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Question
The Clemson Manufacturing Corp. engineers have estimated that a new factory can be constructed for the manufacture of hydraulic valves and fittings. Two different technologies, A and B, have been considered in the manufacturing process. The costs of the factory and annual earnings are given below for both technologies.Capital Costs Earnings
(in $millions) (in $millions)
End of the Year A B A B
0 $10 $15 $0 $0
1 10 10 -1 0
2 10 0 1 2
3 0 0 5 10
4 0 0 10 10
5 0 0 20 10
At the end of five years, technology A will have a scrap value of one million dollars, and technology B will have a scrap value of 5 million dollars. Assume that these two projects are equally risky and the appropriate discount rate is 10 percent per year. Calculate the net present value of each of these factories. Determine if either or both would be feasible. Does it matter whether or not real or nominal terms are used for capital costs, cash flows, and discount rate? Explain.
Answer
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Related questions
Q:
Your firm is evaluating a potential investment in new machinery, but the manager in charge of the project uses an opportunity cost of capital that is too large. How does this error affect the projected net present value of the firm's investment?
A) NPV is overstated
B) NPV is understated
C) NPV is unaffected
D) NPV changes from positive to negative
Q:
For net present value calculations, the rate of return that one could earn by investing in another project with similar risk is known as the:
A) real interest rate.
B) nominal interest rate.
C) prime interest rate.
D) opportunity cost of capital.
Q:
If the inflation rate falls and nominal interest rates are unchanged,
A) inflation will fall.
B) inflation will continue at the same rate.
C) real interest rates rise.
D) real interest rates are unaffected.
E) real interest rates fall.
Q:
If an individual has $10,000 in a savings account paying 3% and the inflation rate is 2%, the nominal interest rate is
A) 3% and the real rate is 5%.
B) 5% and the real rate is 7%.
C) 5% and the real rate is 3%.
D) 3% and the real rate is 1%.
E) 5%.
Q:
The real interest rate is
A) the nominal rate plus the rate of inflation.
B) the nominal rate minus the rate of inflation.
C) the nominal rate divided by the rate of inflation.
D) the nominal rate multiplied by the rate of inflation.
E) the nominal rate.
Q:
The first term in an NPV calculation is usually
A) positive, because firms consider only positive returns.
B) positive, because interest charges do not accrue until the second period.
C) zero, because interest charges do not accrue until the second period.
D) negative, because funds for the project have to be borrowed up front before it is begun.
E) negative, because the cost of the project is immediate, but revenue streams from the project come later.
Q:
The "NPV Criterion" is that a firm should invest in a new capital project if
A) the present value of the expected future cash flows is larger than the present value of the cost of the investment.
B) the future value of the expected future cash flows is larger than the cost of the investment.
C) financing can be secured on the basis of new bonds.
D) financing can be secured on the basis of new stocks.
E) financing is not necessary because there are enough liquid assets in the company's portfolio to afford the investment.
Q:
Which of the following is NOT a factor that has contributed to declining private-sector differential between union and nonunion wages in the U.S. since 1980?
A) Globalization of the production process
B) Improved ability of firms to substitute capital for labor in production
C) Adoption of two-tiered wage and benefit structures by unionized firms
D) Declines in the unemployment and health insurance premiums paid by union workers
Q:
Suppose a labor market has perfectly inelastic supply that is composed of union and non-union workers, and both groups of workers initially earn the perfectly competitive wage. What happens to the equilibrium employment level and wage for non-union workers if the union exercises its bargaining power?
A) Both increase.
B) Employment increases and wage declines.
C) Wage increases and employment declines.
D) Both decline.
Q:
Suppose a labor market has perfectly inelastic supply that is composed of union and non-union workers, and both groups of workers initially earn the perfectly competitive wage. What happens to the equilibrium employment level and wage for union workers if the union exercises its bargaining power?
A) Both increase.
B) Employment increases and wage declines.
C) Wage increases and employment declines.
D) Both decline.
Q:
Figure 14.4Given the information in Figure 14.4, the monopsony wage rate is:A) W1.B) W2.C) W3.D) W4.E) none of the above
Q:
Figure 14.3A labor union is exercising monopoly power in the labor market.Refer to Figure 14.3. To maximize total wages paid to workers, the labor union will agree to wage rate:A) W0.B) W1.C) W2.D) W3.E) none of the above
Q:
An example of monopoly power in input markets is
A) major league baseball owners in the market for player services.
B) the United Auto Workers union in the market for auto worker services.
C) OPEC in the market for crude oil.
D) all of the above
Q:
Who does NOT earn economic rent in a competitive factor market?
A) No one
B) Everyone
C) The last factor of production hired
D) The inframarginal workers
E) Only owners of physical properties earn economic rents
Q:
Scenario 14.4:
John's firm is a competitor in your product market and a monopsonist in the labor market. The current market price of the product that your firm produces is $2. The total product and marginal product of labor are given as:
TP = 100L - 0.125L2 MP = 100 - 0.25L
where L is the amount of labor employed. The supply curve for labor and the marginal expenditure curve for labor are given as follows:
L = PL -5 MEL = 2L + 5
Refer to Scenario 14.4. Suppose that a tax is imposed on each unit of the product that John produces. Which curve will shift?
A) Marginal product of labor
B) Marginal revenue product of labor
C) The supply of labor
D) All of the above will shift due to the tax on output.
Q:
In a competitive labor market, the supply of labor curve is expressed as:AE = $5 + 0.0025L,where AE represents the average expenditure ($/unit) and L represents units of labor hired per unit of time. The demand for labor is based on the following expression:MP = 5 - 0.001L,where MP represents marginal product of labor. Revenue from the final good is $5 per unit sold in a competitive market.a. Determine the equilibrium wage rate and labor employment rate.b. Compute the economic rent earned by labor.
