Answer: B. Square feet of floor space occupied.
Explanation: Rent is usually charged and allotted based on the size of the space occupied,a bigger work space will be enough to occupy more raw materials, machines,offices,finished goods and other things.
The maintenance cost of using a bigger space will most likely be higher than a smaller work space, bigger work space requires more lightening,more ventilation etc which will definitely increase the amount allotted or spent in servicing and carrying our maintenance on this electrical items.
Which of these is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
Answer:
d. All of these are major characteristics of a plant asset.
Explanation:
The total assets comprise of current assets, fixed assets, and the intangible assets
The current assets include cash, stock, account receivable, etc
Fixed assets include plant & machinery, land, equipment, furniture & fittings, etc.
And, the intangible assets include patents, copyrights, goodwill, etc.
The fixed assets have the physical substance plus it is acquired for use only and it provides the services to the number of years.
All the stated options, possessing physical substance, being acquired for use in operations, and yielding services over a number of years, are major characteristics of a plant asset. Therefore, the answer to the question is d. All of these are major characteristics of a plant asset.
Explanation:All of the options provided in the question are indeed major characteristics of a plant asset. A plant asset, also known as a fixed asset, characteristically possesses physical substance, meaning that it is tangible. Examples include machinery, buildings, and land. This asset is also typically acquired for use in operations — it contributes to the functions and profitability of a business. Lastly, a plant asset is expected to yield services over a number of years, meaning this asset has a prolonged use or lifespan that transcends just a single fiscal year. Though some might be confused, option d is the most correct response as it states that all of these are indeed characteristics of a plant asset.
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York Casting Services started the year with total assets of $110,000 and total liabilities of $50,000. The revenues and the expenses for the year amounted to $140,000 and $50,000, respectively. During the year, the company did not issue any common stock, but it distributed dividends of $70,000. Calculate the amount of increase or decrease in stockholders' equity for the year.
Answer:
Net income: $
Revenue 140,000
Expenses (50,000)
Dividend paid (70,000)
Net income 20,000
Net income is the amount of increase in stockholders' equity.
Explanation:
Net income is the excess of revenue over expenses and dividend. A positive net income increases the stockholders' equity. Common stockholders are legal owners of a company, thus, any income not distributed as dividend increases their equity.
A low-cost airline described as one of the excellent companies in the bestseller of the early 1980s, In Search of Excellence, is no longer in business. Industry analysts state that although the service and prices provided by the airline were what customers wanted, the larger airlines were able to drive the low-cost airline out of business through an aggressive price war. This scenario is illustrative of which aspect of the competitive environment
Answer: Monopolistic competition
Explanation:
This is a market in which large numbers of producer sells differentiated products in terms of quality or branding. The ability to differentiate the products makes it possible for the different firms to practice price discrimenation which is further strengthen through advertising of the product, the price differences may force a firm out of the market if the demand for it's products falls significantly.
