Assignment 2 – covers chapters 10, 11, & 17
Chapters 12 & 14 covered in Extra Credit.
Make sure to show and explain your approach. No credit will be given for answers that do not explain
and justify their approach.
Question 1. Dr. Miller’s Random Company sells its output in a perfectly competitive market. The firm's
total cost function is given in the following schedule:
Output
(Units)
0
10
20
30
40
50
60 Total Cost
($)
100
240
340
420
520
660
860 Total costs include a "normal" return on the time (labor services) and capital that the owner has invested
in the firm. The prevailing market price is $14 per unit.
a. Compute the marginal cost curve.
b. Compute the average total cost schedules for Dr. Miller’s Random Company.
c. Is the industry in long-run equilibrium? Justify your answer.
Question 2.
The elasticity of sweaters for pet duck-billed platypus is -1.57 in the Canada. In Australia, the elasticity of
these sweaters is -3.64. However, Canadian sweaters have to be warmer, so the marginal cost is $20,
while it’s only $15 for the Australian sweaters. Calculate the profit maximizing price in each market.
Question 3.
The Potato Cannon manufactures and sells a line of potato-based self-defense home security systems.
Demand per period (Q) for a particular model is given by the following relationship:
Q = 500.4P
where P is price. Total costs (including a "normal" return to the owners) of producing Q units per period
are:
TC = 20,000 + 50Q + 3Q2
(a)
(b)
(c) Express total profits () in terms of Q.
At what level of output are total profits maximized? What price will be charged? What
are total profits at this output level?
What model of market pricing has been assumed in this problem? Justify your answer. Question 4 – Answer this in Excel. Use formulas to show your work and separate cells to answer the
question. Submit the Excel file with the Word document with the answers to other questions.
Lucky Lion Corporation is considering the purchase of a football-making machine for which the initial
cash outlay will be $95,000. Predicted net cash inflows before depreciation and taxes are $22,000 per year
for the next five years. The machine will be depreciated (using the straight-line method) over the 5-year
period with a zero estimated salvage value at the end of the period. The corporation's marginal tax rate is
38 percent and its cost of capital is 12 percent.
(a)
(b)
(c)
(d) Determine the annual net cash flow after depreciation and taxes for years 1-5.
Determine the internal rate of return.
Determine the net present value.
Should Lucky Lion Corporation purchase the machine? Why or why not? Question 5 – Read the article from the LA Times, “Why throw money at defense when everything is
falling down around us.”
The article is two years old, but since we are still discussing infrastructure and military spending, I believe
it’s still relevant. Explain how decisions about cost of capital affect the calculus of deciding if projects are
worthwhile expenditures of public funds. Without stating an actual value, compare and contrast two
different types of public capital expenditures. Would you use a higher cost of capital for one of the
projects than for the other? Why? As you answer this question, remember that I will grade you based
on how well you demonstrate your understanding of the material from the text.
Submit the exam in the dropbox, which will submit your response to turnitin to check for originality.
Please let me know if you have questions.

• 1499835383-Assignment 2 SummI Econ 562 1.docx
• 1499835387-Why throw money at defense when everything is falling down around us_ - LA Times.pdf

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