ECON 303
Practice Questions for Exam 1
1.
Suppose a firm’s current profit is $80 million, the interest rate is 6%, and the expected
growth rate of the firm’s profit is 5%.
a.
What is the value of the firm if it continues for 3 years? (
Answer: $315.5
million
)
b.
What is the value of the firm if it continues for ever?
(
Answer: $8,480
million
)
c.
What is the value of the firm on the exdividend date if it pays it current profit
as dividend and continues for ever?
(
Answer: $8,400 million
)
2.
Suppose a firm’s current profit is $50 million and interest rate is 4%.
a.
What is the value of the firm if it continues for 3 years with no growth in
profit? (
Answer: $188.8 million
)
b.
What is the value of the firm if it continues for 3 years with 3% annual growth
in profit?
(
Answer: $197.1 million
)
c.
What is the value of the firm if it continues for ever with 3% annual growth in
profit?
(
Answer: $5,200 million
)
3.
Suppose total benefits and total costs are given by B(Y) = 90Y  4Y
2
and C(Y) = 5Y
2
.
a.
What is the marginal benefit? (
Answer: 90  8Y
)
b.
What is the marginal cost? (
Answer: 10Y
)
c.
What is the value of Y that maximizes net benefits? (
Answer: 5
)
d.
What is the maximum level of net benefits? (
Answer: 225
)
4.
Suppose total benefits and total costs are given by B(Y) = 50Y  6Y
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Fall '09
 DOUGDAVIS
 Supply And Demand

Click to edit the document details