You are evaluating two different silicon wafer milling machines. The Techron I costs $245,000, has a three-year life, and has pretax operating costs of $63,000 per year. The Techron II costs $420,000, has a five-year life, and has pretax operating costs of $35,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $40,000. If your tax rate is 22 percent and your discount rate is 10 percent, compute the EAC for both machines. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Answer:
Techron I
EAC = -$120,263.94
Techron II
EAC = -$114,504.27
Explanation:
Techron I
Cost of Machine = $245,000
Useful Life = 3 years
Annual Depreciation = Cost of Machine / Useful Life
Annual Depreciation = $245,000 / 3
Annual Depreciation = $81,666.67
Salvage Value = $40,000
After-tax Salvage Value = $40,000 × (1 - 0.22)
After-tax Salvage Value = $31,200
Annual OCF = Pretax Operating Costs × (1 - tax) + tax × Depreciation
Annual OCF = -$63,000 × (1 - 0.22) + 0.22 × $81,666.67
Annual OCF = -$31,173.33
NPV = -$245,000 - $31,173.33 × PVIFA(10%, 3) + $31,200 × PVIF(10%, 3)
NPV = -$245,000 - $31,173.33 × 2.4869 + $31,200 × 0.7513
NPV = -$299,084.39
EAC = NPV / PVIFA(10%, 3)
EAC = -$299,084.39 / 2.4869
EAC = -$120,263.94
Techron II:
Cost of Machine = $420,000
Useful Life = 5 years
Annual Depreciation = Cost of Machine / Useful Life
Annual Depreciation = $420,000 / 5
Annual Depreciation = $84,000
Salvage Value = $40,000
After-tax Salvage Value = $40,000 × (1 - 0.22)
After-tax Salvage Value = $31,200
Annual OCF = Pretax Operating Costs × (1 - tax) + tax × Depreciation
Annual OCF = -$35,000 × (1 - 0.22) + 0.22 × $84,000
Annual OCF = -$8,820
NPV = -$420,000 - $8,820 × PVIFA(10%, 5) + $31,200 × PVIF(10%, 5)
NPV = -$420,000 - $8,820 × 3.7908 + $31,200 × 0.6209
NPV = -$434,062.78
EAC = NPV / PVIFA(10%, 5)
EAC = -$434,062.78 / 3.7908
EAC = -$114,504.27
Pharoah Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. (a) On July 1, (1) Pharoah purchase $76,000 of inventory, terms 3/10, n/30, FOB shipping point. (2) Pharoah paid freight costs of $1,276. (b) On July 3, Pharoah returned damaged goods and received credit of $7,600. (c) On July 10, Pharoah paid for the goods.
Answer:
inventory 76,000 debit
accounts payable 76,000 credit
---to record purchase on account--
freigth-in 1,276 debit
cash 1,276 credit
--to record payment of freigth--
accounts payable 7,600 debit
returns and allowance 7,600 credit
--to record return of good to supplier--
accounts payable 68,400 debit
purchase discount 2,052 credit
cash 66,348 credit
--to record payment within discount period--
Explanation:
As the company determinates inventory on a periodic basis we do not adjust right away, we use discount and return accounts instead of inventory
76,000 original invoice nominal
-7,600 discount
68,400 nominal after return subject to discount of 3%
-2,052 discount
66,348 cash outlay to settle with supplier
Consider an asset that has a beta of 1.25. If the risk free rate is 3.25 and the mrket risk premium is 5.5% caculate the expected return on the asset.
Answer:
10.125%
Explanation:
The formula to compute the expected return on the asset is shown below:
Expected return on the asset = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)
= 3.25% + 1.25 × 5.5%
= 3.25% + 6.875%
= 10.125%
The (Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is used in the computation part
The beginning Cash account balance is $38,700. During the period, cash disbursements (outflows) totaled $144,600.
If ending Cash is $51,200, then cash receipts must have been:
A. $105,900
B. $234,500
C. $132,100
D. $157,100
E. none of the abov
Answer:
D. $157,100
Explanation:
Amount in $
Beginning Cash account balance 38,700
Cash disbursement (outflows) (144,600)
Cash inflows xxxx
Ending balance 51,200
Cash inflows = 51,200 + 144,600 - 38,700
= $157,100
The right option is D. $157,100.
Simple majority rule can generate inefficient outcomes because
a. it does not register the intensity of voters' preferences.
b. it cannot adjust for special interest lobbying efforts.
c. it does not adjust for the costs of rational ignorance.
d. people are often misinformed on what it is they are voting on.
e. none of the above
Answer:
A
Explanation:
A cost that changes in proportion to changes in volume of activity is a(n): Select one: a. Differential cost. b. Fixed cost. c. Incremental cost. d. Variable cost. e. Product cost.
Answer:
The correct option is D
Explanation:
Variable cost is the corporate cost or an expense which varies in proportion or relation to the production output. Increase or decrease in the variable cost grounded on the production volume of the company or firm, which in short means that increase or rise in variable cost and the production increases and fall in variable cost, production decreases.
