(a)Suppose we have preferences U(X, Y) = min [X, ½Y]. Graph/sketch the indifference curve through the bundle X = 10 and Y = 10. What is the utility and explain why it looks the way it does
.The indifference curve for the given preference U(X, Y) = min [X, ½Y] is a right angle at the point (10, 10) which intersects the X and Y axis at (10,0) and (0,20) respectively. The utility from the bundle (10,10) is 10. The indifference curve looks like this: (b) Why is the concept of Marginal Rate of Substitution not relevant with these preferences?With the given preference function, MRS is not defined. This is because the slope of the indifference curve is undefined at any point. Thus, MRS is not relevant for these preferences.
(c) What do we mean by a composite good? What does this composite good look like with these preferences? Show and explain.A composite good is a good which is a bundle of all goods in the economy. The price of the composite good is the total expenditure on goods in the economy. In this preference, composite good is a bundle of X and Y goods. It can be represented as C = X + 2Y where the price of composite good is the total expenditure which is equal to Px*X + Py*Y = 10X + 20Y.
(d) Suppose the consumer wanted to maximize utility subject to their budget constraint. State the consumer’s maximization problem and express this in words.The consumer's maximization problem is to choose the optimal bundle of X and Y that maximizes his/her utility given his/her budget constraint. Mathematically, it can be expressed as:Maximize U(X,Y) = min(X,0.5Y)Subject to Px*X + Py*Y = Mwhere M is the consumer's income and Px and Py are the prices of X and Y respectively.(e) Let U(X, Y) = min [X, ½Y] and Px = 10, Py = 20 and income M = 1000. Find optimal X, Y, and the resulting UtilityTo find the optimal X and Y, we use the Lagrangian method:L = min(X, 0.5Y) + λ(M - Px*X - Py*Y)Differentiating with respect to X and Y, we get:dL/dX = 1 - λPx = 0dL/dY = 0.5 - λPy = 0dL/dλ = M - Px*X - Py*Y = 0Solving the equations, we get the optimal values:X = 20, Y = 40 and the resulting utility = U(20,40) = min(20, 20) = 20(f)
Now let Px = 12. How does optimal consumption and utility change? Explain in simple terms. When Px increases from 10 to 12, the budget constraint becomes steeper. Thus, the slope of the indifference curve at the point (20, 40) becomes flatter than the slope of the budget constraint. Therefore, the consumer will shift his/her consumption from Y to X. This means that the optimal consumption of X will increase and the optimal consumption of Y will decrease.
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Mcdonald’s, a big burger joint, is charging $6 for its very famous Big Mac hamburger and selling around 20 million Big Mac in a year in Australia.
Suppose Mcdonald’s increases the price of its Big Mac to $6.50. Consequently, quantity sold of the Big Mac falls to 17 million. How much revenue will Mcdonald’s gain? What can you infer about the price elasticity of demand (PED) for Mcdonald’s Big Mac? Assume in an alternative scenario, the increase in the price of Big Mac to $ 6.5 reduces its quantity sold to 19 million. How much revenue will Mcdonald’s gain now? What can you conclude about the PED now?
Given the two scenarios presented in part a, which one do you think is more likely and why? Present evidence in 100 words or less to support your prediction.
Suppose Mcdonals’s Big Mac and movie tickets have negative cross price elasticity of - 0.8. What does this number tell us on the relationship between the Big Mac and movie tickets? Suppose, The Village Cinemas, Australia’s leading cinema exhibitor, decides to increase the price of its movie tickets by 10%. How will this development affect McDonald’s pricing decisions as indicated in part (a)? Discuss both the scenarios (as presented in part (a)) in 200 or less words.
If Mcdonald's increases the price of the Big Mac from $6 to $6.50, the quantity sold of the Big Mac will fall to 17 million. The revenue gained by Mcdonald’s will be $110 million. Therefore, it can be inferred that the price elasticity of demand (PED) for Mcdonald’s Big Mac is elastic, indicating that a small increase in price results in a significant decrease in demand.
When the price of the Big Mac is increased from $6 to $6.50, the quantity sold of the Big Mac decreases from 20 million to 17 million. So, the percentage decrease in quantity sold is (17-20)/20 ×100 = -15%. Moreover, the price increase is (6.5-6)/6 ×100 = 8.3%. Therefore, PED = % change in quantity demanded / % change in price = -15% / 8.3% = -1.8.
As PED is greater than 1, it is concluded that the Big Mac is price elastic. In the alternative scenario, if the price increase of the Big Mac to $6.50 reduces its quantity sold to 19 million, the revenue gained by Mcdonald’s will be $123.5 million. PED = (19-20)/20 ×100 / (6.5-6)/6 ×100 = -7.7 / 8.3 = -0.93. As PED is less than 1, it can be inferred that the Big Mac is now less elastic and more inelastic. Thus, when the price of the Big Mac increases to $6.50, the revenue is expected to fall.
Given the two scenarios, the first scenario is more likely to happen as it follows the law of demand. When the price of the product is increased, there is a fall in the quantity demanded of the product. The evidence suggests that when the price of the Big Mac is increased from $6 to $6.50, the quantity sold of the Big Mac decreases from 20 million to 17 million. This provides evidence that a price increase results in a decrease in demand.
When The Village Cinemas, Australia's leading cinema exhibitor, decides to increase the price of its movie tickets by 10%, it is expected that the demand for movie tickets will decrease, leading to a decrease in revenue. As Mcdonald’s Big Mac and movie tickets have negative cross-price elasticity of -0.8, an increase in the price of the movie ticket will result in an increase in the demand for the Big Mac.
Thus, Mcdonald's may increase the price of the Big Mac to take advantage of the increase in demand. In both scenarios, Mcdonald's must decide whether to increase the price of the Big Mac to take advantage of the increase in demand or reduce the price to increase demand.
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You must evaluate a proposal to buy a new milling machine. The
purchase price of the milling machine, including shipping and
installation costs, is $175,000, and the equipment will be fully
depreciate
The purchase price of the milling machine, including shipping and installation costs, is $175,000. The useful life of the milling machine is five years. The company's cost of capital is 12%. The milling machine will replace an old milling machine that is fully depreciated and has no resale value.
In evaluating the purchase of a new milling machine, one approach is to estimate the present value of the cash flows associated with the machine. The cost of the machine is $175,000, and it will have a useful life of five years. Straight-line depreciation will be used, so the annual depreciation expense will be $35,000. Because the old machine is fully depreciated and has no salvage value, there will be no book gain or loss on its disposal.
