Problem Set Seven Solutions
Chapter 9 1. Two car manufacturers, Saab and Volvo, have fixed costs of $1 billion and constant marginal costs of $10,000 per car. If Saab produces 50,000 cars per year and Volvo produces 200,000, calculate the average fixed cost and average total cost for each company. On the basis of these costs, which company’s market share should grow in relative terms? Answer: Average total cost is average fixed cost plus marginal cost: ATC = FC/Q + MC. Volvo’s average fixed cost $1 billion/200,000 = 5,000 is much less than Saab’s average fixed cost $1 billion/50,000 = 20,000 due to producing more cars. Volvo’s average production cost $15,000 is lower than Saab’s of $30,000 by the difference in average fixed costs. Volvo’s market share should grow relative to Saab’s.

6. What is the socially desirable price for a natural monopoly to charge? Why will a natural monopoly that attempts to charge the socially optimal price invariably suffer an economic loss? Answer: The socially desirable price to charge is the one at which the marginal benefit to consumers equals the marginal cost of production. However, natural monopolies usually have very large fixed costs and relatively low marginal costs. The high fixed costs mean that average cost is greater than marginal cost, so that charging a price equal to marginal cost implies economic losses.

8. Suppose that Aggieland Cinema is a local monopoly whose demand curve for regular adult tickets on Saturday night is P = 12 - 2Q, where P is the price of a ticket in dollars and Q is the number of tickets sold in hundreds. The demand for student tickets on Sunday afternoon is P = 8 - 3Q, and for regular adult tickets on Sunday afternoon, P = 10 - 4Q. On both Saturday night and Sunday afternoon, the marginal cost of an additional patron, student or not, is $2. a. What is the marginal revenue curve in each of the three markets? Answer: The marginal revenue curves are MR = 12 - 4Q adult Saturday night, MR = 8 -...

...ECON112 Macroeconomics ProblemSet 3 *Solution* Fall 2010 (Instructor: Li, Yao; TA: Fok Pik Lin, Astor)
-----------------------------------------------------------------------------------------------------------------------------------Posted: Monday, November 1, 2010 Due: 5:30 PM Monday, November 8, 2010 40 marks total
Part I: True/False/Uncertain Please justify your answer with a short argument for each question and
draw a diagram if necessary. (15 marks, 3 marks each: 1 mark for correct judgment and 2 marks for correct argument)
1. Suppose that workers in the Republic of Communia are highly unionized, while workers in the Republic of Individuela are not. In all other respects, the two countries are exactly the same. Then Communia is likely to have a higher natural level of output than Individuela. False. In our model of the labor market, the level of unionization is captured by the
Communia is likely to have a higher natural rate of unemployment than Individuela. Hence Communia is likely to have a lower natural level of output than Individuela.
1
2. Suppose there is a decrease in the price level from P to P’. Given the stock of nominal money, M, this leads to an increase in the real money stock, M/P, which shifts the LM curve down. This implies that the AD curve shifts to the right.
3. When output is below the natural level of output, the actual price level is lower than the expected price level. True. The...

...SOLUTIONS
Financial Management
Seminar + Homework, Week 5
1. Starware Software was founded last year to develop software for gaming applications. Initially, the founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified an interested venture capitalist. This venture capitalist will invest $1 million and wants to own 20% of the company after the investment is completed.
a. How many shares must the venture capitalist receive to end up with 20% of the company? What is the implied price per share of this funding round?
b. What will the value of the whole firm be after this investment (the post-money valuation)?
Answer:
a. After the funding round, the founder’s 8 million shares will represent 80% ownership of the firm. To solve for the new total number of shares (TOTAL):
8,000,000 = 0.80 TOTAL
So TOTAL = 10,000,000 shares. If the new total is 10 million shares, and the venture capitalist will end up with 20%, then the venture capitalist must buy 2 million shares. Given the investment of $1 million for 2 million shares, the implied price per share is $0.50.
b. After this investment, there will be 10 million shares outstanding, with a price of $0.50 per share, so the post-money valuation is $5 million.
2. Three years ago, you founded your own company. You invested $100,000 of your money and received 5 million shares of Series A preferred stock. Since then, your company has...