Therefore, the cost which changes or varies in the proportion to change in the volume of the activity is known or referred as variable cost.
One of the ten IG principles is a Continuous improvement. What is the importance of this principle to the organization program? A. Provide periodic program review and necessary adjustment against gaps and or shortcomings B. Ensure guidelines and policies are being followed to measure employee compliance C. Document management and report management software must be deployed for control D. None of the above
Answer:
The correct answer is letter "A": Provide periodic program review and necessary adjustment against gaps and or shortcomings.
Explanation:
Information Governance or IG principles are regulations that look for taking care of information security and control. Ten (10) are the IG principles and Continuous Improvement is the last one. This principle states that the programs reviewed by the IG are being transformed continuously which implies monitoring on a regular basis to avoid business gaps and shortcomings.
In 2016, Carow sold 3,000 units at $500 each. Variable expenses were $250 per unit, and fixed expenses were $500,000. The same selling price is expected for 2017. Carow is tentatively planning to invest in equipment that would increase fixed costs by 20%, while decreasing variable costs per unit by 20%. What is Carow's break-even point in units for 2017? Select one:
Answer:
2,000 units
Explanation:
In this question we use the formula of break-even point in unit sales which is shown below:
= (Fixed expenses) ÷ (Contribution margin per unit)
where,
Fixed expenses would be
= $500,000 × 120%
= $600,000
As fixed expense is increased by 20% so it would be 100 + 20 = 120%
Contribution margin per unit = Selling price per unit - Variable expense per unit
= $500 - $250 × 80%
= $500 - $200
= $300
As variable expense per unit is decreased by 20% so it would be 100 - 20 = 80%
Now put these values to the above formula
So, the value would equal to
= ($600,000) ÷ ($300)
= 2,000 units
Final answer:
Carow's break-even point in units for 2017 is calculated based on the increased fixed cost due to new equipment investment and the decreased variable cost per unit. The new fixed cost is $600,000, while the new variable cost per unit is $200. With a selling price of $500, the break-even point is 2,000 units.
Explanation:
To calculate Carow's break-even point in units for 2017, we need to consider the changes in fixed and variable costs that the new equipment will bring. The initial fixed costs are $500,000, and they will increase by 20%, resulting in a new fixed cost of $600,000 (500,000 × 1.20). The variable cost per unit, originally $250, will decrease by 20%, leading to a new variable cost of $200 (250 × 0.80). The break-even point in units is found by dividing the total fixed costs by the contribution margin per unit, which is the selling price minus the variable cost per unit.
Break-even point in units = Total fixed costs / (Selling price - Variable cost per unit)
Break-even point in units = $600,000 / ($500 - $200)
Break-even point in units = $600,000 / $300
Break-even point in units = 2,000 units
Thus, Carow's break-even point for 2017 is 2,000 units.
1. In uncertain circumstances, the conservatism principle guides accountants to A. accelerate revenue recognition and delay expense recognition. B. accelerate expense recognition and delay revenue recognition. C. recognize expense of prepaid items when payment is made. D. delay both expense recognition and revenue recognition.
Answer:
A
Explanation:
Which is true of output-choice models of oligopoly behavior?
a. Niether the Cournot nor the Stackelberg model can be constructed as a sequential game.
b. Both the Stackelberg and Cournot models can be constructed as sequential games
c. The Cournot, but not the Stackelberg, model can be constructed as a sequential game.
d. The Stackelberg, but not the Cournot, model can be constructed as a sequential game
Sea Company reports the following information regarding its production costs: Units produced 42,000 units Direct labor $35 per unit Direct materials $28 per unit Variable overhead $17 per unit Fixed overhead $105,000 in total Compute the product cost per unit under absorption costing.
The product cost per unit under absorption costing for Sea Company is $82.50.