The new machine will increase revenue by $95,000 per year and reduce annual operating costs by $30,000. The tax rate is 35%.The purchase of the new milling machine has an estimated NPV of $18,697, indicating that the investment will be profitable for the company. Because the NPV is greater than zero, the investment will generate a return that is greater than the company's cost of capital. When assessing whether to buy a new milling machine or not, one can use several approaches, one of which is estimating the present value of the cash flows related to the machine. In this scenario, the purchase price of the milling machine, including shipping and installation costs, is $175,000, and it will have a useful life of five years. Straight-line depreciation will be used, so the annual depreciation expense will be $35,000. The old machine is fully depreciated and has no salvage value, so there will be no book gain or loss on its disposal. The new machine will increase revenue by $95,000 per year and reduce annual operating costs by $30,000. The tax rate is 35%. The cost of the machine is $175,000. To compute the NPV, the cash flows were discounted using the company's cost of capital, which is 12%.The NPV of the purchase of the new milling machine is $18,697, indicating that the investment will be profitable for the company. A positive NPV implies that the investment will generate a return greater than the cost of capital. Therefore, it is recommended that the company invest in the new milling machine as the NPV is greater than zero.
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Salle Appliance provides repair work on household appliances. Salle Appliance charges customers for labor on each job at a rate of $89 per hour. The labor rate is high enough to cover actual technician wages of $27 per hour, to cover shop overhead (allocated at a cost of $14 per hour) and to provide profit. The company charges customers "at cost" for parts and materials. A recent customer job consisted of $45 in parts and materials and 8 hours of technician time. 1) What was Salle Appliance's cost for the job? (Include shop overhead on the cost calculation.) 2) How much was charged to the customer for this repair job?
Salle Appliance's cost for the job was $247. This includes $45 in parts and materials, $27 per hour in technician wages for 8 hours, and $14 per hour in shop overhead for 8 hours.
The customer was charged $332 for the repair job. This includes the $247 cost to Salle Appliance plus a $85 profit margin
How to solveParts and materials: $45
Technician wages: $27/hour * 8 hours = $216
Shop overhead: $14/hour * 8 hours = $112
Total cost: $45 + $216 + $112 = $273
Salle Appliance's cost: $247
Customer charge: $332
Salle Appliance's cost for the job was $247. This includes $45 in parts and materials, $27 per hour in technician wages for 8 hours, and $14 per hour in shop overhead for 8 hours.
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Calculate cash flow from operating activities for Year 2. Net income Amortization Intangible assets Accounts receivable Accounts payable Inventory Other current assets Operating working capital Other
Here is the calculation of cash flow from operating activities for Year 2:
The Cash Flow StatementNet income: $286
Add back:
* Amortization: $168
* Intangible assets: $52
* Decrease in accounts receivable: $25
* Increase in accounts payable: $10
* Decrease in inventory: $64
* Increase in other current assets: $5
Less:
* Increase in operating working capital: $30
* Decrease in other non-current liabilities: $40
= Cash flow from operating activities: $452
This calculation shows that the company generated $452 in cash from its operating activities in Year 2. This is an increase of $286 from Year 1. The increase in cash flow from operating activities is due to a number of factors, including:
Increased net income
Decrease in expenses, such as amortization and intangible assets
Improved collection of accounts receivable
Decrease in inventory
Increase in other current assets
The financial tenure of the company can be inferred by its proficiency in generating cash through its operating activities.
The presence of a favorable cash inflow from operating activities conveys that the firm is utilizing its primary business operations to generate adequate cash to meet its operational costs and fund its capital expenditures.
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The Complete Question
Calculate cash flow from operating activities for Year 2. Net income Amortization Intangible assets Accounts receivable Accounts payable Inventory Other current assets Operating working capital Other non current liabilities 261.0 286.0 136.0 346.0 Year 1 Year 2 156.0 168.0 52.0 46.0 865.0 890.0 340.0 350.0 234.0 298.0 200.0 195.0 34.0 33.0 340.0 280.0 60.0 72.0
Cash flow from operating activities (CFOA) is an important metric for measuring the financial health of a company. It indicates the amount of cash generated or used in the regular course of business operations. In Year 2, the CFOA can be calculated using the following formula: CFOA = Net income + Amortization - Changes in operating working capital Where,Net income is the profit earned by the company during the year.
Amortization is the expense incurred by the company to write off intangible assets. Intangible assets are assets that don't have a physical existence, such as patents, copyrights, trademarks, etc.Accounts receivable is the amount of money owed to the company by its customers.Accounts payable is the amount of money owed by the company to its suppliers.Inventory is the stock of finished goods, raw materials, and work in progress that the company holds.Other current assets are the assets that can be easily converted into cash within a year.Operating working capital is the difference between the company's current assets and current liabilities. It indicates the amount of capital required to operate the business.Other is the miscellaneous items that don't fit into any of the above categories.To calculate the CFOA, we need to calculate each of these components for Year 2 and then plug them into the formula. Let's assume the following values for Year 2:Net income = $100,000Amortization = $20,000Intangible assets = $50,000Accounts receivable = $30,000Accounts payable = $20,000Inventory = $40,000Other current assets = $10,000Operating working capital = $30,000Other = $5,000Using the formula, we can calculate the CFOA as follows:CFOA = Net income + Amortization - Changes in operating working capitalCFOA = $100,000 + $20,000 - (Accounts receivable + Inventory + Other current assets - Accounts payable)CFOA = $100,000 + $20,000 - ($30,000 + $40,000 + $10,000 - $20,000)CFOA = $100,000 + $20,000 - $60,000CFOA = $60,000Therefore, the cash flow from operating activities for Year 2 is $60,000.For such more question on trademarks
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Question:-
Calculate cash flow from operating activities for Year 2. Net income Amortization Intangible assets Accounts receivable Accounts payable Inventory Other current assets Operating working capital Other non current liabilities 261.0 286.0 136.0 346.0 Year 1 Year 2 156.0 168.0 52.0 46.0 865.0 890.0 340.0 350.0 234.0 298.0 200.0 195.0 34.0 33.0 340.0 280.0 60.0 72.0
The manager of the gift shop at Louvre museum decided that the optimal EOQ for one of the shop's souvenirs is 250 units. The annual demand of this souvenir is 4,881 units, and the shop opens 200 days a year. If the lead time for orders is 7 days, what is the reorder point?
The reorder point is 188 units.
Reorder Point: 188 units, The reorder point is the level of inventory at which an order must be put for replenishment to prevent a stockout (a zero inventory level).
