Economics Solutions

1. Suppose a firm’s current profit is $80 million, the interest rate is 6%, and the expected

growth rate of the firm’s profit is 5%.

a. What is the value of the firm if it continues for 3 years? (Answer: $315.5

million)

b. What is the value of the firm if it continues for ever? (Answer: $8,480

million)

c. What is the value of the firm on the ex-dividend date if it pays it current profit

as dividend and continues for ever? (Answer: $8,400 million)

2. Suppose a firm’s current profit is $50 million and interest rate is 4%.

a. What is the value of the firm if it continues for 3 years with no growth in

profit? (Answer: $188.8 million)

b. What is the value of the firm if it continues for 3 years with 3% annual growth

in profit? (Answer: $197.1 million)

c. What is the value of the firm if it continues for ever with 3% annual growth in

profit? (Answer: $5,200 million)

3. Suppose total benefits and total costs are given by B(Y) = 90Y - 4Y2 and C(Y) = 5Y2.

a. What is the marginal benefit? (Answer: 90 - 8Y)

b. What is the marginal cost? (Answer: 10Y)

c. What is the value of Y that maximizes net benefits? (Answer: 5)

d. What is the maximum level of net benefits? (Answer: 225)

4. Suppose total benefits and total costs are given by B(Y) = 50Y - 6Y2 and

C(Y) = 10Y + 4Y2.

a. What is the marginal benefit? (Answer: 50 - 12Y)

b. What is the marginal cost? (Answer: 10 + 8Y)

c. What is the value of Y that maximizes net benefits? (Answer: 2)

d. What is the maximum level of net benefits? (Answer: 40)

5. Suppose the generalized demand function for good X is given by Qd = 20 - 4Px + 2Py

+ M. The price of good Y is $15, and income is $150.

a. What is the demand function for good X? (Answer: Qd = 200 - 4Px)

b. What is the inverse demand function for good...