a. 0.16%.
b. 1.6%.
c. 2%.
d. 10%.
Show your work
15. a) What is meant by price elasticity of demand. List and explain three factors of price elasticity of demand.
b) Why managers are interested in the concept of price elasticity of demand? Illustrate with examples
c) Why are managers interested in the concept of consumer surplus? Illustrate with examples.