Final Exam Review BA 315 Spring 06

Final Exam Review BA 315 Spring 06 - Review for Final Exam...

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1 Review for Final Exam, BA 315: Economy, Industry, and Competitive Analysis T ime and Procedures for Final Exams: Final exam is on Wednesday June 14, 2006 at 8:00 a.m. , in Lil room 262. The final exam is closed book and notes. Office hours for final week : Tuesday June 13, 8:30-2:00 Chapters Included in Final Exam: Schiller book: chapters 1-8, 10, 12, 13, and 14 Thompson and Strickland: the first 3 chapters: Chapters 3, 4, 5 Examples: The following questions are provided as a guide for your preparations for final exam. Part A: Demand and Supply 1 Suppose that the demand and supply functions for good X are Q d = 80 - 2 P Q s = - 20 + 3 P a. Equilibrium price is $_ 20_ ____ and equilibrium quantity is _ 40 _______ units. Calculations:___ 80 2 20 3 100 5 20 d s Q Q P P P P = = − + = = , 40 d s Q Q = = b. The price elasticity (point elasticity) at equilibrium values of price and quantity you calculated in (a) is ____ - 1 ______________. (Show calculations) calculations:__ 20 2 1 40 d d P Q P E P Q = = − × = − ________________________________ c. If you raise the price by 2%, given the demand price elasticity calculated in (b), the total revenue will change by ___ 0_ ___%. (Show calculations): Calculations:______ % 1 % % % % % % % % 0 Q Q P P TR P Q P P − = = − = + = − + = ______ 2. Suppose the demand price elasticity for your product is -20. What this implies for a price hike of 5%? Would you recommend increasing price by 5%? Why? 3. Assume that when Price for gas is $1.50 per gallon you demanded 20 gallons a week. When price increased to $3.50 you demanded 10 gallon per week. What is the price elasticity of your demand for gas in the above price ranges? Part B: Economic Profit, Normal profit 1. Consider a firm that employs some resources that are owned by the owner of the firm. When accounting profit is zero, economic profit a. must also equal zero. b. is sure to be positive. c. must be negative. d. cannot be computed accurately, but the firm is breaking even nonetheless. (Show your reasoning): 0 . 0 econ acc implicit TR TC TC acc π π + = ⇒< = ±²³²´ ±²³²´ 2. Kate recently invested $250,000 in a new scooter rental company. At the end of the year, the company's income statement reported revenues of $180,000 and costs of $135,000. As long as the normal rate of return is less than _____, the company's economic profit was greater than zero.
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2 Part C: Marginal Benefit and Marginal Cost (15 points) 1 A radio manufacturer is experiencing theft problems at its warehouse and has decided to hire security guards to reduce the thefts. The firm wants to minimize the net cost of warehouse thefts. Number of Security Guards Number of Radios Stolen Per Week Cost of stolen Radios Reduction in Cost, i.e., MB or MRP MC, or Wage 0 25 25x$40=$100 0 - 0 1 15 15x$40=$600 $1000-600=$400 $130 2 10 10x$40=$400 $600-400=$200 $130 3 6 6x$40=$240 $400-240= $160 $130 4 4 4x$40=$160 $240-160=$80 $130 5 3 3x$40=$120 $160-120=$40 $130 a If each security guard is paid $130 a week and the cost of a stolen radio is $40, how many security guards should the firm hire? (Show calculations in table) Rule:___hire three Guards based on , , MRP W or MB MC _____________ b If the cost of a stolen radio is $40, what is the MOST the firm would be willing to pay to hire the first security guard? Why? (Show your reasoning) Calculations:__First guard provides $400 MRP or MB, therefore we should be willing to pay up to $400.
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