1. Approximately 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these addicts cost the U.S. economy $300 billion in medical expenses and lost productivity. Despite the enormous potential market, many biotech companies have shied away from funding research and development (R&D) initiatives to find a cure for drug and alcohol addiction. Your firm – Drug Abuse Sciences (DAS) – is a notable exception. It has spent $170 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $30 million today. Unfortunately, the firm’s opportunity cost of funds is 7 percent and it will take another five years before final approval from the Federal Drug Administration is achieved and the product is actually sold. Expected (year-end) profits from selling the drug are presented in the accompanying table.
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Year 9 |
|
$0 |
$0 |
$0 |
$0 |
$15,000,000 |
$16,500,000 |
$18,150,000 |
$19,965,000 |
$21,961,500 |
What is the net present value of the project?
Instruction: Round your answer to the nearest penny (2 decimal places). Use a negative sign (-) where appropriate.
$
If the firm prices below $140, revenue will:
b. What is the own price elasticity of demand when Px = $240? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price above $240?
Instruction: Round your response to 1 decimal place.
Own price elasticity:
If the firm prices above $240, revenue will:
c. What is the cross-price elasticity of demand between good X and good Z when Px = $140? Are goods X and Z substitutes or complements?
Instruction: Round your response to 2 decimal places.
Cross-price elasticity:
6. You are an assistant to a senator who chairs an ad hoc committee on reforming taxes on telecommunication services. Based on your research, AT&T has spent over $15 million on related paperwork and compliance costs. Moreover, depending on the locale, telecom taxes can amount to as much as 25 percent of a consumer’s phone bill. These high tax rates on telecom services have become quite controversial, due to the fact that the deregulation of the telecom industry has led to a highly competitive market. Your best estimates indicate that, based on current tax rates, the monthly market demand for telecommunication services is given by Qd = 250 – 5P and the market supply (including taxes) is QS = 3P – 110 (both in millions), where P is the monthly price of the telecommunication services.
The senator is considering tax reform that would dramatically cut tax rates, leading to a supply function under the new tax policy of QS = 3.5P – 110. How much money per unit would a typical consumer save each month as a result of the proposed legislation?
Instruction: Round your answer to the nearest penny (2 decimal places).
$
What price should BAA charge for runway slots between July and September?
£
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18. A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms. One firm produces an unreliable product and the other a reliable product. At the time of the sale, the consumer is unable to distinguish between the two firms’ products. From the consumer’s perspective, there is an equal chance that a given firm’s product is reliable or unreliable. The maximum amount this consumer will pay for an unreliable product is $0, while she will pay $100 for a reliable product. |
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a. |
Given this uncertainty, what is the most this consumer will pay to purchase one unit of this product? |
$[removed]
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b. |
How much will this consumer be willing to pay for the product if the firm offering the reliable product includes a warranty that will protect the consumer? |
$[removed]
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19 As the manager of Smith Construction, you need to make a decision on the number of homes to build in a new residential area where you are the only builder. Unfortunately, you must build the homes before you learn how strong demand is for homes in this large neighborhood. There is a 60 percent chance of low demand and a 40 percent chance of high demand. The corresponding (inverse) demand functions for these two scenarios are P = 300,000 – 400Q and P = 500,000 – 275Q, respectively. Your cost function is C(Q) = 140,000 + 240,000Q. |
How many new homes should you build, and what profits can you expect?
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Number of homes you should build: |
[removed] homes |
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Profits you can expect:
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