ITS QUESTION NUMBER 2
long run? Does the market quantity and price approximate the competitive outcome? Why or why not? If not, what is the deadweight loss and how does it compare to the monopoly case? e. Now assume that due to 3D printing or expiration of patent, the fixed costs decrease by 75 percent for all firms and potential firms. How many firms are viable in this case? How does the deadweight loss compare to your findings in b and d? f. What are some the important managerial implications from this problem? 2. Firm Abs will incur $5,000,000 in initial capital outlays in Year 1, $3,000,0000 in Year 2 and $1,000,0000 in Year 3. Since the company does not expect to be able to produce or sell its product until Year 2, it will not incur any labor and materials cost in Year 1. Based on marketing research and forecasting tools, Firm Abs to sell 6,000 units in Year 2 at a price of S320 and then expect that quantity to double in Year 3 and remain at that level in Years 5. However, they anticipate that the price will gradually reduce to $300, $270, and $240 in Years 3-5. a. Calculate the costs and revenues over the five-year period without taking into the time value of money. What is the net profit of undiscounted costs and revenues? b. Now calculate the net present value under the following scenarios and compare to your answer in a. i. Calculate the net present value using discount rates of 10, 8, and 6 percent. Show your work. ii. What would be your decision given your answers in i and ii? Explain. iii. Regardless of your answer in iii., assume that your company decided to go forward with the investment. What would be the relevant costs to consider when deciding whether to shutdown at the beginning of Year 3? Year 4? Year 5? 2 2. Firm Abs will incur $5,000,000 in initial capital outlays in Year 1, $3,000,0000 in Year 2 and $1,000,0000 in Year 3. Since the company does not expect to be able to produce or sell its product until Year 2, it will not incur any labor and materials cost in Year 1. Based on marketing research and forecasting tools, Firm Abs to sell 6,000 units in Year 2 at a price of $320 and then expect that quantity to double in Year 3 and remain at that level in Years 5. However, they anticipate that the price will gradually reduce to $300, $270, and $240 in Years 3-5. a. Calculate the costs and revenues over the five-year period without taking into the time value of money. What is the net profit of undiscounted costs and revenues? b. Now calculate the net present value under the following scenarios and compare to your answer in a. i. Calculate the net present value using discount rates of 10, 8, and 6 percent. Show your work. ii. What would be your decision given your answers in i and ii? Explain. iii. Regardless of your answer in iii., assume that your company decided to go forward with the investment. What would be the relevant costs to consider when deciding whether to shutdown at the beginning of Year 3? Year 4? Year 5
