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Question 1
A. Identify each of the following as either a positive or a normative economic statement: a. The high temperature today was 37 degrees.
b. It was too hot today.
c. Other things being equal, higher interest rates reduce the total amount of borrowing. d. Interest rates are too high.

B. In order to attract Muro John to the position of CEO of GMO Tz Seed Company Inc. Muro is given the following package (a) a signing bonus of $200,000. (b) In addition to his salary Muro will be paid a bonus of $200,000 in any year that company return on assets exceeds 6.5%. Also (c) Muro receives 500 shares per annum of the stock, which he may not sell for 5 years. Comment on the likely effectiveness of each of these components of as a means to mitigate the principle-agent problem (you need to understand the meaning of this). Indicate which is the mostly likely chosen option and the least likely and reasons behind your answers.

Question 2

Kahima’s Incorporated anticipates the following earnings for the next 5 years.

|Years in the Future |Anticipated Profit | |1 |22 | |2 |24 | |3 |26 | |4 |28 | |5 |30 | | | |

Suppose that the discount rate is 10% and that the production machine costs $90 (000), what is the net present value of the machine? Is it a good purchase?

Question 3

Liwenga has the opportunity to operate a business renting portable kiosks during NaneNane’s annual event. He will operate the business for 3 months. Looking at weather patterns, Liwenga observes that rain is frequent during that time, and on average, there are only 60 rentable days only instead of 90. In each of these days, Liwenga believes he can rent 40 kiosks per day at $7 per rental. Liwenga will run the business by himself day, and must pay Sabasaba Ground Enterprises $9,000 for the business (the use of the movable kiosks and for the rental location). Suppose Liwenga could earn $4500 working on construction site.

a. What are Liwenga’s Accounting Profits for undertaking the business? What are his Economic Profits

b. Can Liwenga expect economic profits from the venture? If so, to what are these profits attributable?

B. Muro runs a small studio business. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his studio, and materials cost $20,000 per year. Muro has $40,000 of his own funds invested in equipment (cameras, printers, and so forth) that could earn him $4,000 per year if alternatively invested. Muro has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3,000 per year. Total annual revenue from studio products sales is $72,000. Calculate accounting profits and economic profits for Muro’s studio.

C. How do the concepts of accounting profits and economic profits differ? Why are economic profits smaller than accounting profits? What are the three basic sources of economic profits?

Classify each of the following in accordance with these sources: a. A firm’s profits from developing and patenting a new medication that greatly reduces cholesterol and thus diminishes the likelihood...
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