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Five case studies in optimization theory

Using optimization theory, analyze the following quotations: a. The optimal number of traffic deaths in the United States is zero. b. Any pollution is too much pollution. c. We cannot pull U.S. troops out of Iraq. We have committed so much already. d. If Congress cuts out the NASA space station, we will have wasted all th

Optimal capital structure to minimize cost of capital

ROE Starsburg electronics has never used debt, but the treasurer is considering a possible change in the capital structure. For now, assume that only two financing options are being considered for a firm that currently has $200,000 in total assets â?" remaining at zero percent debt (i.e. $200,000 equity) or shifting to $1

Capital Budgeting: proposed acquisition of a new spectrometer for the firm

Capital Budgeting You have been asked by the President of your company to evaluate the proposed acquisition of a new spectrometer for the firmâ??s R&D department. The equipmentâ??s base price is $75,000 and it would cost another $15,000 to install it. The spectrometer falls under 3-year MACRS schedule and will be sold aft

Consumer theory: Budget lines and indifference curves

See the attached diagram. A consumer is in equilibrium at point A. The price of good X is $5. a) What is the price of good Y? b) What is the consumer's income? c) At point A, how many units of good X does the consumer purchase?

Marginal analysis and fixed & variable costs

Consider the following costs of owning and operating a car. A $25,000 Ford Taurus financed over 60 months at 7 percent interest means a monthly payment of $495.03. Insurance costs $100 a month regardless of how much you drive. The car gets 20 miles per gallon and uses unleaded regular gasoline that costs $3.50 per gallon. Fi

Impact of tax on price of land

Suppose that the current market rate of interest is 10 percent. The market rent of a parcel of land is $6,000 per year. A 10 percent land tax is imposed. As a result of the tax, the price of the land parcel: a. falls from $60,000 to $30,000. b. increases from $30,000 to $60,000. c. falls 10 percent. d. falls 20 percent.

Short-Run/Long-Run Costs and Output Decisions

Name a business (for example, a restaurant, book store, home supply store, etc.) Make a list of some of its fixed costs, and a second list of some of its variable costs. Why it is so important to differentiate between fixed and variable costs?

Taxpayer's Marginal Tax Rate (MTR)

A worker lives in a state that has its own income tax. The worker is in the 31 percent federal tax bracket. In addition, he is subject to a 9 percent MTR for his state income tax. Assume that mortgage interest is deductible both on his federal and state income tax, and that state income taxes are deductible on the federal inc

Corporate profit, tax liability, and average tax rate (ATR)

This problem deals with calculating a corporations total accounting profit and calculating its tax liability using a tax rate table. Also, calculate the average tax rate (ATR) of the corporation. A complete version of the question and a copy of the tax table to be used can be found at the pdf file attached to this problem.

Calculate present worth, future worth and annual worth

Which of the four projects listed blow would you choose if you only want to invest in one project if the criteria is a) Present Worth, b) Future Worth or c) Annual Worth? All projects are for five years and the risk-free interest rate is 10%. Invest $14,000 today and receive $25,000 in five years. Invest $10,000 today, rece

case study

Global Insurance is a disability insurance company. Traditionally, it has organized its corporate headquarters around functional specialties. After an application for an insurance policy arrives at headquarters from a field agent, it is processed through a series of functional departments. One department checks to see if th

Finance: Capital budgeting explained

A manufacturing company is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new pla

How the Congressional Budget Office DOESN'T Calculate GDP

Does the Congressional Budget Office calculate GDP by simply adding up the sales of all business firms in one year, in other words, do they add up all the transactions in an economy? Explain and justify your answer. Please provide examples to support your claim.

Compare insurance premiums. Predict which will be higher.

Life insurance companies require applicants to submit to a physical examination as proof of insurabiltiy prior to issuing standard life insurance policies. In contrast, credit card companies offer their customer a type of insurance called "credit life insurance" which pays off the credit card balance if the cardharolder dies. W

Substitution effect & income effect (with graphs)

Managers are very interested in how a consumer makes a choice among alternatives. In this exercise, we ask you to consider the amount of money you spend purchasing gasoline to operate your automobile for a month and any alternatives available to you assuming your net income available to make those purchases. Also assume gasoline

WAAC and Market Weights

Webster Company has compiled the information show in the following table. Source of Capital Book Value Market Value After-Tax Cost Long-Term Debt $4,000,000 $3,840,000 6.0% Preferred Stock 40,000 60,000 13.0% Common Stock Equity 1,060,000

Six common short-answer questions on economics tests, along with sample answers.

a. Describe an externality created by a firm in your state. b. What are the social costs associated with the externality? c. List three remedies that the federal, state, or local government could introduce to reduce the problem. d. Why is it important for a profit maximizing firm to consider market structure in determin

How adverse selection leads to market failure

One important case of market failure is caused by imperfect information. Adverse selection occurs when buyers and sellers have different amounts of information about the good for sale. A common example is when individuals have more information about an automobile. Give another example of adverse selection and describe at leas

Managerial Economics

Three college students consider the option of forming a lawn care and landscaping business during their summer vacation. They estimate the following costs: Insurance $2,600 Equipment Rental Fees 1,000 Fuel and Supplies $4 per lawn Miscellaneous

Keynsian economics within America's economic crisis

When the United States economy slides into a recession Keynsian economics states the government should engage in fiscal policy measures, tax reduction and spending, to help the economy recover. Would you advocate doing one, both, or neither?

problem 7.4 in Nicholson

This corresponds to problem 7.4 in Nicholson (notes are available online from the publisher, SW learning, but they are not necessary). Suppose there is a 50-50 chance that a risk-averse individual with a current wealth of $20,000 will contract a debilitating disease and suffer a loss of $10,000. A. Calculate the cost of ac

As vice president of sales for a rapidly growing company, you are grappling with the question of expanding the size of your direct sales force (from its current level of 60 national salespeople). You are considering hiring 5 to 10 additional personnel. How do you go about hiring.

As vice president of sales for a rapidly growing company, you are grappling with the question of expanding the size of your direct sales force (from its current level of 60 national salespeople). You are considering hiring 5 to 10 additional personnel. How would you estimate the additional dollar cost of each additional sale

Depreciation and amortization.

Pearson Brothers recently reported an EBITDA of $8.0 million and net income of $2.8 million. It had $2.88 million of interest expense, and its corporate tax rate was 30%. What was its charge for depreciation and amortization?

Insurance calculation: Auto insurance price prediction example

Consider a state in which automobile drivers are divided equally into two types of drivers: careful and reckless. The average annual auto-insurance claim is $400 for a careful driver and $1,200 for a reckless driver. Suppose that the state adopts an insurance system under which all drivers are placed in a common pool and allo

Typical Travelers and Taxes

A city has announced plans to widen a radial highway. The demand curve for the typical traveler is T=40 -P, where T is the number of trips per month and P is the cost per trip (in cents). For example, if the cost is 10 cents, the typical traveler will make 30 trips per month. If the new highway is built, the cost per trip would

NPV and IRR for Capital Budgeting in a Project

Coffee retailer Roasted Bean, is looking into expanding into the midwest by opening several new stores. The company spent $500,000 on a marketing study that suggested significant demand for the company's coffee products. You are asked to evaluate the project over a 5-year period. You estimate the cost of construction of $40 mill