Q:
Suppose the supply and demand of land for natural gas extraction are imperfectly elastic. Given that coal is a potential substitute for natural gas in energy applications, a change in the price of coal may shift the demand curve for natural gas. What happens to the economic rents assigned to land on which natural gas is extracted if the price of coal declines?
A) Rents increase
B) Rents are positive and remain unchanged
C) Rents decrease
D) Rents are zero before and after the change
Q:
Under an upward sloping supply curve for land, the economic rents to land ________ as the demand for land shifts rightward.
A) decrease
B) increase
C) remain the same
D) We do not have enough information to answer this question.
Q:
Which of the following is NOT true about the supply of labor to the firm in a competitive labor market?
A) It is horizontal.
B) It is perfectly elastic.
C) It is equal to the marginal expenditure curve.
D) It is upward sloping.
Q:
Use the following statements to answer this question:
I. Under profit maximization, the quantity of labor used in production is optimal if MR = w/MPL.
II. The expression MR = w/MPL implies that the revenue earned from the last unit of output produced equals the marginal cost of the last unit of output.
A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
D) I and II are false.
Q:
Scenario 14.3:Suppose that a firm's demand curve for its product is as follows: Output Price of the Good 25 9 40 8 54 7 67 6 79 5 90 4Also suppose that labor is the only variable input of production, and that the total product of labor is: Amount of Total Output Labor 2 25 3 40 4 54 5 67 6 79 7 90Refer to Scenario 14.3. What is the marginal profit from hiring the third unit of labor?A) 30B) 65C) 85D) 225E) none of the above
Q:
Scenario 14.3:Suppose that a firm's demand curve for its product is as follows: Output Price of the Good 25 9 40 8 54 7 67 6 79 5 90 4Also suppose that labor is the only variable input of production, and that the total product of labor is: Amount of Total Output Labor 2 25 3 40 4 54 5 67 6 79 7 90Given the data in Scenario 14.3, how much labor should the firm employ if labor costs $30 a unit?A) 3 units of laborB) 4 units of laborC) 5 units of laborD) 6 units of laborE) 7 units of labor
Q:
The Acme Company is a perfect competitor in its input markets and its output market. Its average product of labor is 30, the marginal product of labor is 20, the price of labor is $20, and the price of the output is $5. For Acme Company, the marginal revenue product of labor
A) is $100.
B) is $150.
C) is $400.
D) is $600.
E) cannot be determined with the information provided.
Q:
Figure 14.1A consumer's original utility maximizing combination of income and leisure is shown in the diagram above as point A. After a wage increase, the consumer's utility maximizing combination changes to point C.Refer to Figure 14.1. The substitution effect of the wage increase on the amount of hours of leisure is:A) L1 to L0B) L1 to L2.C) L0 to L2.D) L0 to L1.E) none of the above
Q:
A firm purchases a factor of production in a competitive market. At the current purchase rate the MRP of the factor is greater than the marginal expenditure for the factor. Thus, the firm
A) can increase profit by reducing the employment of the factor of production.
B) is now maximizing profit.
C) should not use this factor of production because it has no potential in generating a profit.
D) can increase profit by expanding the employment of the factor of production.
Q:
An increase in technology that enhances labor productivity will likely result in:
A) a decrease in labor employment and an increase in the wage rate.
B) an increase in labor employment and an increase in the wage rate.
C) a decrease in labor employment and a decrease in the wage rate.
D) an increase in labor employment and a decrease in the wage rate.
E) employers using less labor and more capital while the wage effect is unknown.
Q:
Scenario 14.2:A firm can hire labor at the minimum wage of $4.25 per hour. Assume that labor works 8 hours a day. The firm's production function is as follows:Number of Days Number of Units of Labor of Output 0 0 1 8 2 15 3 21 4 26 5 30Refer to Scenario 14.2. What is the average product of the 4th worker?A) 4B) 5C) 6D) 6.5E) 7
Q:
If leisure is a normal good, then the income effect of a decrease in wage will
A) decrease the number of hours worked.
B) increase the number of hours worked.
C) decrease the number of leisure hours.
D) increase the sum of leisure plus hours worked.
Q:
The marginal revenue product can be expressed as the
A) additional revenue received from selling one more unit of product.
B) increment to revenue received from one additional unit of input hired.
C) marginal physical product of an input times the average revenue received from the sale of the product.
D) average physical product of the input times the marginal revenue received from the sale of the final product.
Q:
The widget market is controlled by two firms: Acme Widget Company and Widgetway Manufacturing. The structure of the market makes secret price cutting impossible. Each firm announces a price at the beginning of the time period and sells widgets at the price for the duration of the period. There is very little brand loyalty among widget buyers so that each firm's demand is highly elastic. Each firm's prices are thus very sensitive to inter-firm price differentials. The two firms must choose between a high and low price strategy for the coming period. Profits (measured in thousands of dollars) for the two firms under each price strategy are given in the payoff matrix below. Widgetway's profit is before the comma, Acme's is after the comma. a. Does either firm have a dominant strategy? What strategy should each firm follow?
b. Assume that the game is to be played an infinite number of times. (Or, equivalently, imagine that neither firm knows for certain when rounds of the game will end, so there is always a positive chance that another round is to be played after the present one.) Would the tit-for-tat strategy would be a reasonable choice? Explain this strategy.
c. Assume that the game is to be played a very large (but finite) number of times. What is the appropriate strategy if both firms are always rational?