...Department of Economics University of California, Berkeley
Fall 2012 Econ 182
SolutionsProblemSet 8
Problem 1. Exchange Rates and International Transmission a. Suppose that the US engages in a monetary expansion. Since exchange rate is pegged to the US dollar, country X’s monetary authorities are forced to expand their money supply as well (recall that i = i* under FixER). Interest rates fall in country X, output expands, and of course the exchange rate remains unchanged. On the AA-DD diagram, both the AA and the DD schedules shift to the right. The shift in DD can be explained by the increase in US output which causes an increase in net exports of country X. In addition, smaller interest rates are known to increase investment, which can also explain the shift in DD. The case of monetary contraction is similar. Thus with fixed exchange rates, monetary shocks transmit positively from the US to country X.
b. Suppose now that the US aggregate demand increases. Perhaps fiscal policy in the US expands. An increase in the US aggregate demand increases US nominal rates and, with fixed exchange rates, forces monetary authorities in country X to contract the money supply (in order to keep i = i*). Monetary contraction in country X leads to a fall in output due to a decline in investment. Exchange rate of course is unchanged. In the AA-DD diagram, both AA and DD schedules shift to the left. The reverse argument...

...Me1
ProblemSet #2
The US College Enrollment and the “Third Law of Demand”
A theorem proposed by Professors Alchian and Allen in their text, University Economics (1964) has had several rebirths of interest in the literature. The so-called “third law of demand,” or “relative price theorem,” holds that a fixed cost added to a good of varying quality causes the consumer to prefer the category considered of higher quality to the lower.
Recently a number of studies, keeping this theorem in mind have looked into a relationship between the ratio of public to private enrollment and unemployment in cross-sectional as well as in time series data. Part of the full cost of participating in higher education is foregone employment income. In their regression model, these studies have regressed the public/private ENROLLMENT RATIO (as an indicator of relevant demand) against UNEMPLOYMENT RATES (as an indicator of cost) as well as a number of variables designed to account for “other things” which tend to vary at the same time, such as income, financial aid and tuition ratios. Tuition ratio is typically specified as the ratio of the full cost (including forgone employment income) of public higher education (Pa) to private higher education (Pb), where Pa is less than Pb.
In Table 1, below, a cross-sectional model reveals the relationships between relative education demands by public and private university students (as measured by state level ENROLLMENT...

...Yue
Office: KRAN B024A
Office Hours: Monday 12 noon-1 pm &Tuesday 9-10 am.
Phone: 496-1458 email: kyue@purdue.edu
Course goal: We provide a broad overview of the microeconomic aspects of the international economy. We emphasize the development of analytical tools. We also show how we can apply these tools to questions with real-world relevance.
Prerequisites:
Econ 251, Econ 252 (Principles of Microeconomics, Principles of Macroeconomics)
Textbook:
1. Feenstra and Taylor, “International Trade”, 2nd Edition. We follow the textbook very closely in class and cover about 70% of its contents.
2. Yeaple, Study Guide for Feenstra and Taylor’s International Trade, 2nd Edition. We take many practice problems from the Study Guide.
5 copies of the textbook (2nd edition) and 5 copies of the Study Guide (2nd edition) are on reserve at Parrish (the management-and-econ library).
Distribution of homework and other materials:
Katalyst - https://webapps.krannert.purdue.edu/kap/
Course Grades:
Quizzes (best 5 out of 6) 30%
Homework Assignments (best 3 of 4) 25%
Extra Credit Questions 10%
Midterm (in class) 20%
Final Exam 25%
Dates for Quizzes, Homework Assignments, Review Sessions and Exams:
These dates are fixed and will not change. See the class calendar.
Course Materials:
This should be regarded as a likely (but not 100%-certain) schedule as some topics may run shorter or longer than...

