1. If the interest rate is 10 percent, what is the present value of $10 received one year from now?
2. $10.10
3. $10.05
4. $9.09
5. $10.11

1. The period of time defining the long run is characterized by:
2. managers’ ability to adjust all factors of production.
3. only fixed costs of production exist.
4. only fixed costs and variable costs of production exist.
5. greater than three years.

1. Which of the following “costs” could a firm that wants to remain in business NOT avoid if it halted current production?
2. Only fixed costs
3. Only variable costs
4. Only sunk costs
5. Fixed costs and sunk costs

1. Economic profits:
2. Signal where resources are most highly valued by society.
3. Allow consumers to cover their opportunity cost.
4. Are the same as accounting profits.
5. None of the statements associated with this question are correct.
6. An isocost line:
7. represents the combinations of inputs that cost the firm the same amount of money
8. defines the combinations of inputs that yield the same level of output.
9. is the rate at which a producer can substitute between two inputs and maintain the same level of output.
10. has a convex shape.

1. The head of the accounting department at a major software manufacturer has asked you to put together a pro forma statement of the company’s value under several possible growth scenarios and the assumption that the company’s many divisions will remain a single entity forever. The manager is concerned that, despite the fact that the firm’s competitors are comparatively small, collectively their annual revenue growth has exceeded 50 percent over each of the last five years. She has requested that the value projections be based on the firm’s current profits of $4.4 billion (which have yet to be paid out to stockholders) and the average interest rate over the past 20 years (9 percent) in each of the following profit growth scenarios:
   
   a. Profits grow at an annual rate of 10 percent. (This one is tricky.)
2. The firm will shut down at its growth rate
3. The growth rate is not possible
4. The firms value is infinite
5. The firms value is zero

Instructions: Round your responses to 2 decimal places.

b. Profits grow at an annual rate of 3 percent.

billion

c. Profits grow at an annual rate of 0 percent.

billion

d. Profits decline at an annual rate of 2 percent.

billion

1. A firm produces output according to a production function:
   
   Q = F(K,L) = min {9K,3L}.
   
   a. How much output is produced when K = 2 and L = 3?
   
   
   
   
   b. If the wage rate is $70 per hour and the rental rate on capital is $45 per hour, what is the cost-minimizing input mix for producing 9 units of output?
   
   Capital: 
   Labor: 
   
   
   c. How does your answer to part b change if the wage rate decreases to $45 per hour but the rental rate on capital remains at $45 per hour?

1. From California to New York, legislative bodies across the United States are considering eliminating or reducing the surcharges that banks impose on noncustomers, who make $10 million in withdrawals from other banks’ ATM machines. On average, noncustomers earn a wage of $20 per hour and pay ATM fees of $2.75 per transaction. It is estimated that banks would be willing to maintain services for 4 million transactions at $0.75 per transaction, while noncustomers would attempt to conduct 16 million transactions at that price. Estimates suggest that, for every 1 million gap between the desired and available transactions, a typical consumer will have to spend an extra minute traveling to another machine to withdraw cash.
   Based on this information, what would be the nonpecuniary cost of legislation that would place a $0.75 cap on the fees banks can charge for noncustomer transactions?
   Instructions: Round your answer to the nearest penny (2 decimal places). 
   $
   What would be the full economic price of this legislation?
   $

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