A firm can borrow capital to invest and faces a marginal revenue (MR) for each u
ID: 2820864 • Letter: A
Question
A firm can borrow capital to invest and faces a marginal revenue (MR) for each unit of capital (K) invested is as follows: 1st K has MR $2.50; 2nd K has MR $2.0; 3rd K has MR $1.60; 4th K has MR $1.45; 5th K has MR $1.38; and 6th K has MR $1.34. If the interest rate is 39%, then the firm's optimal demand for capital is
5
6
A company can take out a $150,000 loan and make a repayment of $156,750 in one year, or it can issue discount bonds that have a yield of 4.5%. In this case, to raise funds as cheaply as possible, the company should
3Explanation / Answer
1.
d). 6
Unit of capital
Marginal revenue (MR)
Total revenue (TR)
Total cost (TC)
Profit
1
2.50
2.50 (2.50 + 0.00)
0.725 (2.50 * 29 %)
1.775
2
2.00
4.50 (2.50 + 2.00)
1.305 (4.50 * 29 %)
3.195
3
1.60
6.10 (4.50 + 1.60)
1.769 (6.10 * 29 %)
4.331
4
1.45
7.55 (6.10 + 1.45)
2.190 (7.55 * 29 %)
5.360
5
1.38
8.93 (7.55 + 1.38)
2.590 (8.93 * 29 %)
6.340
6
1.34
10.27 (8.93 + 1.34)
2.978 (10.27 * 29 %)
7.292
(Profit = Total revenue - Total cost).
Profit at the level of 6th unit of capital amounting to $ 7.292 is the highest.
2.
Interest rate on loan = (156750-150000)/150000=
4.5%
Interest rate on bonds
4.5%
Therefore to raise funds company can do either because the rate is same.
Option 3 is correct
Unit of capital
Marginal revenue (MR)
Total revenue (TR)
Total cost (TC)
Profit
1
2.50
2.50 (2.50 + 0.00)
0.725 (2.50 * 29 %)
1.775
2
2.00
4.50 (2.50 + 2.00)
1.305 (4.50 * 29 %)
3.195
3
1.60
6.10 (4.50 + 1.60)
1.769 (6.10 * 29 %)
4.331
4
1.45
7.55 (6.10 + 1.45)
2.190 (7.55 * 29 %)
5.360
5
1.38
8.93 (7.55 + 1.38)
2.590 (8.93 * 29 %)
6.340
6
1.34
10.27 (8.93 + 1.34)
2.978 (10.27 * 29 %)
7.292
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.