Assignment 1 (The law of supply and demand)

1- Suppose that we have the following price data:-

a- Calculate the percentage change in the price of each good.
b- Calculate the percentage change in the relative price of gasoline in terms of soda.
c- Why do we only worry about relative prices in economics?
Year Price of Gasoline Price of Soda
1987 $ 0.89 per gallon $ 0.35 per 16 oz. bottle
2005 $ 2.39 per gallon $ 1.49 per 16 oz. bottle
–
a) Gasoline Soda
b) Old = & New = 
c) Because Relative prices remove any inflation effects
2- Suppose that you have the following demand and supply curve for rental
cars, find the equilibrium price and quantity. Qd ,Qs
∵ We in equilibrium price and quantity
∴ Qd = Qs   
3- Suppose that you estimated the following demand curve for footballs.

Q = Represents quantity demanded. P = represents price. I = represents

average income. You know that current market price is $50 and average
income is $20,000.
a) Calculate current demand.
b) Calculate the price elasticity of demand.
a) ( ) ( )
b) We suppose the change of the new price is 10% so the new price will be $ 55
∴ ( ) ( )

∴ ( )( ) ( )( )

4- Suppose, we know what demand and supply look like for restaurant meals
Qd , Qs
Where Q is the number of meals sold (in thousands) per month, P is the
average meal price, I is average income (in thousands). Assume that average
income is = $20,000.
a) Calculate the equilibrium price and quantity.
b) Calculate the elasticity of demand at the equilibrium price.
c) What effect would a 10% increase in average income have on the price of
restaurant meals?
a) ∵ we in equilibrium price and quantity
∴ Qd =Qs  ( )
 POld =15005 and QOld = 30030
c) The change of the new price is 10% so PNew = $ 16505.5 QNew = 33031
∴Qd = Qs  –  ( )


)∴ ( )( ) ( )( )
5- The demand and supply for a monthly cell phone plan with unlimited texts can be
represented by: Qd , Qs Where P is the monthly price in $.
a. If the current price for a contract is $40 per month, is the market in equilibrium?
b. Would you expect the price to rise, fall, or be unchanged?
c. If so, by how much? Explain.
a)Qd ( ) ,Qs
∵ Qd Qs ∴
b) The price needs to rise because there is shortage
c) Qd = Qs = Q*  P* P*  P* , Q*
∴
6- The demand and supply for monthly gym memberships are given as:-
Qd , Qs where P is the monthly price, in dollars
a. If the current price for memberships is $50 per month, is the
market in equilibrium?
B .Would you expect the price to rise or fall?
c. If so, by how much?
Qd ( )
Qs ( )
a) Qd Qs ∴
b) The price needs to fall because there is surplus
c) Qd = Qs = Q*  P* P*  P* , Q*
∴
7- Suppose that the supply of lemonade is represented by: QS
Where Q is measured in pints and P is measured in cents per pint.
a. If the demand for lemonade is QD , what is the current
equilibrium price and quantity?
b. Suppose that a severe frost in Florida raises the price of lemons, and thus
the cost of making lemonade. In response to the increase in cost, producers
reduce the quantity supplied of lemonade by 400 pints at every price. What is
the new equation for the supply of lemonade?
c. Compute the new equilibrium price and quantity of lemonade after the frost.
a) Qd = Qs   
s
b) The new supply is equal to the old supply so Q2 = Qs  Q2s
c) ∴  P2 Q2
8- The Supply & Demand of gym memberships QD , QS
Now, suppose the town opens a new community center with a pool and a
weight room. As a result, consumers demand 200 fewer gym memberships
at every price.
a. Write down the new demand equation.
b. What do you expect to happen to the equilibrium price and
quantity (remember, previously P*= $45, Q*= 150)?
c. Compute the new equilibrium price and quantity.
a) Quantity demanded has fallen by 200 at every price so the eq.is QD
b) The equilibrium price and quantity should fall because the demand curve had shift
c) Qd = Qs    
9- The demand for gym memberships in a small town is given as: QD
where Q is the number of monthly members and P is the monthly membership
rate.
Answer the following questions:
a. Calculate the price elasticity of demand when the price of gym memberships is
$50 per month.
b. Calculate the price elasticity of demand when the price of gym memberships is
$100 per month.
c. Based on your answers to a. and b., what can you tell about the relationship
between price and the price elasticity of demand along a linear demand curve?
a) We suppose the change of the new price is 10% so PNew = $ 55
QNew ( ) , POld =50 and QOld = 260

∴ ( )( ) ( )( )
b) We suppose the change of the new price is 10% so PNew = $ 110
QNew ( ) , POld =100 and QOld = 160

∴ ( )( ) ( )( )
c) I tell that the price rises along a linear demand curve.

