ECON 103C -- Final Exam Peter Bell, 2014

Transcription

1 Name: Date: 1. Which of the following factors causes a movement along the demand curve? A) change in the price of related goods B) change in the price of the good C) change in the population D) both b and c 2. If Z is a normal good, and A and Z are complements, then an increase in the price of good Z will: A) increase demand for good A. B) decrease demand for good A. C) decrease demand for good Z. D) both b and c. 3. For many university students, after graduation their demand for used cars decreases. This could be because used cars are considered: A) a Giffen good. B) a normal good. C) obsolete. D) an inferior good. 4. If goods A and B are substitutes and B is a normal good, then a decrease in the price of good B will: A) increase demand for good A. B) increase demand for good B. C) decrease demand for good A. D) both b and c. 5. The market for soybeans is initially in equilibrium. Because of "mad cow" disease, producers decide to replace bone meal with soybeans in cattle feed. The likely effect is that: A) the equilibrium quantity of soybeans will rise, but we can't determine what will happen to the equilibrium price. B) the equilibrium price of soybeans will rise, but we can't determine what will happen to the equilibrium quantity. C) the equilibrium price and quantity of soybeans will fall. D) the equilibrium price and quantity of soybeans will rise. Page 1 of 25

2 6. If the economy booms and people's incomes rise, then the demand curve for a normal good like new houses will and the equilibrium quantity of new houses produced will. A) not shift; increase B) shift to the left; decrease C) not shift; not change D) shift to the right; increase 7. A binding price ceiling is designed to: A) prevent shortages. B) keep prices low. C) increase the quality of the good. D) none of the above. 8. You manage a popular nightclub and lately revenues have been disappointing. Your bouncer suggests that raising drink prices will increase revenues, but your bartender suggests that decreasing drink prices will increase revenues. You aren't sure who is right, but you do know that: A) your bouncer thinks the demand for drinks is inelastic, while your bartender thinks the demand for drinks is elastic. B) both the bouncer and bartender think the demand for drinks is inelastic. C) your bouncer thinks the demand for drinks is elastic, while your bartender thinks the demand for drinks is inelastic. D) both the bouncer and bartender think the demand for drinks is elastic. 9. Along a given demand curve, an increase in the price of a good will: A) decrease producer surplus. B) increase consumer surplus. C) decrease consumer surplus. D) have no effect on consumer surplus. 10. Alexis is willing to buy the last ticket to the Tragically Hip concert at Canada's Wonderland for $16, while Jake is willing to pay $24. Alexis is first in line and buys a ticket for $15. She then resells her ticket to Jake for $20. By reselling the ticket instead of going to the concert herself, Alexis causes: A) the sum of the consumer and producer surplus to decrease. B) consumer surplus to decrease and producer surplus to increase. C) the sum of the consumer and producer surplus to increase. D) a deadweight loss of $5. Page 2 of 25

3 11. Suppose Q D (P)=15-P, Q S (P)=2P. Solve the equilibrium price, P*. A) 0 B) 1 C) 5 D) Suppose Q D (P)=15-P, Q S (P)=2P. Solve the equilibrium quantity, Q*. A) 0 B) 1 C) 5 D) Suppose Q D (P)=15-P, Q S (P)=2P. Solve the Consumer Surplus at equilibrium. A) 5 B) 25 C) 50 D) Suppose Q D (P)=15-P, Q S (P)=2P. Solve the Producer Surplus at equilibrium. A) 5 B) 25 C) 50 D) Suppose there is a supply curve, Q S,1 as below. Pick the correct statement. Q S,1 0 for 0 < P < 10 = { 10P 100 for 10 < P A) Producer has a costly inventory because they sell a positive quantity at low prices. B) Producer has a costly inventory because they sell zero quantity at low prices. C) Producer only sells for prices above some threshold because they sell a positive quantity at low prices. D) Producer only sells for prices above some threshold because they sell zero quantity at low prices. Page 3 of 25

