Microeconomics (9th Edition) (Pearson Series in Economics)
9th Edition
ISBN: 9780134184241
Author: Robert Pindyck, Daniel Rubinfeld
Publisher: PEARSON
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Chapter 17, Problem 10E
To determine
Calculate the expected profit of the firm.
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You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald’s or a Penn Station East Coast Subs franchise. McDonald’s indicates that, based on the location where you are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent probability that profits will be −$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent probability, and −$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of these two investment opportunities, which is the better investment? Explain carefully.
Questions 18 through 20 refer to the following information:
Shawn's consumption is subject to risk. With probability 0.75 he will enjoy 10000 in
consumption, but with probability 0.25 he will have only 3600. His utility function for
consumption is given by v(c) = vc.
Question 18
What is the expected value of Shawn's consumption?
Question 19
What is his expected utility?
You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur.You will not switch unless you earn an accounting profit that is on average at least as great as your current salary. You look into opening a small grocery store. Suppose that the store has annual costs of $150,000 for labor, $50,000 for rent and $40,000 for equipment. There is a one half probability that revenues will be $210,000 and a one half probability that revenues will be $410,000.
Your economis profit?
Suppose the government imposes a 25 percent tax on accounting profits. This tax is only levied if a firm is earning positive accounting profits. What will your after tax accounting profit be in the low revenue case?
In the high revenue case?
What will your average after tax accounting profit be?
Chapter 17 Solutions
Microeconomics (9th Edition) (Pearson Series in Economics)
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