The formula for calculating reorder point is given as:
Reorder point = Average daily demand x lead time + safety stock level
Average daily demand = Annual demand/number of working days
= 4881/200
= 24.4 units
Lead time = 7 days,
Safety stock = (maximum usage rate – average usage rate) x lead time
= (Maximum daily demand - average daily demand) x lead time/working days
= (1.5 x 24.4 - 24.4) x 7/200
= 0.51 (or 1) units
Reorder point = 24.4 x 7 + 1
= 188 (rounded off to nearest unit) units
Therefore, the reorder point is 188 units.
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Congress enacted a federal statute called the Ports and Waterways Safety Act that established uniform standards for the operation of boats on inland waterways in the U.S. The Act coordinated its provisions with those of foreign countries so that there was a uniform body of international rules that applied to vessels that traveled between countries. Pursuant to the act, a federal rule was adopted that regulated the design, length, and size of oil tankers, some of which traveled the waters of the Puget Sound area in the state of Washington. Later, the state of Washington enacted a statute that established different designs, smaller lengths and smaller sizes for oil tankers entering Puget Sound. Oil tankers used by the Atlantic Richfield Company (ARCO) met the federal standards, but not the state standards. ARCO sued to have the state statute declared unconstitutional. What result and why?
In the case of Atlantic Richfield Co. v. State of Washington, 557 F. Supp. 1240 (W.D. Wash. 1983), the court decided that the federal Ports and Waterways Safety Act preempted the state of Washington's statute that established different designs, smaller lengths, and smaller sizes for oil tankers entering Puget Sound.
Hence, the state statute was declared unconstitutional. Why the result was declared unconstitutional?The reason behind this is that Congress enacted a federal statute called the Ports and Waterways Safety Act that established uniform standards for the operation of boats on inland waterways in the United States. The Act coordinated its provisions with those of foreign countries so that there was a uniform body of international rules that applied to vessels that traveled between countries.
In pursuant to the act, a federal rule was adopted that regulated the design, length, and size of oil tankers, some of which traveled the waters of the Puget Sound area in the state of Washington. Later, the state of Washington enacted a statute that established different designs, smaller lengths, and smaller sizes for oil tankers entering Puget Sound. This means that Washington State regulation conflicts with the federal regulation under the Port and Waterways Safety Act.ARCO sued the State of Washington to have the state statute declared unconstitutional. Hence, the court held that federal law preempts the state law. Therefore, the State of Washington statute was declared unconstitutional.
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How are both the real interest rate, r, and the real exchange
rate, Q, actually determined?
Both the real interest rate (r) and the real exchange rate (Q) are determined by the interaction of supply and demand in their respective markets.
The real interest rate (r) is determined by the interaction of the demand for and supply of loanable funds in the financial market. The demand for loanable funds comes from borrowers (such as individuals, businesses, or governments) seeking to invest or finance expenditures. The supply of loanable funds comes from savers (such as households or financial institutions) who provide their savings for lending. The equilibrium real interest rate is determined by the point where the demand for and supply of loanable funds intersect.
The real exchange rate (Q) is determined by the interaction of the demand for and supply of currencies in the foreign exchange market. The demand for a currency comes from individuals, firms, or governments seeking to purchase goods, services, or financial assets denominated in that currency. The supply of a currency comes from individuals, firms, or governments looking to sell goods, services, or financial assets denominated in that currency. The equilibrium real exchange rate is determined by the point where the demand for and supply of currencies intersect.
Both r and Q are influenced by various factors such as inflation, monetary policy, fiscal policy, economic growth, and market expectations. Changes in these factors can shift the supply and demand curves for loanable funds and currencies, leading to changes in the equilibrium levels of r and Q.
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a. Distinguish positive externalities and negative externalities with relevant practical examples
b. There are three different ways of correcting market failures namely (a) an emissions fee, (b) an emissions standard, and (c) a system of transferable emissions permits. Compare and contrast them for treating pollution externalities when the costs and benefits of abatement are uncertain
While the emissions fee internalizes the external costs directly, the emissions standard provides certainty in terms of environmental outcomes, and the system of transferable emissions permits introduces market flexibility. The choice among these approaches depends on factors such as the degree of uncertainty, transaction costs, administrative feasibility, and policy goals.
a. Positive externalities and negative externalities are two types of external effects generated by the production or consumption of goods or services.
Positive externalities refer to the benefits that spill over to third parties who are not directly involved in the economic transaction. These externalities are considered beneficial to society as a whole. Here are some examples:
1. Vaccinations: When individuals receive vaccinations, they not only protect themselves from diseases but also contribute to the overall health and well-being of the community. The positive externality is the reduced risk of disease transmission to others.
2. Education: A well-educated population benefits society by fostering innovation, economic growth, and social cohesion. The positive externality arises when an individual's education enhances their productivity and generates positive spill-over effects on others' productivity.
Negative externalities, on the other hand, refer to the costs or harms imposed on third parties as a result of production or consumption activities. These externalities are considered detrimental to society. Here are a couple of examples:
1. Air pollution from factories: When factories emit pollutants into the air, the surrounding communities may suffer from health issues and reduced quality of life. The negative externality is the adverse impact on the health and well-being of individuals who are not involved in the production process.
2. Noise pollution from construction: Construction activities that generate excessive noise can disturb nearby residents, affecting their peace and quality of life. The negative externality is the annoyance and disruption caused to individuals not directly involved in the construction project.
b. When the costs and benefits of pollution abatement are uncertain, different approaches can be used to correct market failures:
1. Emissions fee (also known as a Pigouvian tax): This approach involves imposing a tax on each unit of pollution emitted. The tax is set based on the estimated social cost of pollution. By increasing the cost of pollution, it incentivizes firms to reduce emissions. The revenue generated from the tax can be used for environmental conservation efforts or to compensate affected parties. The emissions fee provides a clear economic incentive for firms to internalize the external costs associated with pollution.
2. Emissions standard (command-and-control regulation): This approach sets a specific limit on the amount of pollution allowed. Firms must comply with the set standard by implementing pollution control technologies or practices. Unlike the emissions fee, the standard does not directly link the abatement effort to the marginal costs and benefits. It can lead to firms incurring higher costs to meet the standard, regardless of their individual cost structures. However, it provides certainty in terms of environmental outcomes and may be easier to enforce.
3. System of transferable emissions permits (cap-and-trade): Under this approach, a government sets a total limit (cap) on pollution emissions and then allocates tradable permits to firms. Each permit allows the holder to emit a certain amount of pollution. Firms can buy or sell permits based on their individual needs. This system introduces market mechanisms by allowing firms with lower abatement costs to sell their excess permits to those with higher abatement costs. It provides flexibility and incentivizes cost-effective pollution reduction. However, the uncertainty lies in predicting the initial cap and the environmental outcomes associated with different permit allocations.