Explanation:To calculate the product cost per unit under absorption costing, we need to consider the total fixed overhead as well as the variable costs per unit. Here's the step-by-step calculation:
Calculate the variable cost per unit: Direct labor + Direct materials + Variable overhead = $35 + $28 + $17 = $80 per unit.
Calculate the total cost per unit: Variable cost per unit + (Fixed overhead / Units produced) = $80 + ($105,000 / 42,000) = $82.50 per unit.
Therefore, the product cost per unit under absorption costing for Sea Company is $82.50.
The particular type of shareholder voting used has become less important with the influence of takeovers, leveraged buy-outs, and other challenges to management control.
A. True
B. False
Answer: B. False
Explanation:
Even in the case of take over or mergers or acquisition, a shareholder remains part of the organization because the shareholder still has the shares within the company and therefore could play a decisive role in the voting.
A business school administrator who is determining what classes will be offered in which roomsand who will teach each specific class is involved in which classical management function?
Answer:
The correct answer is organizing
On August 5, 2021, Blossom Furniture shipped 50 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was $220 each. The cost of shipping the dining sets amounted to $1850 and was paid for by Blossom Furniture. On December 30, 2021, the consignee reported the sale of 40 dining sets at $720 each. The consignee remitted payment for the amount due after deducting a 5% commission, advertising expense of $470, and installation and setup costs of $650. The total profit on units sold for the consignor is
Final answer:
The total profit on units sold for the consignor is $13,390.
Explanation:
To calculate the total profit on units sold for the consignor, we need to consider the cost of the dining sets, the cost of shipping, and the deductions made by the consignee.
The total cost of the 50 dining sets is 50 x $220 = $11,000.
The cost of shipping the dining sets is $1850.
The consignee reported the sale of 40 dining sets at $720 each, which amounts to $28,800.
The consignee deducted a 5% commission of $1,440 (40 x $720 x 0.05), advertising expense of $470, and installation and setup costs of $650.
Therefore, the total profit on units sold for the consignor is
= $28,800 - $1,440 - $470 - $650 - $11,000 - $1,850
= $13,390.
Bob and Carol refinanced their sole residence, valued at $500,000, in 2019. Under the refinancing arrangement, they refinanced their $300,000 indebtedness for $400,000, receiving $100,000 in cash that they used to pay for their daughter's wedding. What percent of the interest they pay on the refinanced property are they able to deduct?A) 25 % B) 50 % C) 75 % D) 100 %
The percentage of interest they pay on the refinanced property are they are able to deduct 75%
Explanation:
based on the IRS ,
The first $300,000 of the new loan is treated as home acquisition debt. The interest on that amount of the new loan qualifies as an itemisable deduction The last $100,000 of the new loan can be used for daughter's wedding is treated as home equity debt.$ 300,000/$ 400,000 or 75% will qualify for deduction.
hence it is said to be 75%
Based on the amount acquired from the refinancing agreement, the percentage that is deductible is C. 75%
Current tax laws allow one to deduct interest on up to $300,000 on home acquisition debt which is what Bob and Carol did.
The amount that is deductible is therefore:
= Interest deductible loan / Refinanced amount
= 300,000 / 400,000 x 100%
= 75%
In conclusion, option C is correct.
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An additional cost incurred only if a company pursues a particular course of action is a(n):
An additional cost incurred only if a company pursues a particular course of action is an incremental cost.
Explanation:
The company in order to manufacture it's goods has to make certain costs which are related to the production process. From the processing of the raw material to the final goods and it's distribution in to the market involves incurring of the cost.
But sometimes there are certain extra cost that the firm has to make because of a particular course of action that the firm takes up. This is different from the routine actions of the firm involved in the production of the goods and there fore it is known as the incremental cost because it has increased the cost of the firm.
11. At Stolen Horse Corporation, indirect labor is a variable cost that varies with direct labor hours. Last month's flexible budget performance report showed that actual indirect labor cost totaled $2,056 for the month and 5,140 direct labor hours were actually worked. The report also showed the spending variance for indirect labor was $257 unfavorable and the activity variance for indirect labor was $28 favorable. What was the amount of direct labor hours Stolen Horse budgeted for last month?