4 16. Suppose there is a supply curve, Q S,2 as below. Pick the correct statement. Q S,2 5 for 0 < P < 5 = { 5P 20 for 5 < P A) Producer has a costly inventory because they sell a positive quantity at low prices. B) Producer has a costly inventory because they sell zero quantity at low prices. C) Producer only sells for prices above some threshold because they sell a positive quantity at low prices. D) Producer only sells for prices above some threshold because they sell zero quantity at low prices. 17. Suppose Q D,1 (P)=100-P, Q D,2 (P)=50-P. Pick the correct statement. A) For 0<P<50, total demand is Q D (P) = 150 2P. B) For 0<P<50, total demand is Q D (P) = 50 P. C) For 50<P<100, total demand is Q D (P) = 150 2P. D) For 50<P<100, total demand is Q D (P) = 50 P. 18. Suppose Q D,1 (P)=100-P, Q D,2 (P)=50-P. Pick the correct statement. A) For 0<P<50, total demand is Q D (P) = 50 P. B) For 0<P<50, total demand is Q D (P) = 100 P. C) For 50<P<100, total demand is Q D (P) = 50 P. D) For 50<P<100, total demand is Q D (P) = 100 P. 19. Pick the correct statement for the Consumer Surplus as a dq integral, where Q : P D (Q ) = 0, P* and Q* are equilibrium price and quantity. A) Q P D (Q)dQ B) C) D) o Q o P D (Q) P dq Q P D (Q)dQ Q Q P D (Q) P dq Q Page 4 of 25

5 20. Pick the correct statement for the Consumer Surplus as a dp integral, where P : Q D (P ) = 0, P* and Q* are equilibrium price and quantity. A) P Q D (P)dP B) C) D) o P o Q D (P) Q dp P Q D (P)dP P P Q D (P) Q dp P 21. Suppose a policy forces market price above equilibrium, P > P*, and forces the market to clear at the supply. Pick the correct statement. A) Quantity in market is more with policy than in equilibrium. B) Quantity in market is less with policy than in equilibrium. C) Quantity in market is the same with policy as in equilibrium. 22. Suppose a policy forces market price above equilibrium, P > P*, and forces the market to clear at the supply. Pick the correct statement. A) Consumer Surplus is more with policy than in equilibrium. B) Consumer Surplus is less with policy than in equilibrium. C) Consumer Surplus is the same with policy as in equilibrium. 23. Suppose a policy forces market price above equilibrium, P > P*, and forces the market to clear at the supply. Pick the correct statement. A) Producer Surplus is more with policy than in equilibrium. B) Producer Surplus is less with policy than in equilibrium. C) Producer Surplus is the same with policy as in equilibrium. 24. Suppose a policy forces market price below equilibrium, P < P*, and allows demand and supply to choose their own quantity. What will the quantity demand, Q D, and quantity supply, Q S, be in the market? A) Q D > Q* and Q S > Q*. B) Q D > Q* and Q S < Q*. C) Q D < Q* and Q S > Q*. D) Q D < Q* and Q S < Q*. Page 5 of 25

6 25. Suppose a policy forces market price below equilibrium, P < P*, and forces the market to clear at the supply curve. What will be the difference between consumer surplus under the policy versus equilibrium? A) CS certainly larger. B) CS certainly smaller. C) CS maybe larger or smaller. 26. Suppose a policy forces market price below equilibrium, P < P*, and forces the market to clear at the demand curve. What will be the difference between consumer and producer surplus under the policy, CS and PS, versus under equilibrium, CS* and PS*? A) CS > CS* and PS > PS*. B) CS > CS* and PS < PS*. C) CS < CS* and PS > PS*. D) CS < CS* and PS < PS*. 27. Suppose a policy forces market price above equilibrium, P > P*, and forces the market to clear at the supply curve. What will be the difference between consumer and producer surplus under the policy, CS and PS, versus under equilibrium, CS* and PS*? A) CS > CS* and PS > PS*. B) CS > CS* and PS < PS*. C) CS < CS* and PS > PS*. D) CS < CS* and PS < PS*. 28. Suppose a policy forces market price above equilibrium, P > P*, and forces the market to clear at the demand curve. What will be the difference between Total Surplus under the policy versus under equilibrium? A) Total Surplus is certainly larger. B) Total Surplus is certainly smaller. C) Total Surplus maybe larger or smaller. 29. Suppose a policy forces market price above equilibrium, P > P*. Pick the correct statement. A) Shortage of supply causes demand to clear at a higher price in the black market. B) Shortage of supply causes demand to clear at a lower price in the black market. C) Excess supply causes demand to clear at a higher price in the black market. D) Excess supply causes demand to clear at a lower price in the black market. 30. Suppose a policy forces market price below equilibrium, P < P*. Pick the correct statement. Page 6 of 25