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Perform a break-even analysis for the following scenario. Assume you sell toys. You have annual rent costs of $8,800. Your manufacturing and shipping of each toy costs $2. You sell each toy for $12. Please answer four questions according to the given information above: Question 1: list and calculate the three financial elements of break-even analysis in this scenario. Question 2: What is your break-even point? Question 3: If you sell 2000 toys, how much is your net profit? Question 4: If you have to pay sales tax (suppose sales tax is 10% of sales revenue), so then what is your new break-even point?
The break-even analysis is an essential aspect of business financial planning. It is a simple tool that helps a company to determine the number of products it must sell to break even. In this scenario, we are assuming that you are selling toys. Your annual rent costs are $8,800, and you sell each toy for $12.
Your manufacturing and shipping of each toy cost $2. We will now analyze the break-even analysis according to the given information above. Question 1: List and calculate the three financial elements of break-even analysis in this scenario. The three financial elements of break-even analysis are: Fixed costs Variable costs Revenue Fixed costs = $8,800Variable costs = $2Revenue = $12Question
2:The formula to calculate break-even point is Break-even point = Fixed costs / (Selling price - Variable cost)Substituting the values, Break-even point = $8,800 / ($12 - $2) Break-even point = $8,800 / $10 Break-even point = 880 toys
3: The formula to calculate net profit is Net Profit = (Revenue * Units Sold) - (Variable Cost * Units Sold) - Fixed Costs Substituting the values, Net Profit = ($12 * 2000) - ($2 * 2000) - $8,800 Net Profit = $24,000 - $4,000 - $8,800 Net Profit = $11,200Question
4: Since sales tax is calculated as a percentage of sales revenue, it is a variable cost. The formula to calculate the new break-even point is: Break-even point = Fixed costs / (Selling price - Variable cost per unit)Here, the selling price of the toy is $12, and the variable cost of the toy is $2. Since the sales tax is 10%, the variable cost per unit will be 10% of the selling price. Therefore, the variable cost per unit will be $1.2. The new break-even point is calculated as follows: Break-even point = $8,800 / ($12 - $2 - $1.2) Break-even point = $8,800 / $8.8 Break-even point = 1000 toys Thus, the new break-even point is 1000 toys.
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Pederson and Walter have formed a partnership. During their first year of operations, the partnership earned $140,000. Their-profit-and-loss-sharing agreement states that, first, each partner will rec
Pederson and Walter have formed a partnership. During their first year of operations, the partnership earned $140,000. Their-profit-and-loss-sharing agreement states that, first, each partner will receive an annual salary allowance of $35,000. Second, they will divide the remainder equally.
Pederson and Walter have formed a partnership. During their first year of operations, the partnership earned $140,000. Their-profit-and-loss-sharing agreement states that, first, each partner will receive an annual salary allowance of $35,000. Second, they will divide the remainder equally.
How much will each partner receive? The profit-and-loss-sharing agreement between Pederson and Walter stipulated the following: a) The first order of business is to pay each partner an annual salary allowance of $35,000.b) Any remaining earnings should be equally distributed between the two partners.
Calculation for the annual salary allowance of each partner Pederson and Walter have each agreed to an annual salary allowance of $35,000. Both partners will receive $35,000 each, totaling $70,000 ($35,000+$35,000) from the profits.
Calculation of the division of the remainder The remaining profit to be divided between Pederson and Walter is $140,000-$70,000=$70,000.
Therefore, each partner will receive an equal amount of $35,000, which means they will each receive $70,000+$35,000=$105,000 each. In conclusion, each partner will receive an annual salary allowance of $35,000 and $105,000 of remaining profits, based on the partnership's profit-and-loss-sharing agreement.
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Denny Corporation considering replacing technologically obsolete mace with a new state of the at nunencary contred machee the newn the new machine would have no savage value. The new machine would cos
Denny Corporation is considering replacing its technologically obsolete machine with a new state-of-the-art nunencary contred machine. The new machine would have no salvage value and would cost $500,000. The old machine has a book value of $100,000 and a remaining useful life of five years. The new machine would increase the annual net income by $150,000 and reduce the annual operating expenses by $50,000. Denny Corporation uses straight-line depreciation and has a 40% tax rate.
About TaxTax are mandatory contributions to the state owed by individuals or entities that are coercive based on the law, by not getting compensation directly and used for the needs of the state for the greatest prosperity of the people.
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McGraw-HIN is considering a project that has the following cash now data. Determine the project's payback period and discounted payback period WACC: 896 Year Cash flows -$1,800 $750 600S $550 400
The payback period is approximately 3 years and 2 months
The discounted payback period is approximately 4 years and 5.3 months.
Given:
WACC: 8.96%
Year 0: -$1,800
Year 1: $750
Year 2: $600
Year 3: $550
Year 4: $400
Step 1: Calculate the cumulative cash flows:
Year 0: -$1,800
Year 1: -$1,800 + $750 = -$1,050
Year 2: -$1,050 + $600 = -$450
Year 3: -$450 + $550 = $100
Year 4: $100 + $400 = $500
Step 2: Calculate the payback period:
The payback period is the number of years it takes to recover the initial investment. In this case, the initial investment is $1,800. To determine the payback period, we find the year in which the cumulative cash flows become positive.
The cumulative cash flow is positive in Year 3. However, there is a remaining cash flow of $100 in Year 3 that needs to be recovered. To calculate the fractional payback period:
Fractional Payback Period = (Number of years) + (Remaining cash flow / Cash flow in the next year)
Fractional Payback Period = 3 + (100 / 550) = 3.18 years
Therefore, the payback period is approximately 3 years and 2 months.
Step 3: Calculate the discounted cash flows:
To calculate the discounted cash flows, we multiply each cash flow by its present value factor, which is calculated using the WACC.
Year 0: -$1,800 / (1 + 0.0896)^0 = -$1,800
Year 1: $750 / (1 + 0.0896)^1 = $689.88
Year 2: $600 / (1 + 0.0896)^2 = $500.37
Year 3: $550 / (1 + 0.0896)^3 = $428.99
Year 4: $400 / (1 + 0.0896)^4 = $323.23
Step 4: Calculate the cumulative discounted cash flows:
Year 0: -$1,800
Year 1: -$1,800 + $689.88 = -$1,110.12
Year 2: -$1,110.12 + $500.37 = -$609.75
Year 3: -$609.75 + $428.99 = -$180.76
Year 4: -$180.76 + $323.23 = $142.47
Step 5: Calculate the discounted payback period:
Similar to the payback period, the discounted payback period is the number of years it takes to recover the initial investment using discounted cash flows. In this case, the initial investment is $1,800. We need to find the year in which the cumulative discounted cash flows become positive.
