Assignment 2 PDF

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Enrique Rodriguez ECON 5310 Dr. Verma Week 2 Assignment 1. Suppose an initial investment of $100 will return $50/year for three years (assume the $50 is received each year at the end of the year). Is this a profitable investment if the discount rate is 20%? -100 + (50/1.2) + (50/1.2^2) + (50/1.2^3) -100 + 41.67 + 34.72 + 28.94 = 5.33 Net Present Value = $5.33 If the discount rate is 20% then this would be a profitable investment because it has a positive Net Present Value. 2. In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will only be able to sell 20,000 room-nights that cost on average $50 per room per night to service. You spent $20 million on the hotel in 2008, and your cost of capital is 10%. The current going price to sell the hotel is $15million. What is your breakeven price? 20,000,000 + (20,000*50) + (20,000,000*.10) 23,000,000 – 15,000,000 8,000,000 20,000*X – 8,000,000 = 0 20,000*X = 8,000,000 X = 400 So, the breakeven price for a room is $400. 3. George has been selling 5,000 T-shirts per month for $8.50. When he increased the price to $9.50 he sold only 4,000 T-shirts. What is the demand elasticity? If his marginal cost is $4 per shirt, what is his desired markup and what is his initial actual markup? Was raising the price profitable? ((5,000 - 4,000)/(5,000 + 4,000)) / ((8.5 - 9.5)/(8.5 + 9.5)) (1000/9000) / (-1/18) .11/-.056 Demand Elasticity = -1.964 1/-1.964 Desired markup = -0.5092 (8.5 - 4)/8.5 4.5/8.5 Initial actual markup = 0.5294 The demand elasticity is -1.964. His actual margin was already larger than his desired margin; in this case he would decrease his profits by raising his price. 4. Suppose there are 10 individuals with values as follows: {10, 8, 8, 8, 8, 8, 8, 4, 0, 0}. Construct a demand schedule (table), and calculate the marginal revenue of the second unit sold.

Price 10 8 4 0

Qty 1 7 8 10

Rev 10 56 32 0

MR 10 7.67 -24

The marginal revenue for the second unit sold is $7.67....