Other Economics Answers

Expected Cash Flows

Year Project A Project B

0 -500 -875

1 100 150

2 110 200

3 120 252

4 175 375

5 240 530

6 300 680

a. If you were told that each project’s cost of capital was 12%, which project should be selected using the NPV criteria?

b. What is the profitability index for each project if the cost of capital is 12%?

c. What is the regular payback period for these two projects?

An equipment costing 5, 000, 000 can be sold for 1, 000, 000 after it’s useful life of five years. What will be the book value of the said equipment if the company plans to sell it the end of 3 years? Use the sum of years digit method.

An asset has it original value of 120, 000 pesos has a salvage value of 3% of its original value in 12 years. What is the asset’s value after 8 years of use? Use straight line depreciation method.

Equipment costing 2,000,000 with a 200,000 annual operation and maintenance cost. Determine the capitalized cost if money is worth 20% per year.

HOW TO CALCULATE MANUFACTURING OVERHEAD

A government conducts a cost-benefit analysis into the construction of a new high-speed railway network. The analysis reveals the following information. If it is to build the railway network, the government requires that the net social benefit is more than US$20 billion. What must the external costs be to satisfy the government?

14.6

Suppose a monopoly can produce any level of output it wishes at a constant marginal (and average) cost of $5 per unit. Assume the monopoly sells its goods in two different markets separated by some distance. The demand curve in the first market is given by

Q₁ = 55-P₁,

and the demand curve in the second market is given by

Q₂=70-2P₂.

a. If the monopolist can maintain the separation between the two markets, what level of output should be produced in each market, and what price will prevail in each market? What are total profits in this situation?

b. How would your answer change if it costs demanders only $5 to transport goods between the two markets? What would be

the monopolist's new profit level in this situation?

The Toyota Motor Corporation makes cars in response to customer orders rather than attempting to sell cars it has already built. If the company received a large increase in orders for its Prius model, what will be expected of its current supply curve on a demand and supply diagram? 

What is a possible drawback of using R2 for comparing different models with the same dependent variable and different number of explanatory variables? Why using adjusted R2 for model evaluation may be better?

Explain what does the expression “OLS is BLUE” mean. State Gauss-Markov assumptions

required for OLS estimator to be BLUE.