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Week 1 Assignment 1

Angenetta Turner

Managerial Economics BUS 640

Applied Problems 1

Instructor: Thomas Badley

Week 1 Assignment

July 22, 2012

Week 1 Assignment 2

Applied Problem Chapter 1 1. At the beginning of the year, an audio engineer quit his job and gave up a salary of $175,000 per year in order to start his own business, Sound Devices, Inc. The new company builds, installs, and maintains custom audio equipment for businesses that require high-quality audio systems. A partial income statement for Sound Devices, Inc., is shown below: 2010 Revenues Revenue from sales of product and services..$970,000 Operating costs and expenses Cost of products and services sold.355,000 Selling expenses155,000 Administrative expenses 45,000 Total operating costs and expenses $555,000 Income from operation$415,000 Interest expense (bank loan) 45,000 Legal expenses to start business. 28,000 Income taxes... 165,000 Net income..$177,000 To get started, the owner of Sound Devices spent $100,000 of his personal savings to pay fro some of the capital equipment used in the business. In 2010, the owner of Sound Devices could have earned a 15 percent return by investing in stocks of other new businesses with risk levels similar to the risk level at Sound Devices.

Week 1 Assignment 3 What are the total explicit, total implicit, and total economic costs in 2010? Total implicit: $830,000 Total explicit cost: $555,000 Total economic cost: $1385,000 What is accounting profit in 2010? Total Revenue Explicit Cost = Accounting profit $970,000 $555,000 = $415,000 accounting profit. What is economic profit in 2010? Total Revenue (Explicit cost + Implicit cost) = Economic Profit $970,000 ($555,000 + $830,000) $970,000 $1388,000 = $415,000 economic profit. Give your answer in part c, evaluate the owners decision to leave his job to start Sound Devices. The audio engineer made the right decision to leave his job to start a Sound Device. A positive economic profit means that he made the right decision. A negative economic profit would mean that he made the wrong decision

Applied Problems Chapter 2 2. Florida Citrus Mutual, an agricultural cooperative association for citrus growers in Florida, needs to predict what will happen to the price and output of Florida oranges under the conditions below. What are your predictions? For each part, sketch a graph showing the appropriate demand and supply analysis. A major freeze destroys a large number of the orange trees in Florida Answer: Supply will decrease, therefore causing the price of oranges to increase and output will decrease. The scientists in the agricultural extension service of the University of Florida discover a way to double the number of oranges produced by each orange tree. Answer: Supply will increase, therefore causing the price of orange products to decrease and output will increase. The American Medical Association announces that drinking orange juice can reduce the risk of heart attack. Answer: Demand will increase, therefore the price will increase and output will increase due to the high demand for the product. 3

Week 1 Assignment 4 The price of Florida grapefruit falls. Answer: This one can be challenging. An increase in the price of Florida grapefruit could be interpreted as either a demand shifter (change in the price of a substitute in consumption) or a supply shifter (change in the price of a substitute in production) or BOTH simultaneously. If only demand decreases (supply constant), then price will decrease and output will decrease. If only supply increases (demand constant), then price will decrease and output will increase. If both happen simultaneously, then price will decrease but the change in output will be indeterminate.

4. Rising jet fuel prices recently led most major U.S. airlines to raise fares by approximately 15 percent. Explain how this substantial increase in airfares would affect the following: The demand for air travel Answer: Air travel would decrease due to the rise in tickets to compensate for fuel. The demand for hotels. Answer: Hotels demand could decrease or increase because people that would normally use hotels when flying would probably change what they do. However, individuals traveling by car would still use hotels which may cause hotels to run special to attract car travelers. The demand for rental cars. Answer: Rental cars would decrease for those individuals that would usually rent them when they traveled via airline. The supply of overnight mail. Answer: Overnight mail will decrease because they would do less mail flights due to the rise in fuel.

Week 1 Assignment 5

Reference
Thomas, C. & Maurice, S. (2011). Managerial economics: Foundations of business analysis and strategy (10th ed.). New York: McGraw-Hill