Answer:
5,220 hours
Explanation:
Lets summarize the information first,
Actual Hours = 5,140
Actual Indirect labor cost = $2,056
Spending Variance = $257 Unfavorable
Activity Variance = $28 Favorable
We can reverse work for budgeted labor hours, first for the standard rate,
Spending variance = Actual hours * Standard rate/hour - Actual Overheads
-257 = 5140x - 2056
x = (2056-257)/5140
x = 0.35/hour (This is the standard over head rate )
Activity Variance = Standard rate*Standard hrs - Standard rate*Actual Hrs
28 = 0.35y - 0.35*5140
Solving for y,
y = 1827/0.35
y = 5,220
So budgeted hours for Stolen Horse Corporation were = y = 5,220 hours
Hope that helps.
True/False
Advertising cannot affect an internal search. However, it can be a very effective tool once a consumer begins an external search.
Answer:
False
Explanation:
Internal search is when a consumer search for the alternatives from the prior knowledge or memory about the category of service or the product.
Internal search is usually done when the low involvements are to be considered.
External search is when a consumer search for the alternatives from the friends or specialized sources like reports or available analytics or from the
These are done when there is high involvement of capital or resources
hence,
Advertising creates an impact in a way that it stores some visual or impression of the product in the mind of consumer i.e an impression while making choices in internal search
The Howe Co. stockholders equity account follows: Common stock (400,00 shares at $4par) $1,600,000 Paid in capital in excess in par 1,000,000 Retained earnings 1,900,000 Total stockholders equity $4,500,000 The earnings available for common stockholdes from this periods operations are $100,000,which have been included as part of the $1,9 million retained earnings. A. what is the maximun dividend per share that the firm can pay?(assume that legal capital includes all paid-in-capital) B. If the firm has $160,000 in cash, what is the largst per-share dividend it can pay without borrowing? C. Indicate the accounts and changes,if any,that will result if the firm pays the dividends indicated in parts A and B? D. Indicate the effects of an $80,000 cash dividend on stockholders equity.
Answer:
Explanation:
The computations are shown below:
A. Dividend per share:
= (Total retained earning) ÷ (number of shares)
= ($1,900,000) ÷ (400,000 shares)
= $4.75 per share
B. Largest per share:
= (Cash) ÷ (number of shares)
= ($160,000) ÷ (400,000 shares)
= $0.40 per share
C. In part A, the cash and retained earnings is decreased by $1,900,000
whereas in part B, the cash and retained earnings is decreased by $160,000
D. The retained earning which is a part of stockholder equity is decreased by $80,000
Which one of the following statements is true regarding a partner's personal liability for partnership assets?
a.In a general partnership, all partners are liable for entity debts.
b.LLC members can never be liable for entity debts.
c.In a limited liability partnership, a partner might be subject to liability for other partners' malpractice.
d.In a limited partnership, all partners have limited liability for partnership debts.
e.None of these statements are true.
Answer:
The correct answer is A
Explanation:
General partnership is a kind of business partnership or the business arrangement in which 2 or more individuals or person agreed to share all the profits, legal liabilities, assets financial liabilities of a business which is jointly-owned. And any partner of the business might be sued for the entirety of a business debts of partnership.
So, the correct statement is that in general partnership, all partners are held liable for the debts of the entity in the partnership.
Final answer:
The correct answer is a: In a general partnership, all partners are liable for entity debts. This structure allows partners to share the responsibility for the business, including liabilities, which could affect their personal assets.
