Key for Problem set 4 Spring 2007

# Key for Problem set 4 Spring 2007 - Economics 100 Key for...

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Economics 100 – Key for Problem Set #4 Spring 2007 Page 1 of 4 1. The builder of a new movie theater complex is trying to decide how many screens she wants. The cost of construction is \$1,000,000 per screen. The builder is borrowing from the bank at some real interest rate to build the movie theater complex. Listed below are the number of patrons the complex will attract, depending on the number of screens (6 points): Number of Screens Total Number of Patrons per year Increase in Patrons for each Screen Marginal Revenue of each Screen 1 40,000 40,000 \$80,000 2 75,000 35,000 \$70,000 3 105,000 30,000 \$60,000 4 130,000 25,000 \$50,000 5 150,000 20,000 \$40,000 a. Suppose that after paying the movie distributor and all other noninterest expenses the owner expects to net \$2.00 per ticket sold. The increase in patrons for each screen is the change in the total number of patrons per year. The marginal revenue for each screen is the increase in patrons for each screen (number of tickets) times \$2.00 per ticket. b. If the bank is charging a real interest rate ( R ) of 0.045, then the marginal cost of borrowing to pay for each screen is \$45,000. Using the profit-maximizing rule that a firm invests so long as the marginal revenue marginal cost, the builder will build 4 screens . c. If the bank is charging a real interest rate ( R ) of 0.055, then the marginal cost of borrowing to pay for each screen is \$55,000. Using the profit-maximizing rule that a firm invests so long as the marginal revenue marginal cost, the builder will build 3 screens .

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Key for Problem set 4 Spring 2007 - Economics 100 Key for...

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