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Q1. A company is considering manufacturing 2 mutually exclusive products A and B. Product A is a watch band specifically designed to fit on watches manufactured by the firm only. Product B is a watch band that is designed to be adapted to a variety of watches including those produced by competitors. Expected investment is $100,000 for each of the products. Expected cash flows are $20,000 per year for product A. The expected value for B is $23,000 for 8 years also.


The coefficient of variation (CV) for A is 1.0 and for B is 1.5. Because of high risk attached to B the risk adjustment to B is k=15% and for product A, k=10%. Which project would you recommend to the company for investment?




Suppose that a coffee producing firm estimated the following regression of the demand for its brand of coffee:


Qc= 1.5-3 Pc+0.8Y+2Pb-0.6Ps+1.2A

Where Qc = sales of coffee brand C, in dollars per pound Pc = price of coffee brand C, in dollars per pound

Y = personal disposable income, in millions of dollars per year

Pb = price of the competitive brand of coffee, in dollars per pound Ps = price of sugar, in dollars per pound

A = advertising expenditures for coffee brand C, in hundreds of thousands of dollars per year. Suppose also that this year, Pc = $2, Y = $2.5, Pb = $1.80, Ps = $1 and A =$1.


  1. Interpret the results of the estimated
  2. Compute point price elasticity of demand for the firm’s brand of coffee with respect to its price.
  3. Compute the cross-price elasticity of demand for coffee with respect to the price of competitive coffee brand
  4. At the current price level, would it be viable for the firm to increase the price level of its brand of coffee? Support your (Hint, what effect does an increase in price of the firm’s brand of coffee have on total revenue?)
  5. Would you recommend that the firm continues to advertise its product?


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N\B The homework must be submitted in the next class session.