Critically evaluate the following: In your planning meetings the advertising executive says: “Unit sales went up last year by 15% when we increased advertising expenditures by 5%. Clearly, advertising is very effective. Our advertising budget should be funded at an even larger amount this year.” (Hint: Be sure to address whether the executive’s statement is unambiguously reliable.)

2. Ariel has been told that she will be in line for the following bonuses over the course of the next 5 years if she attains her sales quotas each period:

a. Year 1 – $10,000

b. Year 2 – $15,000

c. Year 3 – $20,000

d. Year 4 – $30,000

e. Year 5 – $50,000

With this data, calculate the Present Value of these future bonus payments, assuming she achieves the targets.

3. A firm with a 2 input production process measures the marginal output with respect to one input at 12 while the price of that input is $3.00. Knowing that the price of the second input is $4.00, what should the firm do to optimize production (assume that the MPP’s are independent for the sake of this discussion). Why?

4. Barb listens only to Broadway Musicals or Dead Kennedys. She buys 14 Broadway Musical downloads and 20 downloads by Dead Kennedys per month, but would forgo downloads by Dead Kennedys for the Broadway Musical downloads at the rate of 2.0-to1 whenever she has more Dead Kennedys units than Broadway Musical units. She would forego only 1.0 of a unit by Dead Kennedys per Broadway Musical when the opposite is true, however.

If you took away 12 Dead Kennedys downloads, how many Broadway Musical downloads would she need in total to remain at the same satisfaction level? Be sure to show your work.

5. Frankie and Jose’ both shop at the same store and face the same prices but come away with very different commodity bundles. Last week Frankie bought $10 worth of fruit and $5 worth of candy while Jose purchased $5 worth of fruit and $30 worth of candy. Even though their bundles differ markedly, what trait do they share with regard to the MRS between candy and fruit? 6. Describe the effect of each of the following events on either the demand or supply of iPhones in the USA. Further indicate the likely direction in the total amount of iPhones exchanged AND the change in expected market price (both) when: a. domestic incomes decrease. b. the price of wireless network usage rises. c. the price of landline phones and usage falls. d. the price of Android apps declines.

Page – 3

7. A professional duct cleaning firm estimates that each additional room it cleans costs the firm $22. The owner estimated the firm’s demand could be described by the equation below. She also estimated the marginal revenue equation from the demand equation. Estimated demand equation: Q = 40,000 – 1,000P

a. Calculate the optimum output level. (show your work) b. In order to sell the amount computed in part (a) above; at what price would the company have to offer its service? c. If fixed costs are $57,500, what is this firm’s total profit at the optimum price/output combination?

8. A certain industry with five firms is under scrutiny due to an impending merger. Firm 1 has 30% of the market while firm 2 and 3 has 25%. The remaining firms have 10% each. What is the Herfindahl-Hirschman index for the industry? Based on DOJ guidelines, do you think it is likely that the Justice Department would block a merger between firms 3 and 4? What other aspects of the marketplace might the department consider as it evaluates the shares?

9. True or false? A sunk cost is always a fixed cost, but a fixed cost is not necessarily a sunk cost. Explain your response being sure to define your terms.

10.

(/0x4*

a. Does this represent the SR or LR? Explain.

b. What is the optimal number of workers this firm will hire?

c. What are profits at this number of workers?