7 A) Shortage of supply causes demand to clear at a higher price in the black market. B) Shortage of supply causes demand to clear at a lower price in the black market. C) Excess supply causes demand to clear at a higher price in the black market. D) Excess supply causes demand to clear at a lower price in the black market. INTENTIONAL BLANK SPACE Page 7 of 25

8 31. In the short run: A) all inputs are variable. B) all costs are variable. C) all inputs are fixed. D) some inputs are fixed and some inputs are variable. 32. If Jacob knows the marginal cost of producing the 7th sports jersey is $21, then the total cost of 7 sports jerseys is: A) The answer cannot be determined from the above information. B) $147. C) $21. D) $ If Marie Marionettes is operating under conditions of diminishing marginal product, the marginal costs will be: A) constant. B) equal to ATC. C) decreasing. D) increasing. 34. When marginal cost is rising: A) average variable cost must be rising. B) average total cost must be rising. C) both a and b must occur. D) both average variable cost and average total cost may be rising or falling. 35. Suppose the marginal cost curve in the short run first decreases, then reaches a minimum, and then increases. If we are at an output where marginal cost is increasing and above the total cost, then: A) average total cost must be increasing. B) marginal product must be increasing. C) average variable cost must be increasing. D) both a and c are correct. Page 8 of 25

9 36. For a perfectly competitive firm, marginal revenue: A) is greater than price. B) is equal to price. C) is less than price. D) decreases as the firm increases output. 37. In perfect competition, the assumption of easy entry and exit implies that: A) in the long run, all firms in the industry will earn zero economic profits. B) in the short run, all firms in the industry will earn positive economic profits. C) in the short run, all firms in the industry will earn zero economic profits. D) a and b are correct. 38. Suppose a perfectly competitive firm can increase its profits by increasing its output. Then, it must be the case that the firm's: A) price exceeds its marginal revenue. B) marginal revenue exceeds its marginal cost. C) price exceeds its average total cost. D) marginal cost exceeds its marginal revenue. 39. A perfectly competitive firm is definitely suffering an economic loss when: A) P > AVC. B) MR < MC. C) P < ATC. D) P < MC. 40. If price is consistently below average total cost, then in the short run a perfectly competitive firm should: A) raise the price. B) There is not enough information given to answer this question. C) continue to produce to minimize losses. D) shut down. 41. Suppose there are two revenue functions: R1(Q) = 10 Q, R2(Q) = (15-Q) Q. The price in the market with perfect competition is 10 and if Q=10 then the price in the monopoly market is the same, P=10. Page 9 of 25

10 42. Suppose there are two revenue functions: R1(Q) = 10 Q, R2(Q) = (15-Q) Q. Pick the correct statement. A) R1 represents perfect competition and R2 represents monopoly; Q=5 gives P=10 in both markets. B) R1 represents perfect competition and R2 represents monopoly; Q=10 gives P=10 in both markets. C) R1 represents monopoly and R2 represents perfect competition; Q=5 gives P=10 in both markets. D) R1 represents monopoly and R2 represents perfect competition; Q=10 gives P=10 in both markets. 43. Suppose there are two revenue functions: R1(Q) = 10 Q, R2(Q) = (15-Q) Q. The marginal cost for each producer is always 1, which means C(Q) = Q. Each producer has a feasible set, Q [0, Q ]. Pick the correct statement. A) If Q > 7 then Q1*=Q2*. B) If Q > 7 then Q1*<Q2*. C) If Q < 7 then Q1*=Q2*. D) If Q < 7 then Q1*<Q2*. 44. Suppose there are two revenue functions: R1(Q) = 10 Q, R2(Q) = (15-Q) Q. The marginal cost for each producer is always 1, which means C(Q) = Q Each producer has a feasible set, Q [0, Q ]. Pick the correct statement. A) If Q > 7 then Q1*>Q2*. B) If Q > 7 then Q1*<Q2*. C) If Q < 7 then Q1*>Q2*. D) If Q < 7 then Q1*<Q2*. 45. Suppose there is a revenue function, R1(Q) = 10 Q, where the marginal cost is always one, C(Q) = Q, and the producer has a feasible set, Q [0, Q ]. The profit function at optimal level of production is Π1* =9Q... Page 10 of 25

