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1. A firm is considering whether to invest in a new project
that has an initial cost of $100,000 and is expected to
generate a net cash flow of $20,000 per year for 10 years.
The firm's cost of capital is 10%. What is the net present
value (NPV) of the project?
a) $61,446
b) $100,000
c) $200,000
d) -$38,554
Answer: a) $61,446
Rationale: NPV = sum of discounted cash flows - initial
cost = ($20,000/1.1 + $20,000/1.1^2 + ... +
$20,000/1.1^10) - $100,000 = $61,446
2. A monopolist faces a demand curve given by Q = 100 -
2P, where Q is quantity and P is price. The monopolist's
marginal cost is constant at $10. What is the profitmaximizing price and quantity for the monopolist?
a) P = $35, Q = 30
b) P = $30, Q = 40
c) P = $25, Q = 50
d) P = $20, Q = 60
Answer: c) P = $25, Q = 50
Rationale: The profit-maximizing condition for a
monopolist is to set marginal revenue equal to marginal
cost. Marginal revenue is the derivative of total revenue
with respect to quantity. Total revenue is given by P*Q =
(100 - 2Q)*Q = 100Q - 2Q^2. Therefore, marginal revenu
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