1.

Approximately 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these addicts cost the U.S.

economy $300 billion in medical expenses and lost productivity. Despite the enormous potential market, many biotech companies have shied

away from funding research and development (R&D) initiatives to find a cure for drug and alcohol addiction. Drug Abuse Sciences (DAS) - is

a notable exception. It has spent $160 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest

another $35 million today. Unfortunately, the firm's opportunity cost of funds is 7 percent and it will take another five years before final

approval from the Federal Drug Administration is achieved and the product is actually sold. Expected (year-end) profits from selling the drug

are presented in the accompanying table.

Year 1 -$0

Year 2 -$0

Year 3- $0

Year 4- $0

Year 5 -$13,200,000

Year 6 -$16,300,000

Year 7 -$18,000,000

Year 8 -$20,500,000

Year 9 -$21,800,000

What is the net present value of the project? Should DAS continue with its plan to bring the drug to market, or should it abandon the project?

2.

Problem #1 on page 62 (end of Chapter 3)

3.

A firm has a marginal cost of $5 and charges a price of $45. What is the Lerner index for this firm?

4.

Suppose the own price elasticity of market demand for retail gasoline is -0.6, the Rothschild index is 0.4, and a typical gasoline retailer enjoys

sales of $1,800,000 annually. What is the price elasticity of demand for a representative gasoline retailer's product?