# BUSN6120 – HOMEWORK 2

1. Define scarcity and Opportunity cost.  How are these economic concepts related? What role do they play in the making of managerial decisions?

2. A company has two million shares outstanding. It paid a dividend of \$2 during the past year, and expects that dividends will grow at 6 percent annually in the future. Stockholders require a rate of return of 13 percent. What would you expect the price of each share to be today, and what is the value of the companyâ??s common stock?

3. Discuss the difference between the calculations of shareholder wealth and the concept of Market Value Added. (b) Which of the two appear to be more meaningful from the viewpoint of a shareholder?

Problem 4 Suppose a firm has the following demand equation: Q = 1,000 â?” 3,000P + 10A, where Q = quantity demanded P = product price (in dollars) A = advertising expenditures (in dollars) Assume for the questions below that P = \$3 and A = \$2,000 a. Suppose the firm dropped the price to \$2.50. Would this be beneficial? Explain. Illustrate your answer with the use of a demand schedule. b. Suppose the firm raised the price to \$4.00 while increasing the advertising expenditures by \$100. Would this be beneficial? Explain. Illustrate your answer with the demand schedule.

Problem 5 A bookstore opens across the street from the University Book Store (UBS). The new store carries the same textbooks but offers a price 30 % lower than UBS. If the cross-elasticity is estimated to be 1.5, and UBS does not respond to its competition, how much of its sales is it going to lose?