NAME: ________________________________________________
FNR 407
Examination No. 1, 2009
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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.
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2.
Fill in the second column in the following table:
Total
Cost
500
550
610
700
800
920
850
Marginal
Cost
XXXXX
Be certain to use the appropriate sign (+ or -) for each entry in the table.
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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?
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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?
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NAME: ________________________________________________
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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
60
55
50
45
40
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6.
7.
NPV
$’s
5,000
2,000
250
-250
-4,000
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)?
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)?
2
NAME: ________________________________________________
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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.
P
P1
Supply
curve
Demand
curve
Q
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?
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9.
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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?
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NAME: ________________________________________________
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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?
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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
300
400
500
600
700
800
900
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Firm A’s MC
$200
$400
$600
$900
$1,300
$2,000
$5,000
Firm B’s Q
Firm B’s MC
100
200
300
400
500
600
700
$400
$600
$900
$1,300
$2,000
$5,000
$9,000
Market Q
Market MC ,
also the Price
$200
$400
$600
$900
$1300
$2000
$5000
$9000
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?
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NAME: ________________________________________________
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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.
$
Marginal cost
Total average
cost
P1
P2
P3
Q
P1 –
P2 –
P3 -
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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.
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NAME: ________________________________________________
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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?
$’s
MC
$135
Q1
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Q
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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