...
ProblemSet 2
Due Date: Oct31, Monday – between 9 & 11 AM in room S 2.132
Please keep a copy of your assignment and show all your work clearly.
(1) Mr. J. Bond, a retired movie actor, consumes only grapes and the composite good Y (i.e. price of Y is £1). His income consists of £10000 a year from his investment fund plus the proceeds of whatever he sells of the 2000 bushels of grapes he harvests annually from his vineyard in Tuscany. Last year, grapes sold at £2 per bushel and Bond consumed all 2000 bushels of his grapes, in addition to 10,000 units of Y. This year, the price of grapes is £3 per bushel (and the price of the composite good Y is the same as before). If Bond has well-behaved preferences, will his consumption of grapes this year be greater than, less than or the same as last year’s? How about his consumption of the composite good? (Hint: Graph both years’ budget constraints and think about whether last year’s bundle is affordable to Mr. R).
(2) Suppose Carmela’s income is £100 per week, which she allocates between sandwiches and books. Sandwiches cost £2 each. Books cost £10 each if she purchases between 1 and 5 books. If she purchases more than 5 books in a week, the price falls to £5 for the 6th book and all subsequent books. Draw the budget constraint. Is it possible that Carmela might have more than one utility-maximizing...

...Energy
1. A man climbs on to a wall that is 5 m high and gains 2200 J of potential energy. What is the mass of the man?
Given: Formula:
h = 5 m m = PE/gh
PE = 2200 J
Solution:
m = 2200 J / (9.8 m/s2 x 5 m)
m = 49 kg
2. Calculate the kinetic energy of a 500 kg car travelling at 50 m/s.
Given: Formula:
m = 500 kg KE = mv2/2
v = 50 m/s
Solution:
KE = 500 kg x (50 m/s)2 / 2
KE = 625 000 J
Power
3. Riley climbs a flight of stairs in 3 minutes. If he weighs 700 N and the stairs is 20 m from the ground, how much power will she develop?
Given: Formula:
t = 3 mins = 180 s P = Wd/t
W = 700 N
d = 20 m
Solution:
P = 700 N x 20 m / 180 s
P = 77.8 J/s
4. How much power is developed by a car that runs 80 m/s when the force is equal to 50 000 N.
Given: Formula:
V = 80 m/s W = Fv
F = 50 000 N
Solution:
W = 50 000 N x 80 m/s
W = 4 000 000 J/s
Electricity
5. Charges of 6 and + 4 nC are 3 m apart. Determine the force they exert on each other, and the electric field at a point midway between them.
Given: Formula:
k = 9 x 109 Felec = k q1 q2 /r2
q1 = 6 x 109 C
q2 = 4 x 109 C
r = 3 m
Felec = (9 x 109)(6 x 109)(4 x 109)/32
Felec = 24 x 109 N
6. A 50 cm piece of nichrome wire is used in a home heating element. The cross sectional area of the wire is 0.05 mm2. What is the resistance of the heating...

...BE 13.8
Vertical analysis (common-size) percentages for Vallejo Company’s sales, cost of goods sold, and expenses are listed below:
VERTICAL ANALYSIS 2012 2011 2010
Sales 100.0% 100.0% 100.0%
Cost of goods sold 60.5 62.9 64.8
Expenses 26.0 26.6 27.5
Net Income 13.5 10.5 7.7
Did Vallejo’s net income as a percent of sales increase, decrease, or remain unchanged over the 3 year period. Provide numerical support for your answer.
Sales – Cost of Goods Sold – Expenses = Net Income
100 – 64.8 – 27.5 = 7.7 for 2010
100 – 62.9 – 26.6 = 10.5 for 2011
100 – 60.5 – 26.0 = 13.5 for 2012
During the 3 year period of 2010-2012, the net income increased as a percent of sales for the Vallejo Company due to the decrease as a percent of sales in both the cost of goods sold and expenses every year.
BE 13.9
Horizontal analysis (trend-analysis) percentages for Spartan Company’s sales, cost of goods sold, and expenses are listed below:
VERTICAL ANALYSIS 2012 2011 2010
Sales 96.2% 104.8% 100.0%
Cost of goods sold 101.0 98.0 100
Expenses 105.6 95.4 100
Net Income (110.4) (88.6) 0
Explain whether Spartan’s net income as a percent of sales increase, decrease, or remain unchanged over the 3 year period.
Sales – Cost of Goods Sold – Expenses = Net Income
100 – 100 – 100 = 0.0 for 2010
104.8 – 98.0– 95.4 = -88.6 for 2011
96.2 – 101.0 – 105.6 = -110.4 for 2012
In 2010, the net income for the Spartan Company is 0. In 2011, the company’s net income decreased as a percent of...

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