Explanation:
The question concerns the personal liability of partners in different partnership structures. Regarding the options provided:
a. In a general partnership, all partners are indeed liable for entity debts which means each partner can be responsible for all of the business's debts, potentially including those incurred by other partners.b. LLC members refer to members of a Limited Liability Company, and while the primary feature of an LLC is to provide limited liability protection to its members, the statement that they can 'never' be liable is too absolute, and there could be exceptions where members might be personally liable.c. In a limited liability partnership (LLP), generally partners are not liable for the malpractice of other partners, though they may be responsible for their own acts. However, laws can vary by jurisdiction, so this statement might be partly accurate depending on the local regulations.d. In a limited partnership, there are both general and limited partners. Limited partners indeed have limited liability for partnership debts, but general partners do not, which makes the statement partially incorrect.An understanding of each partnership type's liability structure is essential for anyone involved in partnership business arrangements.The TrunkLine Company will earn $60 in one year if it does well. The debtholders are promised payments of $35 in one year if the firm does well. If the firm does poorly, expected earnings in one year will be $30 and the repayment will be $20 because of the dead weight cost of bankruptcy. The probability of the firm performing poorly or well is 50%.
If bondholders are fully aware of these costs what will they pay for the debt?
The interest rate on the bonds is 10%.
a. $25.00
b. $27.50
c. $29.55
d. $32.50
e. $35.00
Answer:
The answer is a. $25.00
Explanation:
The bondholder's cash flow in one-year time from holding a TrunkLine's bond is calculated as:
(The possibility of TrunkLine doing well x Repayment receipt in case TrunkLine doing well) + (The possibility of TrunkLine doing poorly x Repayment receipt in case TrunkLine doing poorly) = (0.5 x 35) + (0.5 x 20) = $27.50.
The current price bondholders are willing to pay for a bond is equal to the present value of a bond's cash flow in one-year time, discounted at the interest rate on the bond 10% which is calculated as below:
27.50 / (1+10%)^1 = $25
Thus, the correct choice is a. $25.00
Arthur, a salesperson in a leading apparel store, is very courteous and friendly with customers who visit the store. However, while interacting with customers through emails, he tends to be rather blunt and aggressive, which has led to a couple of complaints being lodged against him. Which of the following does the scenario illustrate?A) virtual realityB) telepresenceC) augmented realityD) disinhibition
Answer:
(D). Disinhibition
Explanation:
Disinhibition or online disinhibition occurs when an individual feels that due to the anonymous nature of the internet and its platforms, such as email and social media, he or she can make certain rude, harmful or aggressive comments without any consequences.
Such rude comments would not have been made if the interaction was face to face.
Other reasons for this behavior may include; low empathy for others and the feeling that communication isn't happening in real time and so there won't be an immediate reply.
Therefore Arthur's behavior illustrates disinhibition.
The most effective means of increasing productivity and overcoming economic crisis in the Late Middle Ages came from Select one: a. guild supervision and standards. b. higher wages. c. technological advances. d. the Hanseatic League and similar trade associations. e. the decline in guilds.
Answer:
c. technological advances
Explanation:
The most effective means of increasing productivity and overcoming economic crisis in the Late Middle Ages came from increasing the efficiency of workers and providing workers with better tools
Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation? Select one: a. 4.35% b. 4.58% c. 4.83% d. 5.08% e. 5.33%
Answer:
after tax cost of debt = 5.08
so correct option is d. 5.08%
Explanation:
given data
maturity = 20 years
annual coupon = 9.25%
sells price = $1,075
par value = $1,000
tax rate = 40%
to find out
component cost of debt
solution
we get here yield to maturity YTM that is express as
periodic interest payment PMT × [tex](\frac{1-(1+YTM/2)}{YTM/2})^{-40}[/tex] + [tex](\frac{par\ value}{1+YTM/2})^{40}[/tex] = sells price .................1
periodic interest payment PMT = par value × coupon rate ÷ 2
periodic interest payment PMT = $46.25
so from equation 1 we get
46.25 × [tex](\frac{1-(1+YTM/2)}{YTM/2})^{-40}[/tex] + [tex](\frac{par\ value}{1+YTM/2})^{40}[/tex] = 1075
YTM = 8.46 %
and
after tax cost of debt will be here as
after tax cost of debt = YTM ( 1- tax rate )
after tax cost of debt = 8.46% ( 1- 40% )
after tax cost of debt = 5.08
so correct option is d. 5.08%
Consider a firm that operates in a market that competes aggressively in prices. Due to the high fixed cost of obtaining the technology associated with entering this market, only a limited number of other firms exist. Furthermore, over 70 percent of the products sold in this market are protected by patents for the next eight years. Does this industry conform to an economist’s definition of a perfectly competitive market?
