Economics for Healthcare Managers, Third Edition
Economics for Healthcare Managers, Third Edition
3rd Edition
ISBN: 9781567936766
Author: Robert H. Lee
Publisher: Health Administration Press
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Chapter 4, Problem 10E
To determine

Construct a decision tree based on the given informations.

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You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur.You will not switch unless you earn an accounting profit that is on average  at least as great as your current salary. You look into opening a small grocery store.  Suppose that the store has annual costs of $150,000 for labor, $50,000 for rent and $40,000 for equipment. There is a one half probability that revenues will be $210,000 and a one half probability that revenues will be $410,000. Your economis profit? Suppose the government imposes a 25 percent tax on accounting profits. This tax is only levied if a firm is earning positive accounting profits. What will your after tax accounting profit be in the low revenue case? In the high revenue case? What will your average after tax accounting profit be?
You take a position with a large real estate development company as your first job after graduation.  Your first big assignment is to sell an office building – you have been informed the company’s cost into the building (and the bottom line price it is willing to accept) is $400,000.  You have identified a likely buyer and you assess that his top price is either $500,000 with a probability of .3, $600,000 with a probability of .5, or $1,000,000 with a probability of .2.  You have to commit to a posted price – what price will maximize your profitability?
A drug company is considering investing $100 million today to bring a weight loss pill to the market. At the end of one year, the firm will know the payoff; there is a 0.50 probability that the pill will sell at a high price and generate $37 million per year of profit forever and a 0.50 probability that the pill will sell at a low price and generate $1 million per year of profit forever. The interest rate is 10%. Suppose the firm decides to wait one year to determine whether the pill will sell at a high or low price. The firm will not invest if it learns that the pill will sell at a low price. What is the net present value of waiting one year to make the investment? $122.72 million $64.5 million $201.22 million $88 million
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