11 46. Suppose there is a revenue function: R2(Q) = (15-Q) Q. The marginal cost for each producer is always 1, which means C(Q) = Q. Each producer has a feasible set, Q [0, Q ]. Pick the correct statement for optimal profit. A) If Q > 7 then Π2 * =15 Q (Q ) 2. B) If Q > 7 then Π2 * =49, C) If Q < 7 then Π2* =15 Q (Q ) 2, D) If Q < 7 then Π2* = Consider two producers. Both have revenue function equal to R(Q) = 100 Q. However, they have different cost functions, C1(Q) = Q and C2(Q) = Q. Since the marginal profit for producer number one is larger than producer number two (dπ1/dq=98 and dπ2/dq=99), producer number two is better. 48. Consider two producers. Both have revenue function equal to R(Q) = 100 Q. However, they have different cost functions, C1(Q) = Q and C2(Q) = Q. For large levels of production (Q>50) it is better to use producer number one because it has lower fixed costs. 49. Consider two producers. Both have revenue function equal to R(Q) = 100 Q. However, they have different cost functions, C1(Q) = Q and C2(Q) = Q. For large levels of production (Q>50), it is better to use producer number two because it has lower marginal costs. 50. Consider two producers. Both have revenue function equal to R(Q) = 100 Q. However, they have different cost functions, C1(Q) = Q and C2(Q) = Q. For small levels of production (Q<50), it is better to use producer number one because it has lower fixed costs. Page 11 of 25

12 51. Consider two producers. Both have revenue function equal to R(Q) = 100 Q. However, they have different cost functions, C1(Q) = Q and C2(Q) = Q. For small levels of production (Q<50), it is better to use producer number two because it has lower marginal costs. 52. Solve the level of profit for two producers when Q=1, both have revenue function equal to R(Q) = 100 Q, and they have different cost functions, C1(Q) = Q and C2(Q) = Q. A) Π1(1)=48 and Π2(1)=48. B) Π1(1)=48 and Π2(1)=-1. C) Π1(1)=-1and Π2(1)=48. D) Π1(1)=-1 and Π2(1)= Solve the level of profit for two producers when Q=100, both have revenue function equal to R(Q) = 100 Q, and they have different cost functions, C1(Q) = Q and C2(Q) = Q. A) Π1(100) = 9750 and Π2(100) = B) Π1(100) = 9750 and Π2(100) = C) Π1(100) = 9800 and Π2(100) = D) Π1(100) = 9800 and Π2(100) = Suppose a producer faces Q=f(I), where Q is output and I is input. The production function is always increasing, f > 0. Pick the correct statement. A) The f is constant and producer has Constant Returns to Scale. B) The f is increasing and producer has Constant Returns to Scale. C) The f is constant and producer has Decreasing Returns to Scale. D) The f is increasing and producer has Decreasing Returns to Scale. 55. Suppose a producer faces Q=f(I), where Q is output and I is input. The production function is always increasing, f > 0. Pick the correct statement. A) The f is constant and producer has Increasing Returns to Scale. B) The f is decreasing and producer has Increasing Returns to Scale. C) The f is constant and producer has Decreasing Returns to Scale. D) The f is decreasing and producer has Decreasing Returns to Scale. Page 12 of 25

