Week1Managerial - Caroline Herring and Laura Anders...

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Caroline Herring and Laura Anders Managerial Economics Ch 1 2. What is the maximum amount you would pay for an asset that generates an income of $150000 at the end of each of five years if the opportunity cost of using funds is 9 percent? PV= 150,000 + 150,000 + 150000 + 150000 + 150000 = $583,447 1.09 1.09 2 1.09 3 1.09 4 1.09 5 5. What is the value of a preferred stock that pays a perpetual dividend of $75 at the end of each year when the interest rate is 4 percent? PV perpetual bond = CF/I 75/.04= $1875 6. Complete the following table and answer the accompanying questions N(Q)= B(Q)- C (Q) MNB (Q) = MB(Q)- MC (Q) Control Variable Q Total Benefits B(Q) Total Cost C(Q) Net Benefits N(Q) Marginal Benefit MB(Q) Marginal Cost MC(Q) Marginal Net Benefit MNB(Q) 100 1200 950 250 210 40 170 101 1400 1000 400 200 50 150 102 1590 1060 530 190 60 130 103 1770 1130 640 180 70 110 104 1940 1210 730 170 80 90 105 2100 1300 800 160 90 70 106 2250 1400 850 150 100 50 107 2390 1510 880 140 110 30 108 2520 1630 890 130 120 10 109 2640 1760 880 120 130 -10 110 2750 1900 859 110 140 -30 a) At what level of the control variable are net benefits maximized? Net benefits are maximized at level Q= 108, N(Q)=890. b) What is the relation between marginal benefit and marginal cost at the level of the control variable? Marginal Benefits almost equal Marginal Cost at Q= 108. There is a MNB of 10 at this
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Week1Managerial - Caroline Herring and Laura Anders...

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