A two-period project has the following probabilities and cash ...

[nautica902]

A two-period project has the following probabilities and cash flows:
 
  Probability Cash flow
   Period 1: .25 500
   .50 600
   .25 700
 
   Period 2: .30 300
   .50 500
   .20 700
 
  The discount rate is 7, and the initial investment is 1,000. How much is the expected NPV of this project?

Question 2

All firms in a competitive industry have the following long-run total cost curve:
 
  C(q) = q3  10q2 + 36q
   where q is the output of the firm.
  a. Compute the long run equilibrium price. What does the long-run supply curve look like if this is a constant cost industry? Explain.
  b. Suppose the market demand is given by Q = 111  p. Determine the long-run equilibrium number of firms in the industry.

[angrybirds13579]

Answer to Question 1

-20.

Answer to Question 2

a. Long run equilibrium is determined by (1 ) the minimum of the AC curves, and (2 ) the demand equation.
The AC is at a minimum where AC = MC:
Q = 5, AC = MC = 11
Therefore, the long run price will be 11 and each firm will produce 5 units.

b. The market quantity (from demand) is 100 and so 20 firms will exist in this market. The long run supply curve is flat at 11 because the price will always equal this due to free entry and exit of firms.