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
)
Table A (To be Used for Practice Questions 3 & 4)
# Units of Activity
Total Benefit
Total Cost
0
0
0
1
10
5
2
18
11
3
25
18
4
29
27
5
31
38
3.
On Table A,
a.
What is the marginal benefit from the second unit of activity? (
Answer: 8
)
b.
What is the marginal cost of the third unit of activity? (
Answer: 7
)
c.
What is the activity level that maximizes net benefit? (
Answer: 3
)
d.
What is the level of net benefit at four units of activity? (
Answer: 2
)
4.
On Table A,
a.
What is the marginal benefit from the first unit of activity? (
Answer: 10
)
b.
What is the marginal cost of the fifth unit of activity? (
Answer: 11
)
c.
What is the maximum level of net benefit? (
Answer: 7
)
d.
What is the level of net benefit at five units of activity? (
Answer: 7
)
5.
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
)
6.
Suppose total benefits and total costs are given by B(Y) = 50Y  6Y
2
and
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 Spring '08
 SHRESTHA
 Supply And Demand

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