TUTORIAL 2:

Topic 1: The Firm and Its Goals 1) a. If a stock is expected to pay an annual dividend of $20 forever, what is the approximate present value of the stock, given that the discount rate is 5%? b. If a stock is expected to pay an annual dividend of $20 forever, what is the approximate present value of the stock, given that the discount rate is 8%? c. If a stock is expected to pay an annual dividend of $20 this year, what is the approximate present value of the stock, given that the discount rate is 8% and dividends are expected to grow at a rate of 2% per year?

Answer:
a. P = D/k = 20/.05 = $400
b. P = 20/.08 = $250
c. P = D1/(k - g) = 20/(.08 - .02) = $333.33

2) If a stock is expected to pay …show more content…
Qd = 30 and Qs = 50
b. Qd = 46 and Qs = 42
c. Q = 43.33 and P = $3.33

9) A good's Demand Curve is: Qd = 25 - P, and its Supply Curve is: Qs = 10 + 2P.
a. When P = $20, what is the difference, if any, between Qd and Qs?
b. When P = $3, what is the difference, if any, between Qd and Qs?
c. What are the equilibrium values of P and Q?
Answer:
a. Qd = 5 and Qs = 50
b. Qd = 22 and Qs = 16
c. Q = 20 and P = $5

10) List the major non-price determinants of demand.

Answer: Consumer preferences (tastes), income, prices of related goods (complements and substitutes), future expectations, and number of buyers.

11) List the major non-price determinants of supply.

Answer: Input costs, technology, prices of other goods that can be sold by the firm (complements and substitutes), future expectations, weather conditions, and number of sellers. 12) The market for milk is in equilibrium. Recent health reports indicate that calcium is absorbed better in natural forms such as milk, and at the same time, the cost of milking equipment rises. Carefully analyze the probable effects on the market.

Answer: The heath reports are likely to cause an increase in the demand for milk. Alone, this would increase both the equilibrium price and quantity of milk. The increase in equipment costs will cause a decrease in the supply of milk, and this alone would cause an increase in equilibrium price and a decrease in equilibrium