8 athe robotics process entails higher fixed costs

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8. a.The robotics process entails higher fixed costs and lower variable (labor) costs. Therefore, this firm will perform better in a boom and worse in a recession. For example, costs will rise less rapidly than revenue when sales volume expands during a boom. b. Because its profits are more sensitive to the business cycle, the robotics firm will have the higher beta. 9. a.Housing construction (cyclical but interest-rate sensitive): (iii) Healthy expansion b. Health care (a non-cyclical industry): (i) Deep recession c.Gold mining (counter-cyclical): (iv) Stagflation d. Steel production (cyclical industry) (ii) Superheated economy 10. a. Oil well equipment: Relative decline (Environmental pressures, decline in easily-developed new oil fields) b. Computer hardware: Consolidation c. Computer software: Consolidation d. Genetic engineering: Start-up e. Railroads: Relative decline 11. a.General Autos. Pharmaceuticals are less of a discretionary purchase than automobiles. b. Friendly Airlines. Travel expenditure is more sensitive to the business cycle than movie consumption. 17-2
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Chapter 17 - Macroeconomic and Industry Analysis 12. The index of consumer expectations is a useful leading economic indicator because, if consumers are optimistic about the future, they will be more willing to spend money, especially on consumer durables, which will increase aggregate demand and stimulate the economy. 13. Labor cost per unit is a useful lagging indicator because wages typically start rising only well into an economic expansion. At the beginning of an expansion, there is considerable slack in the economy and output can expand without employers bidding up the price of inputs or the wages of employees. By the time wages start increasing due to high demand for labor, the boom period has already progressed considerably. 14. The expiration of the patent means that General Weedkillers will soon face considerably greater competition from its competitors. We would expect prices and profit margins to fall, and total industry sales to increase somewhat as prices decline. The industry will probably enter the consolidation stage in which producers are forced to compete more extensively on the basis of price. 15. a.Expected profit = Revenues – Fixed costs – Variable costs = $120,000 – $30,000 – [(1/3) × $120,000] = $50,000 b. 60 . 1 000 , 50 $ 000 , 30 $ 1 profits ts cos fixed 1 DOL = + = + = c.If sales are only $108,000, profit will fall to: $108,000 – $30,000 – [(1/3) × $108,000] = $42,000 This is a 16% decline from the forecasted value. d. The decrease in profit is 16%, which is equal to DOL times the 10% drop in sales. e.Profit must drop more than 100% to turn negative. For profit to fall 100%, revenue must fall by: % 5 . 62 60 . 1 % 100 DOL % 100 = = Therefore, revenue would be only 37.5% of the original forecast. At this level, revenue will be: 0.375 × $120,000 = $45,000 f. If revenue is $45,000, profit will be: $45,000 – $30,000 – (1/3) × $45,000 = $0 17-3
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Chapter 17 - Macroeconomic and Industry Analysis CFA PROBLEMS 1. a.Lowering reserve requirements would allow banks to lend out a higher fraction of deposits and thus increase the money supply.
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