Economics Answers

A binding output quota reduces consumer surplus to a greater extent when the demand curve is highly elastic. True False or Uncertain

Table 1: Output and Costs of Bicycles
Output (units)
20
40
60
80
100
120
140
160
180
200
Marginal Cost ($)
110
95
85
80
85
110
155
230
280
340
Average Variable Cost ($)
190
165
145
130
115
110
115
125
140
160
A2-10. Table 1 shows output, marginal cost (MC), and average variable cost (AVC) for the production of bicycles.
Suppose the firm’s labour costs equal 80% of its total cost. How would an increase in the price of labour influence the firm’s total average cost in the short run? How would this change affect the firm’s total average cost in the long run?

Stella is an 8 year old that gets a monthly allowance of $10 from her parents. There are only two things that Stella likes to spend her allowance on: chocolate bars and packages of stickers. Assume that initially chocolate bars cost $1 each and packages of stickers cost $2 each.
Suppose that as a result of the price change, the substitution effect caused Stella to increase her chocolate consumption by 4 chocolate bars. How big is the income effect? Can you say whether Stella considers chocolate bars to be a normal or an inferior good? Explain.

When do companies incur the agency costs? Support your answer by giving an
example.

Discuss TWO drawbacks of using payback period method to evaluate projects

Tanjong Inc. is considering two mutually exclusive projects, A and B. Project A costs
RM95,000 and is expected to generate RM65,000 in year one and RM75,000 in year
two. Project B costs RM120,000 and is expected to generate RM64,000 in year one,
RM67,000 in year two, RM56,000 in year three, and RM45,000 in year four. Tanjong
Inc.'s required rate of return for these projects is 10%. Calculate the profitability index
for Project A and Project B. Which project is better?

Dunia Construction Co. (DCC) is considering a new inventory system that will cost
RM750,000. The system is expected to generate positive cash flows over the next
four years in the amounts of RM350,000 in year one, RM325,000 in year two,
RM150,000 in year three, and RM180,000 in year four. DCC's required rate of return
is 8%.
i. What is the net present value of this project?
ii. What is the internal rate of return of this project?
iii. What is the modified internal rate of return of this project?

Fendy purchased 800 shares of Grandsports’ stock at RM3 per share on 1/1/12. He
sold the shares on 12/31/12 for RM3.45. Grandsports’ stock has a beta of 1.9, the
risk-free rate of return is 4%, and the market risk premium is 9%. What is Fendy's
holding period return?

Dynamite Industries paid a dividend of RM1.65 for its common stock yesterday. The
dividends of company are expected to grow at 9% per year indefinitely. If the risk free
rate is 3% and investors' risk premium on this stock is 8%, what is the estimate value
of Dynamite Industries stock 2 years from now?

The price of Dwayne Corporation stock is expected to be RM68 in 5 years. Dividends
are anticipated to increase at an annual rate of 10 percent from the most recent
dividend of RM1.00. If your required rate of return is 15 percent, how much are you
willing to pay for Dwayne stock now?