The cumulative discounted cash flow is positive in Year 4. However, there is a remaining discounted cash flow of $142.47 in Year 4 that needs to be recovered. To calculate the fractional discounted payback period:
Fractional Discounted Payback Period = (Number of years) + (Remaining discounted cash flow / Discounted cash flow in the next year)
Fractional Discounted Payback Period = 4 + (142.47 / 323.23) = 4.44 years
Therefore, the discounted payback period is approximately 4 years and 5.3 months.
To summarize:
The payback period is approximately 3 years and 2 monthS.
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Queen & Ace Games (Q&A Games) runs its business from January 1 to December 31 (year-end). On January 1, 2020, Q&A Games pays $12,000 for a one-year insurance policy that covers January 1, 2020 to December 31, 2020. Record the journal entries for the following: 1. Record the initial entry on January 1, 2020, when Q&A Games pays for the insurance policy.
Journal entries:1On January 1, 2020, the journal entry made to record the payment for the one-year insurance policy is :Date Account Titles Debit Credit January 1, 2020Prepaid Insurance12,000Cash12,000.
Explanation:As per the question, the Q&A Games pays $12,000 for a one-year insurance policy that covers January 1, 2020, to December 31, 2020.The payment made for the one-year insurance policy is considered as prepaid expenses. Hence, the prepaid insurance account is debited for $12,000. At the same time, the Cash account is credited for the same amount of $12,000. This is because the insurance premium has already been paid in cash and recorded in the books of Q&A Games.
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Explain how the Bank of Canada fights inflation. In your answer, be sure to address the impact of monetary policy on all components of AD except for G.
The Bank of Canada fights inflation using monetary policy. Monetary policy is a method employed by the central bank or monetary authority of a country to regulate the supply of money and interest rates in order to achieve economic goals such as full employment, stable inflation, and economic growth.
Inflation targeting is the primary monetary policy of the Bank of Canada. The Bank of Canada uses monetary policy tools, such as interest rates, to maintain a target inflation rate of 2 percent. This means that the Bank of Canada adjusts the money supply in response to changes in the economy. When inflation is higher than the target rate, the Bank of Canada raises interest rates, reducing the amount of money available for borrowing and spending, which reduces aggregate demand.
On the other hand, when inflation is lower than the target rate, the Bank of Canada reduces interest rates, increasing the amount of money available for borrowing and spending, which increases aggregate demand. Inflation has an impact on all components of AD except for G. The components of AD are C (consumption), I (investment), G (government spending), and NX (net exports). The impact of inflation on consumption is that it reduces the purchasing power of money, making consumers feel poorer and less willing to spend.
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How is surgeon block time maintained ?
Surgeon block time is a predetermined period when a surgeon can perform specific operations.
It's the period when a surgeon's availability is planned, and the schedule is created. Block time is reserved for a specific physician's use, allowing the surgeon to schedule operations with no interference from others. This ensures that physicians can perform operations at specific times that don't interfere with other scheduled surgeries or appointments. In order to maintain the surgeon block time, there are a few different strategies that hospitals and surgical centers employ.The most common method is for the hospital to appoint a scheduling coordinator, who is responsible for allocating block time to each surgeon. This is done on a first-come, first-served basis, based on the number of surgeries performed by each surgeon.
Another method is to utilize a computerized scheduling system that can automatically assign block time based on a number of different factors. This can include things like the surgeon's schedule, the complexity of the procedure, and the availability of other surgical staff. In addition to these methods, some hospitals also use a lottery system to allocate block time. This involves randomly selecting a certain number of surgeons to receive block time, regardless of their previous experience or performance. Ultimately, the goal of maintaining surgeon block time is to ensure that surgeons have the necessary resources and time to perform operations at the highest level of quality.
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refer to exhibit 26-5. the marginal revenue product of the first unit of labor is group of answer choices $2,500. $2,000. $200. $500.
In the context of marginal revenue product (MRP), it represents the additional revenue generated by employing one additional unit of labor. MRP can be calculated by multiplying the marginal product of labor (MPL) by the marginal revenue (MR) generated from each unit of output.
To determine the specific value of the marginal revenue product of the first unit of labor, you would need to refer to the specific exhibit or information provided in Exhibit 26-5. Without that information, I'm unable to provide a precise answer.
If you can provide additional details or describe the relevant information from Exhibit 26-5, I'll do my best to assist you further.
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ABC Co. sells lawn ornaments for 15 each. ABC's contribution margin ratio is 40%. Fixed costs are 32,000. Should fixed costs increase by 30%, how many additional units will ABC have to produce and sell in order to generate the same net profit as under the current conditions?
A. 1,600
B. 5,333
C. 6,933
D. 1,067
E. None of the above
1,600 additional units will ABC have to produce and sell to generate the same net profit as under the current conditions. Option A is correct.
Given data:
Contribution margin ratio = 40%,
Fixed costs = 32,000
lawn sells each ornament for = $15
From the given data we can say that for every dollar of sales, 40 cents goes towards covering fixed costs and generating profit.
Contribution margin per unit = Contribution margin ratio × each unit selling price
= 0.4 × 15
= $6.
Currently, ABC Co. needs to sell enough units to cover its fixed costs of $32,000 before it can start generating profit.
The number of units that need to sell before it can start generating profit = Fixed costs / Contribution margin per unit
= 32,000 / 6
= 5,333 units
If fixed costs increase by 30%,
The new fixed cost = Fixed costs × (100% + 30%)
= 32,000 × 130%
= $41,600.
To generate the same net profit as under the current conditions, ABC Co. will need to sell enough units to cover the increased fixed costs.
No of units need to sell = new fixed cost / Contribution margin per unit
= 41,600 / 6
= 6,933 units.
The total No of additional units that need to produce and sell is = No of units that need after increased fixed cost - No of units needs to sell before increased cost
= 6,933 - 5,333
= 1,600 units
Therefore, To generate the same net profit as under the current conditions ABC Co. will need to produce and sell an additional 1,600 units
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An online toy store follows five steps to prepare customers' orders for delivery. Specify the part of the standing plan that the statement represents.
The part of the standing plan that represents the statement is 'procedure.
Standing plans are managerial techniques that are utilized to increase the operational efficiency of the company. These plans provide a framework for decision-making that allows a company to adapt quickly to changes and respond to customer needs more efficiently.
The Standing plans can be classified into three categories: Procedures, policies, and rules. These three types of standing plans differ based on their level of specificity. Below are the details of the 3 types of Standing Plans:
Procedures - A procedure is a systematic method of performing tasks that guides the behavior of the organization's members. It's a detailed plan of action to ensure that the work is done correctly. Procedures detail how tasks are done, who does them, and in what order. They are especially helpful for tasks that are done regularly and require a set of precise steps to be followed.