Answer:
No.
Explanation:
A perfectly competitive market has no barriers for firms to entry or exit; the product is homogenous (not patents involved), and the firms have no power to push the prices up or down. The characteristics described a market that tends to be an oligopoly, with entry barriers and non-homogenous products.
The industry described in question does not fit the economists' definition of a perfectly competitive market due to high entry costs and existing patents limiting competition. It rather resembles an oligopoly.
Explanation:The described market in your question does not fit the definition of a perfectly competitive market. A perfectly competitive market, as defined by economists, assumes a scenario where there are many sellers in the industry, products sold are identical, and there is easy entry and exit for firms. In the scenario you've described, the high-fixed costs associated with entering the market and the existence of patents protecting over 70 percent of products both limit the ease of entry. This situation seems more akin to an oligopoly, a market dominated by a small number of firms that own a significant market share and where entry by new competitors can be difficult.
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HD Corp. and LD Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, HD uses more debt than LD. Which of the following statements is CORRECT? Without more information, we cannot tell if HD or LD would have a higher or lower net income. HD would have the lower equity multiplier for use in the Du Pont equation. HD would have to pay more in income taxes. HD would have the lower net income as shown on the income statement. HD would have the higher net income as shown on the income statement.
Suppose Nationwide increases the insurance premium they charge for their auto policies by 18 percent. In response, the demand for State Farm auto policies in a small town increases from 6,000 to 7,500. What is the cross-price elasticity of demand for State Farm auto policies in this town?
a. Using the midpoint formula, the cross-price elasticity of demand for State Farm auto policies is:_______
b. In this instance, auto insurance from Nationwide and auto insurance from State Farm are _____.
Solution:
Cross-price elasticity of demand is given
Ec = (% Change in Quantity Demanded of good / % Change in Price of good)
A Greek letter "DELTA," which indicates the symbol Delta, suggests the change in the price and quantity demanded from the basic quantify or price.
% Change in Quantity Demanded in units = [ (6,900 - 6,000) / 6,000] * 100
= (900 / 6,000) * 100
= 15%
% Change in Price = [ (1.08x- x) / x] * 100
= (0.08 / 1) * 100
= 8%
Price has been denoted as x and 1.08x respectively, as no indication is available on what the actual price was; only information of how much it increased by is available to us.
Cross-Price Elasticity of Demand (Ec) equals (15% / 8%) = 1.875
Therefore, the cross-price elasticity of demand of State Farm Auto Policies is 1.875
The cross-price elasticity of demand can be calculated using the midpoint formula to measure the response of demand for State Farm insurance policies due to an 18% increase in the prices of Nationwide policies. The positive result reveals that the insurances from the two companies are substitute goods.
Explanation:The cross-price elasticity of demand measures the response of demand for a good to a change in the price of another good. It is calculated using the formula:
E = [(Q2 - Q1) / (Q2 + Q1) / 2] / [(P2 - P1) / (P2 + P1) / 2]
Where Q1 is the initial quantity, Q2 is the final quantity, P1 is the initial price, and P2 is the final price. Note that here the 'price' is not given in numerical terms, but in terms of an 18% increase.
So, for this problem, the initial quantity demand is 6,000 and the final quantity demand is 7,500. As for the percentage change in price, we consider it as -18% for Nationwide. Putting these values in the formula, we should obtain the cross-price elasticity. A positive value will indicate that Nationwide and State Farm auto insurance are substitutes. This is because as the price of Nationwide increases, people are switching to State Farm policies.
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