Firms frequently find themselves in situations where they must choose between pursuing short-term projects that will increase profits immediately (for example, an advertising campaign) and long-term projects that will not increase profits until several years have passed (for example, research designed to develop a new technology.)

(i) Discuss the various techniques used by firms to choose between these projects

(ii) Based on your analysis of the effects of time and the interest rate on present value, how do you think changes in the interest rate will influence a firm's choice between a short term and a long-term project?

Gerald operates an automobile detailing business in Mombasa City. An automobile retailer restores a car to the level of cleanliness and perfection that it had when it was new. His fastidious nature, attention to detail and ability to effectively manage employees have helped to make his business profitable, but he believes that more information about the market would allow him to operate more efficiently. He uses regression analysis to estimate the demand function for his business and gets the following result:

Q_X = 235 - 3P_X + 40_A - 20_U + 8P_W

The number of detailing jobs he gets per month (Q_X) depends on the price he charges per job (P_X), his monthly advertising expenditures (A) measured in Shs 1,000s, the regional percentage unemployment rate (U), and the average price charged by local car wash businesses (P_W) for a standard wash and wax.

Use the estimated demand function given to solve the following questions

(i)Is automobile detailing a normal good or an inferior good? How can you tell?

(ii) Is a wash and wax at the local car wash a complement or a substitute for automobiledetailing? How can you tell?

(iii) Gerald is currently charging shs 65 per detailing job and spending shs 3,500 per month on advertising. The regional unemployment rate is 7.5% and the average price of a wash and wax at a local car wash is shs 15. How many detailing jobs per month can Gerald expect under these conditions? Derive the demand curve for detailing jobs under current conditions.

(iv) Calculate the point advertising elasticity of demand (%QX/%A) under current conditions. Is it elastic or inelastic?

(v) How many additional detailing jobs would result if Gerald spent an additional shsh1,000 on advertising? How much additional revenue will be generated, under current conditions, if an additional shs 1,000 is spent on advertising? Assume that Gary increases his advertising expenditures to shs 4,500 while all other conditions remain unchanged.