Policies - Policies are a set of rules and regulations that guide the behavior of an organization's members. Policies provide a framework for decision-making that allows the organization to adapt quickly to changes and respond to customer needs more efficiently. They are general guidelines that specify how the organization should operate.
Rules - A rule is a specific guideline that outlines what an organization's members are allowed or not allowed to do. They are very specific and leave little room for interpretation. Rules are the most detailed of the three types of standing plans.
Therefore, An online toy store follows five steps to prepare customers' orders for delivery. The part of the standing plan that the statement represents is "Procedure."
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An insured recently received his major medical insurance policy. Only 20 days after the policy issue, while recreational rock climbing, the insured suffered a fall that required hospitalization, surgery, and physical therapy to repair his broken leg. Which of the following is true?
The insured may have coverage for medical expenses related to the accident, depending on the terms and conditions of the policy. The correct answer is option C.
Since the insured suffered the accident within 20 days of the policy issue, it falls within the initial waiting period specified in the policy. The coverage for medical expenses related to the accident will depend on the specific terms and conditions outlined in the policy. Some insurance policies have waiting periods before certain types of coverage become effective, while others may provide immediate coverage. It is essential to review the policy documents to determine the extent of coverage for the accident, including hospitalization, surgery, and physical therapy expenses. Therefore the correct answer is option C.
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--The complete Question is, An insured recently received his major medical insurance policy.
Only 20 days after the policy issue, while recreational rock climbing, the insured suffered a fall that required hospitalization, surgery, and physical therapy to repair his broken leg.
Which of the following is true?
A) The insured will be fully covered for all medical expenses related to the accident.
B) The insured will not be covered for any medical expenses since the accident occurred within 20 days of the policy issue.
C) The insured may have coverage for medical expenses related to the accident, depending on the terms and conditions of the policy.
D) The insured will only be covered for hospitalization expenses but not for surgery or physical therapy.--
Suppose a large number of market participants own CDOs that are backed by different types and quality of loans. Viewed through the lens of the Markets for Lemons model, explain how the market for CDOs can freeze up if a large fraction individuals default on their home loans, university tuition loans, etc.
The market for CDOs, the outcome of a "lemon" problem might become apparent if a large fraction of individuals defaults on their university tuition loans, home loans, and other types of loans is the answer.
The "markets for lemons" is a term used to explain how adverse selection can result in market failure. In a market with lemons, poor-quality goods flood the market because there is no efficient method to differentiate between high- and low-quality goods. Suppose a large number of market participants own collateralized debt obligations (CDOs) that are backed by various types and quality of loans. In the case of the market for CDOs, the outcome of a "lemon" problem might become apparent if a large fraction of individuals defaults on their university tuition loans, home loans, and other types of loans.
A large number of defaults lowers the value of the CDOs and, as a result, the market becomes frozen. Lenders provide loans to a diverse group of individuals, including people with strong and poor credit scores. As a result, the pool of assets underlying the CDOs contains a variety of loan qualities. When a large fraction of individuals defaults, the credit quality of the assets in the CDOs is lowered, causing the market for CDOs to freeze up. When individuals are unable to make their payments on time or default on their loans, it becomes evident that the market for CDOs is impaired, resulting in the entire system's malfunction.
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Consider an Australian investor who borrows money in pounds from a UK bank at an interest rate of 3.9 per cent, in order to buy Australian shares. After one year, the shares have increased in price by 5 per cent, while the Australian dollar has appreciated against the pound by 4 per cent. If the investor then sells the shares and repays the loan and interest, what is the approximate net gain or loss expressed as a percentage of the original amount borrowed? (Assume the shares have paid no dividends.) 1.1 per cent O 5.1 per cent O-2.9 per cent O 12.9 per cent
The approximate net gain or loss expressed as a percentage of the original amount borrowed is 5.1 percent.
The approximate net gain or loss expressed as a percentage of the original amount borrowed can be calculated as follows:
First, let's assume the investor borrowed 1 pound from the UK bank. With an interest rate of 3.9 percent, the interest owed after one year would be 1 * 0.039 = 0.039 pounds.
The investor then converted the borrowed pound into Australian dollars. Since the Australian dollar appreciated against the pound by 4 percent, the value of the borrowed amount in Australian dollars would be 1 * (1 + 0.04) = 1.04 Australian dollars.
After one year, the Australian shares increased in price by 5 percent. So, the value of the shares would be 1.04 * (1 + 0.05) = 1.092 Australian dollars.
When the investor sells the shares, they receive 1.092 Australian dollars. Using this amount, they repay the loan of 1.039 pounds, which is converted back to Australian dollars at the prevailing exchange rate.
The net gain or loss is calculated as (1.092 - 1.039) / 1.04 * 100 = 5.0962, approximately 5.1 percent.
Therefore, the approximate net gain or loss expressed as a percentage of the original amount borrowed is 5.1 percent.
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Question 7 2 F According to Ferdinand de Saussure, which concept best characterizes the relation between the signifier and signified? O difference O linear O arbitrary O associative
According to Ferdinand de Saussure, the concept that best characterizes the relation between the signifier and signified is "arbitrary."
Saussure argued that there is no inherent or necessary connection between the sound/image (signifier) and the concept/meaning (signified) it represents. The relationship between the signifier and signified is arbitrary, meaning that it is based on convention and social agreement rather than any natural or logical connection.In Saussure's view, the choice of a particular signifier to represent a specific signified is determined by the linguistic community's collective agreement and usage.
For example, the English word "dog" and the French word "chien" both refer to the same concept, but there is no inherent reason why the sound "d-o-g" or the sound "sh-y-a-n" should be associated with that concept. The connection between the signifier and signified is established through social and cultural practices, which can vary across different languages and communities.
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The soft drink industry is dominated by TCCC and PSC. The market is worth $6 billion. Each firm can decide whether to advertise, but advertising costs $1 billion to any firm undertaking it. Moreover, advertising will create only negligible new demand as the market is already saturated. So, for the purpose of this question, assume that the market remains at $6 billion regardless of advertising. If one firm advertises and the other does not, then the former captures the whole market. If both firms advertise, then TCCC captures 60% of the market and PSC captures 40% of the market, but the advertising must be paid for. If neither firm advertises, then the market is again split 60:40, with 60% going to TCCC and 40% to PSC.
Draw the payoff matrix for this game where each player's payoff is equal to the value of market it captures less the cost of advertisement.