10- The demand for movie tickets in a small town is given as QD

Answer the following questions:
a. Calculate the price elasticity of demand when the price of tickets is $5.
b. Calculate the price elasticity of demand when the price of tickets is $12.
c. At what price is the price elasticity of demand unit elastic?
d. What happens to the price elasticity of demand as you move down a linear
demand curve?
a) We suppose the change of the new price is 10% so PNew = $ 5.5
QNew ( ) , POld =$5 and QOld = 750

∴ ( )( ) ( )( )
b) We suppose the change of the new price is 10% so PNew = $ 13.2
QNew ( ) , POld = $12 and QOld = 400
∴ ( )( ) ( )( ) ( )

c) ∵ The demand is unit elastic and substitute in

 ( )
  #
d) The demand becomes less elastic or more inelastic.
Assignment 2 (Interest Rates & Worth Analysis)
1- How much can a company afford to spend now on an energy
management system if the software will save the company $21,300 per year
for the next 5 years? Use an interest rate of 10% per year.
( ) ( )
2- A family that won a $100,000 decided to put one half of the money in a
college fund for their child. If the fund earned interest at 6% per year, how
much was in the account 14 years after it was started?
( ) ( )
3- A company is considering investing in new equipment. If the new
equipment will cost $220,000 to purchase and install, how much must the
company save each year for 3 years in order to justify the investment, if the
interest rate is 10% per year?
( ) ( )
4- If a company purchases a new building now for $1.3 million for its
corporate headquarters, what must the building be worth in 10 years? The
company expects all expenditures to earn a rate of return of at least 18% per
year.
( ) ( ) ( )
5- How much could the company afford to spend now on new equipment
instead of spending $200,000 one year from now and $300,000 three years
from now, if the company uses an interest rate of 15% per year?
( ) ( )
( ) ( )
6- A company sells industrial products; the annual cash flows are shown in
the table below. Determine the future worth of the net cash flows at an
interest rate of 10% per year.

( )( ) ( )
7- Rolled ball screws are suitable for high-precision applications such as
water jet cutting. Their total manufacturing cost is expected to decrease
because of increased productivity, as shown in the table. Determine the
equivalent annual cost at an interest rate of 8% per year.

( ) ( )
8- A company that makes self-clinching fasteners expects to purchase new
production line equipment in 3 years. If the new units will cost 350,000 how
much should the company set aside each year, if the account earns 10% per
year?
( ) ( )
9- For the cash flows below, determine the amount in year 1, if the annual worth in
years 1 through 9 is $601.17 and the interest rate is 10% per year.

( )
∴ ( )∴
10- A small construction company is considering the purchase of a used bulldozer
for $61,000. If the company purchases the dozer now, the equivalent future amount
in year 4 that the company is paying for the dozer at 4% per year interest is closest
to:
(a) $52,143
(b) $65,461
(c) $71,365
(d) Over $72,000
( ) ( )
11- An enthusiastic new engineering graduate plans to start a consulting firm by
borrowing $100,000 at 10% per year interest. The loan payment each year to pay
off the loan in 7 years is closest to:
(a) $18,745
(b) $20,540
(c) $22,960
(d) $23,450
( ) ( )
12- An engineer wanted to retire in 20 years with $1.5 million. At 10% per year
interest, to reach the $1.5 million goal, starting 1 year from now, the engineer must
annually invest:
(a) $26,190
(b) $28,190
(c) $49,350
(d) $89,680
( ) ( )
13- The cost of a border fence is $3 million per mile. If the life of such a fence is
assumed to be 10 years, the equivalent annual cost of a 10-mile- long fence at an
interest rate of 10% per year is closest to:
(a) $3.6 million
(b) $4.2 million
(c) $4.9 Million
(d) Over $5.0 million
( )( ) ( )
Assignment 3 (New Present Worth)
1- A company that manufactures magnetic membrane switches is
investigating two production options that have the estimated cash flows
shown ($1 million units). Which one should be selected on the basis of a
present worth analysis at 10% per year?

PW In-house ( – )( ) ( )
( – )( ) ( )

PW Contract ( )( ) ( )( )

In-house should be selected.

