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Fall 2009 - Final - Blue

# Fall 2009 - Final - Blue - Ajax Manufacturing must commit...

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Ajax Manufacturing must commit to a production decision before it knows what demand for its product will be. The firm believes there is a 60 percent chance that demand will be high: Q = 1200 - 6P. There is a 40 percent chance that demand will be low: Q = 600 - 6P. The cost of producing Q units of output are C(Q) = 21,000 + 30Q. 1. Ajax will maximize expected profits producing ____ units of output. a) 390 b) 420 c) 450 d) 480 2. If demand turns out to be high, the price Ajax will charge equals _______ per unit of output. a) 125 b) 130 c) 135 d) 140 3. Maximum expected profit for Ajax equals: a) 4,350 b) 4,400 c) 4,450 d) 4,500 4. If demand turns out to be low, Ajax’s realized profit will equal: a) -22,150 b) -20,800 c) -19,050 d) -18,800 5. Nicole manages the Great Nails Spa. She knows that the price elasticity of demand for a manicure for Brunettes is -1.5 and the price elasticity of demand for a manicure for Blonds is -1.8. If Nicole is maximizing profits charging Brunettes \$36 for a manicure she is charging Blonds: a) \$27 b) \$34 c) \$42 d) \$48 6. Acme Consolidated earned a profit of \$200,000 this year, which it has not yet paid out in dividends to shareholders. The company’s profits are expected to grow at a rate of 5 percent per year into an indefinite future. If you consider 8 percent to be the appropriate rate of interest or rate of time discount the market value of this firm is ________ million dollars. a) 7.0 b) 7.2 c) 7.4 d) 7.6 415 BLUE Final Exam 1 of 7 Fall 2009

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Ellen faces a probability of 0.06 percent of having an accident which would impose a loss of \$80,000 in damages. Her future wealth without this accident will be \$200,000. She is risk averse, with utility of wealth given below. W U(W) 100,00 0 256 110,00 0 1280 120,00 0 1792 130,00 0 2048 140,00 0 2176 150,00 0 2240 160,00 0 2272 170,00 0 2288 180,00 0 2296 190,00 0 2300 200,00 0 2302 7. The minimum premium (assuming zero transaction costs to write the policy) an insurance company would charge Ellen for insurance against this loss equals _____dollars. a) 24 b) 32 c) 40 d) 48 8. The maximum premium Ellen would pay for insurance equals ______ dollars. a) 1,020 b) 1,190 c) 1,260 d) 1,530 9. You are participating in an auction with 4 risk neutral bidders (including you). Independent valuations of bidders in the auction are uniformly distributed between \$500 and \$1,500. If your valuation of the item is \$1,300, your optimal bid in a Dutch Auction format will be: a) \$1,000 b) \$1,100 c) \$1,200 d) \$1,300 10. You are participating in an auction with 4 risk neutral bidders (including you). Independent valuations of bidders in the auction are uniformly distributed between \$500 and \$1,500. If your valuation of the item is \$1,300, your expected gain from this auction equals: 415 BLUE Final Exam 2 of 7 Fall 2009
a) \$43.20 b) \$98.60 c) \$102.40 d) \$112.00 11. You are participating in an auction with 4 risk neutral bidders (including you). Independent valuations of bidders in the auction are uniformly distributed between \$500 and \$1,500. If your

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Fall 2009 - Final - Blue - Ajax Manufacturing must commit...

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