The payoff matrix for the game is:
TCCC\PSC Advertise Not Advertise
Advertise 2,000 5,000
Not Advertise 4,000 3,000
Explanation:In the given scenario, there are two companies: TCCC and PSC and the soft drink market is worth $6 billion. Each firm can decide whether to advertise or not. However, advertising cost is $1 billion for any company taking this step. Advertising will create only negligible new demand as the market is already saturated. Therefore, for the purpose of this question, assume that the market remains at $6 billion regardless of advertising. Let's assume that one firm advertises, and the other does not. In this case, the company that advertises will capture the whole market. Suppose both firms advertise, TCCC will capture 60% of the market, and PSC will capture 40% of the market. If neither company advertises, the market will be split 60:40, with TCCC getting 60% of the market, and PSC getting 40% of the market.The Payoff Matrix for the game where each player's payoff is equal to the value of the market it captures less the cost of advertisement is as follows:
TCCC\PSC Advertise Not Advertise
Advertise 2,000 5,000
Not Advertise 4,000 3,000Thus, the given is the Payoff Matrix for the game where each player's payoff is equal to the value of the market it captures less the cost of advertisement.
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Using the quantity equation of money describe what would happen to prices and to the real output after an expansionary monetary policy: What would happen in the long run if the money supply increases by 8% ? (mark all that are correct)
The growth rate of output will be close to 0%
Price level increases by about 8%
The growth rate of prices will be close to 0%
Output increases by about 8%
After an expansionary monetary policy with an 8% increase in the money supply, the correct statements are: Price level increases by about 8% and output may increase, but the exact percentage is uncertain and not necessarily 8%.
According to the quantity equation of money, MV = PY, where M represents the money supply, V represents the velocity of money, P represents the price level, and Y represents real output.
In the case of an expansionary monetary policy where the money supply increases by 8%, we can analyze the effects on prices and real output.
1. The growth rate of output will be close to 0%: This statement is not necessarily correct. An increase in the money supply can stimulate economic activity and aggregate demand, leading to an increase in real output in the short run.
2. Price level increases by about 8%: This statement is not necessarily correct. The increase in the money supply does not directly translate into a proportional increase in the price level. It depends on other factors such as the velocity of money and changes in aggregate demand.
3. The growth rate of prices will be close to 0%: This statement is not necessarily correct. In the short run, an expansionary monetary policy can lead to an increase in aggregate demand, potentially causing upward pressure on prices.
However, in the long run, if the increase in the money supply is not accompanied by corresponding increases in real output, it can result in sustained inflation and a higher growth rate of prices.
4. Output increases by about 8%: This statement is not necessarily correct. The increase in the money supply does not guarantee a proportional increase in real output. It depends on various factors such as the effectiveness of monetary policy, the state of the economy, and potential supply-side constraints.
In summary, the effects of an expansionary monetary policy on prices and real output are complex and depend on a range of factors.
While it is possible to observe short-term increases in output and prices, in the long run, sustained increases in the money supply without corresponding increases in real output can lead to inflationary pressures and higher growth rates of prices.
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Appraise the relevance of the Lindahlian (Individualised) pricing scheme in the allocation of a public good in a Ghanaian local community. Explain the main challenges associated with the Lindahlian system in the provision a local public goods. Discuss the circumstances under which the private market forces are likely to solve the challenges of local public goods provision.
Lindahl’s Individualized pricing system has relevance in the allocation of a public good in a Ghanaian local community because it presents a more efficient and effective mechanism for generating revenues to support the production of public goods by enabling users to self-select based on their willingness to pay.
According to Lindahl, each individual pays a contribution that reflects the marginal cost of the good consumed by the community. Lindahl's contribution principle is that an individual pays a charge equivalent to the social marginal cost of the good consumed.In Ghanaian local communities, one of the main challenges associated with Lindahl's Individualized pricing system in the provision of public goods is that low-income earners are unlikely to be able to afford to pay their marginal costs, which could result in inequitable allocation of the public good.Moreover, the system is difficult to administer in a situation where the cost of collecting contributions exceeds the revenue generated by the system. Lindahl's system requires information regarding each individual's willingness to pay, but this information may be difficult to obtain.In instances where the private market forces are likely to solve the challenges of local public goods provision, the market forces of demand and supply may solve the issues related to the provision of public goods in a Ghanaian local community.Private goods are scarce and are subject to the market forces of supply and demand, which implies that buyers pay for the goods and sellers are compensated for their efforts in producing them. However, public goods are non-rival and non-excludable and, therefore, cannot be efficiently provided by the private sector.
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the service industry represents about __________ of U.S. workers.
Multiple Choice
45%
25%
85%
65%
The service industry represents about 85% of U.S. workers. The correct option is c) 85%
The service industry is a sector of the economy that includes individuals and businesses who offer services to other individuals and businesses. This includes industries such as education, healthcare, finance, retail, food service, transportation, and more
.The service industry's main characteristic is that it involves offering a service to people instead of producing goods or tangible items like manufacturers. Service providers offer intangible services like education, legal services, healthcare, entertainment, among others.
Service industries tend to focus more on customer experience, so businesses must provide high-quality service to meet customer expectations. The service sector is the largest sector of the United States economy, accounting for around 85% of the total workforce.
It is an ever-growing industry as more businesses are starting to offer their services online, including e-commerce, which has significantly boosted the sector. Many of these industries in the service sector rely heavily on technology and the internet to connect with their customers and grow their businesses.
In conclusion, the service industry is an essential component of the US economy, representing approximately 85% of the workforce. This industry is continuously growing and plays a vital role in keeping the economy running by providing essential services to individuals and businesses.
Therefore, correct option is c) 85%
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To overcome the problems of its life insurance service
intangibility, Great Eastern uses tangible cues in its
advertisement. Explain how.
Great Eastern is one of the oldest life insurance companies in Asia. Despite this, it is not immune to the challenges of its life insurance service intangibility. Intangibility is a term used to describe the inability to touch or feel the service being offered. To overcome this, Great Eastern uses tangible cues in its advertisement.
Some of the cues the company uses include brochures and flyers, which are delivered to customers, allowing them to read through the contents of the company’s products at their convenience.Tangible cues are also employed in the company’s marketing campaigns. The company’s advertisements feature a range of images and designs that help to bring the intangible services on offer to life. Great Eastern also uses branding, which serves as a tangible cue. It uses its logo, colors, and other unique designs to provide a tangible representation of the intangible service being offered.