2- The manager of a canned food processing plant must decide between two
different labeling machines. Machine A will have a first cost of $42,000,
an annual operating cost of $28,000, and a service life of 4 years. Machine B
will cost $51,000 to buy and will have an annual operating cost of $17,000
during its 4-year life. At an interest rate of 10% per year, which should be
selected on the basis of a present worth analysis?
PWA ( )
( )
PWB ( )
– ( )
Machine B should be selected.
3- The supervisor of a community swimming pool has developed two
methods for chlorinating the pool. If gaseous chlorine is added, a chlorinator
will be required that has an initial cost of $8000 and a useful life of 5 years.
The chlorine will cost $650 per year, and the labor cost will be $800 per
year. Alternatively, dry chlorine can be added manually at a cost of $1000
per year for chlorine and $1900 per year for labor. Which method should
be used on the basis of a present worth analysis if the interest rate is 10% per
year?
PWGaseous ( )( )
( )( )
PWDry ( )( )
( )( )
Dry chlorine method should be used.
4- A pipeline engineer working in Kuwait for the oil giant BP wants to perform
a present worth analysis on alternative pipeline routings the first predominately by
land and the second primarily undersea. The undersea Route is more expensive
initially due to extra corrosion protection and installation costs, but cheaper
security and maintenance reduces annual costs. Perform the analysis for the
engineer at 15% per year.

PWLand ( ) ( )
( ) ( )
PWundersea ( ) ( )
( ) ( )
Land route should be selected.
5- A chemical processing corporation is considering three methods to dispose of a
non-hazardous chemical sludge: land application, fluidized-bed incineration, and
private disposal contract. The estimates for each method are shown. Determine
which has the least cost on the basis of a present worth comparison at 10% per
year for the following scenarios:
(a) The estimates as shown
(b) The contract award cost increases by 20% every 2-year renewal

(a) PWLand ( ) ( )
( )
( ) ( )
( )
PWIncin ( ) ( )
( ) ( )

PWContract ( ) ( )
Contract has the least cost.
(b) PWContract ( ) ( )( )
( ) ( ) ( )( )
( ) ( )( )
( )( )
We should select land application.
6- An industrial engineer is considering two robots for purchase by a fiber- optic
manufacturing company. Robot X will have a first cost of $80,000, an annual
maintenance and operation (M&O) cost of $30,000, and a $40,000 salvage
value. Robot Y will have a first cost of $97,000, an annual M&O cost of $27,000,
and a $50,000 salvage value. Which should be selected on the basis of a future
worth comparison at an interest rate of 15% per year? Use a 3-year study period.
FWX ( ) ( )
( ) ( )
FWY ( )– ( )
( ) ( )
Select robot X.
7- Two processes can be used for producing a polymer that reduces friction loss in
engines. Process T will have a first cost of $750,000, an operating cost of $60,000
per year, and a salvage value of $80,000 after its 2-year life. Process W will have a
first cost of $1,350,000, an operating cost of $25,000 per year, and a $120,000
salvage value after its 4-year life. Process W will also require updating at the end
of year 2 at a cost of $90,000. Which process should be selected on the basis of a
future worth analysis at an interest rate of 12% per year?
FWT ( ) ( )
( )
( ) ( ) ( )

FWW ( )– ( )
( )
( ) ( ) ( )

Process T should be selected.

8- Compare the alternatives shown below on the basis of a future worth analysis
using an interest rate of 8% per year?

FWP ( ) ( ) ( )
( ) ( ) ( )

FWQ ( ) ( )
( ) ( )
Alternative Q should be selected.
Assignment 4 (New Annual Worth)
1- An asset with a first cost of $20,000 has an annual operating cost of
$12,000 and a $4000 salvage value after its 4-year life. If the project will
be needed for 6 years, what would the market (salvage) value of the 2-
year-old asset have to be for the annual worth to be the same as it is for
one life cycle of the asset? Use an interest rate of 10% per year.
AW4 ( ) ( )
( ) ( )

( ) ( – )
( )( ) ( )
( ) ( )
( )( ) ( )
 ( ) 
2- The cash flows for two small raw water treatment systems are
shown. Determine which should be selected on the basis of an annual
worth analysis at 10% per year interest.