13 56. Pick the correct statement. A) A producer with a decreasing total costs has Increasing Returns to Scale. B) A producer with a decreasing marginal costs has Increasing Returns to Scale. C) A producer with a decreasing total costs has Decreasing Returns to Scale. D) A producer with a decreasing marginal costs has Decreasing Returns to Scale. 57. Pick the correct statement. A) A producer with increasing total costs has Increasing Returns to Scale. B) A producer with increasing marginal costs has Increasing Returns to Scale. C) A producer with increasing total costs has Decreasing Returns to Scale. D) A producer with increasing marginal costs has Decreasing Returns to Scale. Π2 Π1 Figure 1: Two distributions for profit. Horizontal axis is profit, Π. Vertical axis is frequency. 58. Based on the two distributions in Figure 1, the 5% quantile is lower for distribution number one (Π1) than distribution number two (Π2), which implies a producer would prefer distribution number two... Π2 Π1 Figure 2: Two distributions for profit. Horizontal axis is profit, Π. Vertical axis is frequency. Page 13 of 25

14 59. Based on the two distributions in Figure 2, the variance for the first distribution is larger than the second one, which implies a producer would prefer distribution number two according to the mean-variance preferences... Π1 Π2 60. Based on the two distributions in Figure 3, the mean for the first distribution is larger than the second one, which implies a producer would prefer distribution number one according to the mean-variance preferences... Figure 3: Two distributions for profit. Horizantal axis is profit, Π. Vertical axis is frequency. INTENTIONAL BLANK SPACE Page 14 of 25

15 61. The relationship between an individual's consumption bundle and his/her utility is called A) a production function. B) a consumption function. C) a utility function. D) a demand function. 62. To say that you can't have too much of a good thing means that for any good that you enjoy (say, pizza): A) higher consumption will cause utility to increase at an increasing rate. B) it is valid to measure utility in utils. C) higher consumption will always lead to greater utility. D) higher consumption will increase utility but only up to a point; after that utility will start to decrease. 63. An individual gets 5 units of utility from 1 slice of pizza and 9 units of utility from 2 slices of pizza. The principle of diminishing marginal utility implies that the total utility from 3 slices of pizza will be: A) less than 9 units of utility. B) exactly 12 units of utility. C) more than 12 units of utility. D) less than 13 units of utility. 64. You go to an all-you-can-eat buffet. If you maximize utility, the marginal utility of the last bite that you eat will be: A) dependent on how much you like the buffet. B) equal to the price of the buffet. C) as high as possible. D) zero. 65. If the price of good X equals the price of good Y, then the utility-maximizing consumer will always buy equal amounts of X and Y. 66. At the optimal consumption bundle, the marginal utility of each good purchased is the same. Page 15 of 25

16 67. An indifference curve is a line that shows all the consumption bundles: A) that yield the same marginal utility. B) that an individual can purchase with a given income. C) that have the same marginal rate of substitution. D) that yield the same total utility for an individual. 68. If A and B are two consumption bundles, which of the following statements is consistent with utility being an ordinal, rather than a cardinal, concept? A) I prefer A to B. B) I prefer B to A by a very small margin only 1.5 utils. C) I prefer A to B by an amount equal to 6.5 utils. D) A provides me with twice as much satisfaction as B. 69. For ordinary goods, indifference curves: A) slope downward. B) are convex from the origin. C) never cross. D) are all of the above. 70. The marginal rate of substitution shows how a consumer can substitute between two goods: A) to increase total utility. B) to maintain the same marginal utility. C) to maintain the same income. D) to maintain the same level of total utility. 71. Indifference curves that exhibit a diminishing marginal rate of substitution are: A) downward-sloping straight lines. B) convex to the origin. C) upward sloping over part of their length. D) concave to the origin. 72. A consumer maximizes utility when, given her income, she chooses a consumption bundle where: A) the marginal utility of each good is highest. B) the marginal rate of substitution is highest. C) the marginal utility of each good is equal. D) the highest indifference curve is tangent to the budget line. Page 16 of 25

