Discounting and Net Present Value, economics homework help
Whenever relevant, begin your assessment of the questions below with a statement as to whether the statement is True or False. Use tools of economic analysis such as graphs where appropriate. Don’t just insert graphs, explain them.
1) Assume that all firms want to maximize profits, and that the price mechanism is allowed to freely fluctuate based upon market supply and demand. Appraise this statement (State whether it’s true or false and why): A monopolist will charge a lower price and produce a higher quantity of a good than would be the case if the industry were more competitive, and will result in an increase in efficiency and in an increase in social welfare that would be true if the industry were more competitive. HINT: Include concepts of consumer surplus, producer surplus and deadweight loss in your answer.
2) A foundation is considering supporting a health-intervention project that has been proposed by a local community health center. The foundation will base its decision about whether or not to fund the project strictly by considering the project’s financial benefits and costs. The project costs are $2 million at project inception (Year 0) plus $1 million per year in Years 1, 2, 3, 4 and 5. The present value of project benefits is estimated to be $6 million. (“Year 0” means today, “Year 1” means one year from today, “Year 2” means 2 years from today, and so on.
(a) At a 10% discount rate, should the foundation support this project, or should they reject it?
(b) Now suppose that the discount rate is 12%. Now should the foundation fund the project?
3) (**YOU MUST USE THE ATTACHED PICTURE OF BOX 1 TO COMPLETE THIS QUESTION!**) Two competing hospitals, Gotham Hospital and Sky Hospital, are considering investing in cutting-edge 3-D printing technology that can be used to improve prosthetics for patients, to enhance joint replacement surgery, and in the future could revolutionize organ transplants, such as duplicating body parts like the outer ear.
Consider Box 1 below, which shows the net present value of the investment choices made for each hospital (Gotham’s net present value amounts are shown first in each cell). Note that for each hospital, the net present value depends not only on their decision, but also on their rival’s decision. Neither hospital, though, knows what the other hospital will do; furthermore, antitrust laws prohibit them from cooperating with one another. Suppose that the hospitals do not face regulatory restrictions, such as certificate of needs. (To simplify, it is assumed that if a hospital does Not Invest in the 3- D equipment, that it will choose an alternative project that will generate revenue.)
Which decision, Invest in 3-D printing technology, or Not Invest – will the two hospitals make? Explain.
Would profits be higher if the hospitals could cooperate with one another? Briefly explain.
Generally speaking (not just in reference to Box 1), why might a hospital’s decision to invest in 3-D printing technology increase net present value by more if competitors did not also invest in the same equipment? (Your answer must be limited to ONE sentence.)