AWMF ( ) ( )
( )– ( )

AWUF ( ) ( )
( ) ( )

3- Two equivalent robot instruments are available. Robot Joeboy will

have a first cost of $85,000, annual M&O costs of $30,000, and a
$40,000 salvage value after 3 years. Robot Watcheye will have a
first cost of $125,000, annual M&O costs of $27,000, and a $33,000
salvage value after its 5-year life. Assume an interest rate of 8% per
year. Which robot is the better economic option?
AWJoe ( ) ( )
( ) ( )

AWWat ( ) ( )
( ) ( )
4- A remotely located air sampling station can be powered by solar cells
or by running an above ground electric line to the site and using
conventional power. Solar cells will cost $16,600 to install and will
have a useful life of 5 years with no salvage value. Annual costs for
inspection, cleaning, etc., are expected to be $2400. A new power
line will cost $31,000 to install, with power costs expected to be $1000
per year. Since the air sampling project will end in 5 years, the salvage
value of the line is considered to be zero. At an interest rate of 10% per
year, (a) which alternative should be selected on the basis of an annual
worth analysis and (b) what must be the first cost of the above ground
line to make the two alternatives equally attractive economically?
(a)AWSolar ( )
( )
AWLine ( )
( )

(b) Set AWLine Pline

Pline( )
Pline( ) Pline = $21,906
5- Polypropylene wall caps, used for covering exterior vents for
kitchen cooktops bathroom fans, dryers, and other building air exhausts,
can be made by two different methods. Method X will have a first cost
of $75,000, an operating cost of $32,000 per year, and a $9000 salvage
value after 4 years. Method Y will have a first cost of $140,000, an
operating cost of $24,000 per year, and a $19,000 salvage value after its
4-year life. At an interest rate of 10% per year, which method should be
used on the basis of an annual worth analysis?
AWX ( ) ( )
( ) ( )

AWY = ( ) ( )
( ) ( )
6- An engineer developed the two cash flow diagrams shown at the
bottom of this page. The cash flows for alternative B represent two life
cycles of A. Calculate the annual worth value of each over the respective
life cycles to demonstrate that they are the same. Use an interest rate of
10% per year.

AWA ( ) ( )
( ) ( )
AWB ( ) ( )
( ) ( )
( ) ( )( )
( )
 Assignment 5 (Depreciation)
1) A restaurant purchased $45,000 of equipment. What is the
yearly and monthly straight-line depreciation expense for the
equipment if it has a life time of 10 years and has a residual
value of $5,000?
Dep. Expense yearly
Dep. Expense monthly
2) A truck purchased for $35,000 has an estimated life of 5
years or 250,000 km and a residual value of $5,000. A total of
53,000 km was driven in the first year and 75,000 km in the
second year. Calculate the depreciation rate per unit and the
depreciation expense for the first two years, using the Units-of-
Production depreciation method.
Dep. Rate per unit
Dep. Expenseyear1
Dep. Expenseyear2
3) Using the information in question 2 above, calculate the
depreciation expense for the first two years using the SYD
depreciation method.
( )
The constant denominator
Dep. Expenseyear1
Dep. Expenseyear2
4) A restaurant buys a wood-burning stove for $20,000. The
stove has a lifetime of 4 years and a residual value of $1,500.
Calculate the DDB% and the net book value after the first year
of use. DDB%
Dep. Expenseyear1
Net book valueyear1
6. The method of computing depreciation in which it is assumed
that the loss in value of the asset is constant every year is
a. Straight line method
5) A catering company buys a delivery truck for $34,000 for its
everyday business. The lifetime of the truck is 5 years and the
production life is 200,000 km. The residual value at the end of its
lifetime is $4,000. The truck has the following production in five
years: Year-1: 30,000 km Year-4: 70,000 km
Year-2: 40,000 km Year-5: 10,000 km
Year-3: 50,000 km
Construct a five-year depreciation schedule using the Units-of-
Production and DDB depreciation method.
Unit of Dep. method: Dep. Rateper unit
Year Dep. Rate/unit Production = Dep. Expense
1 0.15 30,000 = $4,500
2 0.15 40,000 = $6,000
3 0.15 50,000 = $7,500
4 0.15 70,000 = $10,500
5 0.15 10,000 = $1,500
Sum Total Depreciation = $30,000
DDB Depreciation method:
Year DDB% Book Value = Dep. Expense Net Book Value
0 $34,000
1 40% 34,000 = $13,600 $20,400
2 40% 20,400 = $8,160 $12,240
3 40% 12,240 = $4,896 $7,344
4 40% 7,344 = $2,937.60 $4,406.40
5 40% 4,406.40 = 1,762.56 $2,643.84
406.40 $4,000
Total Accumulated Dep. Expense = $30,000
Cost-Accum. Dep=$34,000-$30,000=$4,000(Final book value)
7. Of the following method of depreciation, the method in which
annual cost of depreciation is a fixed percentage of the book
value at the beginning of the year is
a. Straight line method b. Sinking fund method
c. Sum-of-year digit method d. Declining balance method