MidtermRev

MidtermRev - ECON 1001 Midterm #1 Revision Q1) After paying...

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ECON 1001 Midterm #1 Revision
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Q1) After paying the movie distributor and meeting all other non-interest expenses, the owner expects to net $2.00 per ticket sold. Construction costs are $1,000,000 per screen. How many screens should be built if the real interest rate is 7% ? A) 1 B) 2 C) 3 D) 4 E) 5 Ans: B N u m b e r o f T o t a l n u m b e r S c r e e n s o f p a t r o n s 1 5 0 , 0 0 0 2 9 0 , 0 0 0 3 1 2 0 , 0 0 0 4 1 4 0 , 0 0 0 5 1 5 0 , 0 0 0
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Installing the ↑ in patrons ↑ in revenue (MB) 1st 50000 $100000 2nd 40000 $80000 3rd 30000 $60000 4th 20000 $40000 5th 10000 $20000 We should use a ‘cost-benefit’ analysis In particular, ‘Marginal Benefit vs Marginal Cost’ of installing ONE MORE screen. MB of installing ONE MORE screen =(increase in patrons)∙$2
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Installing the n-th screen Interest income forgone (MC) 1 $70000 2 $70000 3 $70000 4 $70000 5 $70000 How about the MC of installing ONE MORE screen? Cost of constructing ONE screen = $1,000,000 If you save the money in a bank instead of investing it in the cinema, how much do you get? (r=7% per annum) So MC of installing ONE MORE screen = $1m∙0.07
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Should you install the first screen? YES! Because MB>MC How about the second one? The third one? How many screens would you install in total? Installing the ↑ in revenue (MB) Interest income forgone (MC) 1st $100000 $70000 2nd $80000 $70000 3rd $60000 $70000 4th $40000 $70000 5th $20000 $70000
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Q2)Mike gives a non-refundable $100 to ACE adventure to reserve a raft for a group rafting trip in the New River. The raft has room for 5 people. He can only sell 3 tickets at $25 each for a total of $75. Should Mike cancel the trip? A) Yes, because he will lost $100. B) No, because he is making $75. C) Yes if Mike values going on the trip at less than $25. D) No, because losing $25 is better than losing $100. E) Yes, because he will lost $25 on the venture. Ans: D
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This is a question about opportunity cost . If Mike cancels the trip, he loses $100 and gets nothing. Hence, the net loss is $100. If the trip goes as planned, Mike loses $100, and gets $75 back. The net loss is $25. In other words, if he cancels, he loses $100; if he goes, he loses $25 only.
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As a rational economic agent, what would Mike choose? NOT to cancel the trip! Because losing $25 is better than losing $100 (D). The key word in the question is ‘non-refundable’. That means the $100 is already sunk. Mike would endeavour to recover as much money as possible from the venture.
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Q3) How many hours should IBM employ Pam to maximise its benefit from her employment? A) 1 hour. B) 2 hours. C) 3 hours. D) 4 hours. E) 5 hours. Ans:D
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This is a slightly tricky question. However, all we have to do is to apply the usual π-max principle: MR=MC. To summarise the information provided:
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This note was uploaded on 10/02/2011 for the course ECON 1001 taught by Professor S.c during the Spring '10 term at HKU.

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MidtermRev - ECON 1001 Midterm #1 Revision Q1) After paying...

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