Problem set for week 3

Question 1

1. If MC=$5 and FC/Q=15, then AC=
   a. $15
   b. $5
   c. $20
   d. $10

Answer 1

C

Question 2

2. Which of these is a variable cost for a restaurant that is already set up and running?
   a. Insurance against damages on the rental space
   b. Rent for dining space
   c. Wages for the servers
   d. Tax accountant’s salary

Answer 2

C

Question 3

6. Managers undertake an investment only if
   a. Marginal revenue is greater than zero
   b. Marginal costs are greater than marginal revenue
   c. Marginal revenue is greater than marginal costs
   d. Investment decisions do not depend on marginal analysis

Answer 3

C

Question 4

7. The higher the interest rate
   a. the more value individuals place on future dollars
   b. the more value individuals place on current dollars
   c. individuals do not place any importance on either current or future dollars
   d. does not affect the investment strategy

Answer 4

B

Question 5

8. A publisher is deciding whether or not to invest in a new printer. The printer would cost $900, and
   would increase the cash flows in year 1 by $500 and in year 3 by $800. Cash flows do not change in
   year 2. If the interest rate is 12%, what is the present value of the cash flows from the investment?
   a. $155.59
   b. $1015.85
   c. $1076.56
   d. $346.78

Answer 5

B

Question 6

9. If the interest rate is 11%, $1500 received at the end of 12 years is worth how much today?
   a. 1500*(1+0.11)^12
   b. 1500/(1 +0 .11)^12
   c. 1500/(1 + 11)^12
   d. 1500

Answer 6

B

Question 7

10. A cloth manufacturing firm is deciding whether or not to invest in new machinery. The machinery
    costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second
    year by $30,000. The firm’s current fixed costs are $9,000 and current marginal costs are $15. The
    firm currently charges $18 per unit. If the interest rate is 5% then the net present value of the project is
    a. $6,020.41
    b. $51,020.41
    c. -$7,380.95
    d. $10,000

Question 8

a. Explain the problem of post-investment hold-up, also known as ‘the hold-up problem’

Answer 8

The hold-up problem occurs when a business must incur a sunk cost in order to
fulfil its side of a business deal.