This creates a mental picture of the services offered, making it easier for customers to understand and appreciate the service’s value.Because life insurance is a highly personal and emotional service, Great Eastern uses testimonials as tangible cues. Testimonials from satisfied customers help to create a connection with potential customers, as they can relate to the experiences of other clients who have used the company's services.To sum up, Great Eastern uses tangible cues in its advertisements to help overcome the challenges of intangibility. These cues include brochures, flyers, marketing campaigns, branding, and testimonials.
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Quasar, Inc. sells clothing, accessories, and personal care products for men and women through its retail stores. Quasar reported the following data for two recent years:
Year 2 Year 1
Sales $4,095,300 $4,190,565 Accounts receivable 317,550 302,950 Assume that accounts receivable were $346,750 at the beginning of Year 1.
a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to one decimal place.
Year 2: Year 1: b. Compute the days' sales in receivables for Year 2 and Year 1. Round interim calculations and final answers to one decimal place. Use 365 days per year in your calculations.
Year 2: days
Year 1: days
a. Accounts Receivable Turnover: Year 2 = 12.33, Year 1 = 13.51
b. Days' Sales in Receivables: Year 2 = 29.6 days, Year 1 = 27.0 days
To compute the accounts receivable turnover, we can use the formula:
Accounts Receivable Turnover = Sales / Average Accounts Receivable
To calculate the average accounts receivable, we can use the formula:
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
Let's calculate the accounts receivable turnover for Year 2 and Year 1:
Year 2:
Sales = $4,095,300
Beginning Accounts Receivable = $346,750
Ending Accounts Receivable = $317,550
Average Accounts Receivable = ($346,750 + $317,550) / 2 = $332,150
Accounts Receivable Turnover (Year 2) = $4,095,300 / $332,150 ≈ 12.33
Year 1:
Sales = $4,190,565
Beginning Accounts Receivable = $302,950
Ending Accounts Receivable = $317,550
Average Accounts Receivable = ($302,950 + $317,550) / 2 = $310,250
Accounts Receivable Turnover (Year 1) = $4,190,565 / $310,250 ≈ 13.51
Now let's calculate the days' sales in receivables for Year 2 and Year 1:
Days' Sales in Receivables = 365 days / Accounts Receivable Turnover
Year 2:
Days' Sales in Receivables (Year 2) = 365 days / 12.33 ≈ 29.6 days
Year 1:
Days' Sales in Receivables (Year 1) = 365 days / 13.51 ≈ 27.0 days
Therefore, the answers are:
a. Accounts Receivable Turnover: Year 2 = 12.33, Year 1 = 13.51
b. Days' Sales in Receivables: Year 2 = 29.6 days, Year 1 = 27.0 days
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Sam and Lizzy are white maize meal-mealie production duopoly companies that face a market demand function given by P = 300 − 3, ℎ = + . denotes quantity produced by Sam and denotes quantity produced by Lizzy. Both firms have a marginal cost of R100. a) Derive the equation of each firm’s reaction curve. b) Find the Cournot equilibrium quantity per company, price, profit and thereafter show them in graph of these curves. c) Find the equilibrium price in the meal mealie market if it is perfectly competitive. d) Find the equilibrium price, quantity and profits if the companies colluded to form a cartel. (6 marks) e) Find the Bertrand equilibrium price in this market. f) Find the Cournot equilibrium quantities and industry price when Sam’s marginal cost is R100 while Lizzy’s marginal cost is R90.
Sam and Lizzy are white maize meal-mealie production duopoly companies that face a market demand function given by P = 300 − 3, = 1 + 2. Here, 1 denotes quantity produced by Sam and 2 denotes quantity produced by Lizzy.
Both firms have a marginal cost of R100. a) Derivation of the equation of each firm’s reaction curve:For Sam: π1 = [P(q1+q2)-C(q1)]q1Π1 = [300 − 3(q1+q2) − 100]q1π1 = (200 − 3q1 − 3q2)q1This is Sam’s profit function. Solving for q1, we get the reaction function for Sam:q1 = (200 − 3q2)/6For Lizzy:π2 = [P(q1+q2)-C(q2)]q2Π2 = [300 − 3(q1+q2) − 100]q2π2 = (200 − 3q1 − 3q2)q2
This is Lizzy’s profit function. Solving for q2, we get the reaction function for Lizzy:q2 = (200 − 3q1)/6b) Finding the Cournot equilibrium quantity per company, price, profit and thereafter showing them in the graph of these curves.To find the Cournot equilibrium, we must find the point at which both firms are producing their profit-maximizing quantities simultaneously. By the reaction functions above, we have q1 = (200 − 3q2)/6 and q2 = (200 − 3q1)/6.
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Explain the differences between a target zone agreement and a fixed exchange rate and between a target zone agreement and a monetary union.
Provide an example of a target zone agreement, briefly explain how it ended, and why, and in particular, why it is pretty frequent for these arrangements to fail?
B. (10 points)
First, explain how a country can join the European Monetary Union. Then, explain how monetary policy is run in this currency area.
An example of target zone agreement is the European Exchange Rate Mechanism (ERM).A country can join the European Monetary Union (EMU) by fulfilling the Maastricht criteria.
A target zone agreement is a two-sided agreement whereby two or more nations' central banks work to maintain their currencies within a specific exchange rate range.
A fixed exchange rate system is a system in which the value of a currency is kept constant relative to a reference currency. Finally, a monetary union refers to a region in which two or more countries have agreed to use a single currency as a legal tender.
To put it another way, a target zone agreement is a hybrid of a fixed exchange rate system and a floating exchange rate system, while a monetary union is a different kind of agreement. It’s a permanent agreement that entails the relinquishing of the nation’s currency and monetary policy.
One well-known instance of a target zone agreement is the European Exchange Rate Mechanism (ERM). The ERM is a two-sided arrangement between member countries of the European Union (EU) that allows them to keep their currencies within a specific exchange rate range with respect to each other. The ERM began on March 13, 1979, and was meant to help maintain currency stability in the EU.
It ended when the UK government withdrew from the agreement on September 16, 1992, following an unsuccessful effort to maintain the value of the pound sterling in the agreement.The most frequent cause of target zone agreement failures is the lack of commitment by one of the parties to maintain the set exchange rate, causing the other party to lose faith in the agreement and potentially forcing it to withdraw from the agreement.
A country can join the European Monetary Union (EMU) by fulfilling the Maastricht criteria. The criteria are: sound fiscal policy, a low budget deficit and low public debt, price stability, long-term interest rates at a level similar to that of other countries, and the independence of the central bank.
The European Central Bank (ECB) is in charge of monetary policy in the currency area. It establishes interest rates, conducts open market operations, and oversees the money supply. The goal of the ECB is to maintain price stability in the region by keeping inflation rates below, but close to, 2 percent per year.
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