17 73. The relative price rule says that at the optimal consumption bundle the MRS between two goods must be equal to their relative price. This is equivalent to saying that: A) the MRS is not equal to the ratio of marginal utilities. B) goods should be consumed in the same ratio as their relative price. C) the marginal utility per dollar is the same for both goods. D) the marginal utility of each good consumed must be the same as that of the other. 74. If Coke and Pepsi are perfect substitutes for Lynn, her indifference curves are: A) vertical lines. B) right angles. C) concave from the origin. D) downward sloping straight lines. 75. As an individual moves down his or her indifference curve, total utility remains constant. 76. For Cobb-Douglas utility, U = Q1 a Q2 b, solve the Marginal Rate of Substitution (MRS1,2 = MU1 / MU2). A) (a/b)(q1/q2) B) (a/b)(q2/q1) C) (b/a)(q1/q2) D) (b/a)(q2/q1) 77. For Cobb-Douglas utility, U = Q1 a Q2 b, the equilibrium occurs at which of the following? A) P2/P1 = MRS1,2 B) P1/P2 = MRS1,2 78. For Cobb-Douglas utility with a = b = ½, U = Q1 1/2 Q2 1/2, then which of the following bundles (Q1,Q2) gives the highest level of utility? A) (0,10) B) (2,8) C) (4,6) D) (8,2) Page 17 of 25

18 79. For linear utility, U = a Q1 + b Q2, prices equal one (P1=P2=1) and income equal one (W=1). If a>b>0 then pick the optimal bundle (Q1, Q2). A) (1,0) B) (0,1) C) (½, ½) D) (b/a, a/b) 80. For linear utility, U = a Q1 + b Q2, prices equal one (P1=P2=1) and income equal one (W=1). If b>a>0 then pick the optimal bundle (Q1, Q2). A) (1,0) B) (0,1) C) (½, ½) D) (a/b, b/a) 81. For linear utility with a=b=1, U = Q1 + Q2, and budget constraint 10= 2Q1+Q2. The optimal bundle (Q1,Q2) is (5,0). 82. For linear utility with a=3, b=1, U = 3Q1 + Q2, and budget constraint 10= 2Q1+Q2. The optimal bundle (Q1,Q2) is (5,0). 83. For Leontiff utility, U = min(q1, 10Q2) and budget constraint 1=Q1+Q2. The optimal bundle is (Q1,Q2) is (1,0). 84. For Leontiff utility, U = min(q1, 10Q2) and budget constraint 1=Q1+Q2. Pick the optimal bundle (Q1,Q2). A) (1,0) B) (0,1) C) (10/11, 1/11) D) (1/11, 10/11) Page 18 of 25

19 85. For Leontiff utility, U = min(q1, Q2+ ½Q1), the optimal bundle occurs at the intersection of the budget constraint and the line ½Q1=Q For Leontiff utility, U = min(q1, Q2+ ½Q1), and budget constraint equal to 10 = Q1+Q2. Pick the optimal bundle (Q1,Q2). A) (20/3, 20/3) B) (10/3, 20/3) C) (20/3, 10/3) D) (10/3, 10/3) 87. The marginal utility of coffee consumption for Steve is the change in generated by consuming an additional unit of coffee. A) price B) total utility C) total consumption D) total demand 88. James finds a new job that doubles his income. He adjusts his consumption. From this we know that for every normal good James buys: A) James's marginal utility per dollar will stay constant. B) James's marginal utility per dollar will rise. C) Jame's total utility will fall. D) James's marginal utility per dollar will fall. 89. If the price of good X is less than the price of good Y, then the utility-maximizing consumer will always buy more of X than Y. 90. The assumption that the rational consumer seeks to maximize his/her utility implies utility is measurable according to some objective scale. Page 19 of 25

20 INTENTIONAL BLANK SPACE Page 20 of 25

21 Series 1: 100 PV = (10 + 5k)(1.05) k k=0 91. Pick the correct statement regarding Series 1. A) First payment is $10 and occurs at time 0. B) First payment is $15 and occurs at time 0. C) First payment is $10 and occurs at time 1. D) First payment is $15 and occurs at time What payment occurs at time 100 for Series 1? A) 0 B) 10 C) 500 D) 510 Series 2: 50 PV = (1.05) 25 20(1.05) k k=1 93. Pick the correct statement regarding Series 2. A) First payment occurs at time 0. B) First payment occurs at time 1. C) First payment occurs at time 25. D) First payment occurs at time Pick the correct statement regarding Series 2. A) The payment is 0 from time 0 to 25, and 20 from time 26 to 50. B) The payment is 0 from time 0 to 25, and 20 from time 26 to 75. C) The payment is 20 from time 0 to 25, and 20 from time 26 to 50. D) The payment is 20 from time 0 to 25, and 20 from time 26 to The Present Value of Series 2 is 20(1.05) Page 21 of 25

