You start your own business selling boating equipment. To start the business you sell 5,000 shares of stock at $50 each. This year the revenues from the business are $300,000, and total costs of operating the business are $200,000
All profits are paid out as dividends to the shareholders. If the current interest rate is 20%, what is the economic profit being earned by the shareholders? What will happen to the amount of economic profits earned if the interest rate decreases? Explain your answer.
The shareholders are earning an economic profit of $10 per share. We get this by adding up the total costs of the firm: $200,000 plus the opportunity cost of the initial $250,000 which is $50,000 of lost interest income. That gives us a total of $250,000 in total costs. Since revenues are $300,000 the total profit is $50,000 with profit per share of $50,000/5,000 = $10 . If the interest rate decreases, the shareholders' economic profit will increase. The shareholder will still receive $20 in dividends, if they had put their $50 in an interest-bearing account the return would fallen below $10 . Therefore, their economic profit would increase.
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If the quantity demanded of milk is 55,000 and the quantity supplied of milk is 80,000, then:
a. there is an excess supply of 25,000 units of milk. b. the price of milk will tend to rise to clear the market. c. consumers get the milk they want so market equilibrium exists. d. there is an excess demand of 25,000 units of milk. e. this is the intersection of market supply and demand curves.
Answer the following questions true (T) or false (F)
1. The income effect of a price change refers to the change in the quantity demanded of a good that results from a change in the price of a complementary product. 2. If the price of peaches, a substitute for plums, decreases the demand for plums will increase. 3. An inferior good is a good for which the quantity demanded decreases as the price increases, holding everything else constant.