1. A firm is considering whether to invest in a new project

that has an initial cost of $100,000 and is expected to

generate a net cash flow of $20,000 per year for 10 years.

The firm's cost of capital is 10%. What is the net present

value (NPV) of the project?

a) $61,446

b) $100,000

c) $200,000

d) -$38,554

Answer: a) $61,446

Rationale: NPV = sum of discounted cash flows - initial

cost = ($20,000/1.1 + $20,000/1.1^2 + ... +

$20,000/1.1^10) - $100,000 = $61,446

2. A monopolist faces a demand curve given by Q = 100 -

2P, where Q is quantity and P is price. The monopolist's

marginal cost is constant at $10. What is the profitmaximizing price and quantity for the monopolist?

a) P = $35, Q = 30

b) P = $30, Q = 40

c) P = $25, Q = 50

d) P = $20, Q = 60

Answer: c) P = $25, Q = 50

Rationale: The profit-maximizing condition for a

monopolist is to set marginal revenue equal to marginal

cost. Marginal revenue is the derivative of total revenue

with respect to quantity. Total revenue is given by P*Q =

(100 - 2Q)*Q = 100Q - 2Q^2. Therefore, marginal revenu