22 Series 3: PV = 2(1.05) k + (1.05) 30 10(1.06) k k=1 k=5 96. At what time does the first payment occur for Series 3? A) 0 B) 1 C) 10 D) What is the average rate from time 31 to 35 for Series 3? A) 0% B) 5% C) 6% 98. What is the average payment between time 30 and 35 for Series 3? A) 0 B) 2 C) 10 D) At what time does the last payment occur for Series 3? A) 10 B) 15 C) 30 D) Depreciation is a A) Non-cash expense spread over many years. B) Non-cash expense that occurs in one year. C) Cash expense spread over many years. D) Cash expense that occurs in one year Increasing deprecation causes A) An increase in taxable income, increase in after-tax cash flow. B) An increase in taxable income, decrease in after-tax cash flow. C) A decrease in taxable income, increase in after-tax cash flow. D) A decrease in taxable income, decrease in after-tax cash flow. Page 22 of 25

23 102. A company has an incentive to A) Speed up depreciation because it increases the present value of expenses. B) Speed up depreciation because it decreases the present value of expenses. C) Slow down depreciation because it increases the present value of expenses. D) Slow down depreciation because it decreases the present value of expenses Increasing depreciation, D, causes an increase in the book value at expiry Increasing deprecation, D, increases the capital gain at expiry A company has an incentive to depreciate an asset quickly and as much as possible Pick the correct statement A) Large depreciation reduces taxes during the life of the asset and causes taxes-due on the capital gain at sale. B) Large depreciation increases taxes during the life of the asset and causes taxes-due on the capital gain at sale. C) Large depreciation reduces taxes during the life of the asset and causes a tax rebate on the capital loss at sale. D) Large depreciation increases taxes during the life of the asset and causes a tax rebate on the capital loss at sale If the tax rate is high, then depreciation A) Causes a large increase in after-tax cash flow. B) Causes a large increase in after-tax income. C) Causes a small increase in after-tax cash flow. D) Causes a small increase in after-tax income If depreciation rises by $1 and the tax rate is 50% then A) After-tax cash flow increases by $0.5. B) After-tax income increases by $0.5. C) After-tax cash flow decreases by $0.5. D) After-tax income decreases by $0.5. Page 23 of 25

24 109. If a company goes bankrupt, then the management is always personally liable Higher leverage always benefits a company... Suppose a project costs $100 in cash in the first year. The company can expense $50 in the first year and then $5 each year for the next 5 years. The project brings in incremental cash flow of $200 and has annual cash costs of $80. The tax rate is 50% What is the taxable income in the first year? A) 0 B) 70 C) 120 D) What is the after tax income in the first year? A) 0 B) 35 C) 60 D) What is the after tax cash flow in the first year? A) -15 B) 0 C) 35 D) If the company could expense all the project costs in the first year then what would be the taxes-due in the first year? A) 0 B) 10 C) 20 D) 60 Page 24 of 25

25 115. What is the taxable income in the second year? A) 0 B) 57.5 C) 115 D) What is the after tax income in the second year? A) 0 B) 57.5 C) 115 D) What is the after tax cash flow in the second year? A) 57.5 B) 62.5 C) 67.5 D) 72.5 Suppose a project costs $500 in cash in the first year and lasts for five years. The company faces zero taxes. Without the project, the annual cash revenue is $1000, cash costs are $200, and profits are $500. With the project, the annual cash revenue is $1200, cash costs are $300, and profits are $550 from the first to fifth year The project earns an increase in profit of $50 each year, so the company should do the project The project increases net cash flow, from $800 without the project to $900 with the project. Over five years at 10% discount rate, the present value of the gain in net cash flow is larger than the cost of the project so the company should do the project The project is like an annuity with cost $500 and annual payments 100 for five years. Page 25 of 25