NAME: ______

FNR 407

Examination No. 1, 2009

(5)1.For a specified production process explain why the portion of the marginal cost (MC) curve that lies above the average variable cost (ATC) would be the short-run supply curve for a firm using that production process. Be certain to explain the relevance of ATC.

(5)2.Fill in the second column in the following table:

Total
Cost / Marginal
Cost
500 / XXXXX
550
610
700
800
920
850

Be certain to use the appropriate sign (+ or -) for each entry in the table.

(5)3.If the total volume of pulpwood that a stand will yield at the end of a 50 year rotation is 150 cords per acre, what is the average total product (ATP), also called Mean Annual Increment, for this stand in cords per acre per year?

(5)4.Because of the long time periods required to grow timber, what is the major cost incurred and how is this cost reflected in net present value (NPV) calculations?

(5)5.A consulting foresters calculated net present values for a stand of timber using pulpwood prices from $40 to $60 per cord for an even-aged stand of timber his client was considering purchasing. The discount (interest) rate used was 3% (0.03). Approximately what price must the investor receive for the timber if she wants an internal rate of return of 5% on this investment? (Remember that IRR is the rate at which present value of revenues equals the present value of expenses.)

Price
$/MBF / NPV
$’s
60 / 5,000
55 / 2,000
50 / 250
45 / -250
40 / -4,000

(5)6.Within the context of a single tree, what are the economic/financial implications of the tree being both the thing producing the product (machine) and the product produced (output)?

(5)7.A monopoly exists when there is only one firm providing a good or service to more than one purchaser. Why can’t the monopolist charge whatever they want for the good or service they produce?

Is the marginal cost (MC) curve of a monopolist relevant to the level of production that maximizes its net revenue (profit)?

(5) 8 .In the figure below if the current price is P1 would you expect this price to continue for very long? What adjustments would occur by producers and by consumers? Show on the graph what you think the long-run market equilibrium price would be.

(5)9.Why don’t sunk costs matter when a firm is making decisions about how to improve their financial performance by changing how they conduct their business?

(5)10.If a firm sells into a very competitive market for which price information is available, what can we assume its marginal revenue will be equal to for the product or service it produces?

(5)11.If a firm raises its price and its total revenue goes up, is it selling in an elastic or inelastic market?

If a firm know that its price elasticity of demand is -1 and it wants to maximize total revenue should it decrease, increase, or not change it price?

(5)12. There are only two firms producing widgets in a given market area. Their MC’s are given in the table along with the associated level of output. What is the supply curve for this market area? (Fill in the empty columns)

Firm A’s Q / Firm A’s MC / Firm B’s Q / Firm B’s MC / Market Q / Market MC , also the Price
300 / $200 / 100 / $400 / $200
400 / $400 / 200 / $600 / $400
500 / $600 / 300 / $900 / $600
600 / $900 / 400 / $1,300 / $900
700 / $1,300 / 500 / $2,000 / $1300
800 / $2,000 / 600 / $5,000 / $2000
900 / $5,000 / 700 / $9,000 / $5000
$9000

(6)13.An investor can purchase a warehouse room full of 5 year old wine in oak casks for $500,000. The seller estimates that after bottling the wine in the casks will be worth $750,000 in 3 years. What rate of return would the investor earn if he made this investment and the value estimated by the seller came true?

(5)14.For the situation shown in the graph below describe this firm’s net revenue (profit) level for each of the three price levels shown.

P1 –

P2 –

P3 -

(6)15.A timberland owner expects to earn an 8 percent rate of return on her investments. She owns a 25 year old stand of pine that could be sold today for $600 per acre as pulpwood. If she waits 5 years the stand could be sold for $900 per acre as sawtimber. Set-up the equation she should use to make this determination.

(6)16.The Acme Lumber Company produces pallet lumber that it sells into a highly competitive market. Its average sales price is $150 per MBF cash-and-carry on the dock at their mill. Its fixed costs total approximately $15,000 per month. Its total variable cost is currently running at $135 per MBF, shown on the graph. Given the marginal cost curve below should Acme increase or decrease its output?

(6)17.If a firm makes management decisions on the basis of the affect of a change in their operating procedure on the bottom line, i.e. net revenue (profit), how can they justify making these decisions based on equating the marginal cost and marginal benefit estimated for each change being considered? A graph would be very helpful to explain your answer.

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