Consider a project with the following data: accounting break-even quantity = 19,500 units; cash break-even quantity = 17,500 uni
ts; life = seven years; fixed costs = $210,000; variable costs = $50 per unit; required return = 12 percent. Ignoring the effect of taxes, find the financial break-even quantity. (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)
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Answer:
Explanation:
1. If the price of oil were $70.00 per barrel, what would be the free-market price of gas?
The free-market price is defined by the equilibrium point: when the quantity demanded and the quantity supplied are equal.
QS = 15.90 + 0.72PG + 0.05PO
QD = 0.02 – 1.8PG + 0.69PO
15.90 + 0.72PG + 0.05(70.00) = 0.02 – 1.8PG + 0.69(70.00)
19.4 + 0.72 PG= 48.32-1.8PG
PG(0.72+1.8)=48.32-19.4
PG= 28.92/2.52
PG= $11.48
QS=QD= 15.90+0.72(11.48)+0.05(70.00)
QS=QD= 27.66
What would be the deadweight loss if the price of natural gas were regulated to be $4.00? The deadweight loss would be $___ billion. (Round answer to two decimal places)
If PG is $4.00
The quantity supplies will be less than the quantity demanded. The quantity supplied will be the quantity sold in the market.
QS= 15.90+0.72(4)+0.05(70.00)
QS= 22.28
To find the deadweight loss we must evaluate the quantity supplied in the demand curve:
22.28 = 0.02 – 1.8PG + 0.69(70.00)
1.8PG= 48.32-22.28
PG= 26.04/1.8
PG= 14.47
And now we calculate the area shown in the figure attached:
Base: 14.47-4= 10.47
Height: 27.66-22.28= 5.38
Deadweight loss: (10.47*5.38)/2
Deadweight loss: 28.1643
The deadweight loss would be $28.16 billion.
