Part -1:
Applied problem 1
Appalachian Coal Mining believes that it can increase labor productivity and, therefore, net revenue by reducing air poliution in its mines. It estimates that the marginal cost function for reducing pollution by installing additional capital equipment is
MC= 40P
where P represents a reduction of one unit of pollution in ihe mines. It also feels that for every unit of pollution reduction the marginal increase in revenue (MR) is
MR=1,000-10P
How much pollution reduction should Appalachian Coal Mining undertake?
Applied problem 2
Two partners who own Progressive Business Solutions, which currently operates out of an office in a small town near Boston, just discovered a vacancy in an office building in downtown Boston. One of the partners favors moving downtown because she believes the additional business gained by moving downtown will exceed the higher rent at the downtown location plus the cost of making the move. The other partner at PBS op poses moving downtown. He argues, "We have already paid for office stationery, business cards, and a large sign that cannot be moved or sold. We have spent so much on our current office that we can't afford to waste this money by moving now." Evaluate the second partrer's advice not to move downtown.
Applied problem 3
Twentyfirst Century Electronics has discovered a theft problem at its warehouse and has decided to hire security guards. The firm wants to hire the optimal number of security guards. The following table shows how the number of security guards affects the number of radios stolen per week.
|
Cost per guard
|
200 |
|
|
cost per stolen camera
|
25 |
|
Number of security guard
|
Number of radios stolen per week
|
security guard cost ($)
|
stolen camera cost ($)
|
total cost ($)
|
| 0 |
50 |
-
|
1,250.00
|
1,250.00
|
| 1 |
30 |
200.00
|
750.00
|
950.00
|
| 2 |
20 |
400.00
|
500.00
|
900.00
|
| 3 |
14 |
600.00
|
350.00
|
950.00
|
| 4 |
8 |
800.00
|
200.00
|
1,000.00
|
| 5 |
6 |
1,000.00
|
150.00
|
1,150.00
|
a. If each security guard is paid $200 a week and the cost of a stolen radio is $25, how many security guards should the firm hire
b. If the cost of a stolen radio is $25 what is the most the firm would be willing to pay to hire the first security guard
c. If each security guard is paid 200 a week and the cost of a stolen radio is $50, how many security guards should the firm hire?
Part 2
Applied Problem1:
The director of marketing at Vanguard Corporation believes that sales of the company's Bright Side laundry detergent (S) are related to Vanguard's own advertising expenditure (A), as well as the combined advertising expenditures of its three biggest rival detergents (R). The marketing director collects 36 weekly observations on S, A, and R to estimate the following multiple regression equation:
S = a + bA + cR
Where S, A, and R are measured in dollars per week. Vanguard's marketing director is comfortable using the parameter estimates that are statistically significant at the 10 percent level or better.
a. What sign does the marketing director expect a, b, and c to have?
b. Interpret the coefficients a, b, and c.
Regression outputs:
Dependent Variable: S R-Square F-Ratio P-Value on F
Observations: 36 0.2247 4.781 0.0150
Variable Parameter Estimate Standard Error T-Ratio P-Value
Intercept 175086.0 63821.0 2.74 0.0098
A 0.8550 0.3250 2.63 0.0128
B -0.284 0.164 -1.73 0.0927
c. Does Vanguard's advertising expenditure have a statistically significant effect on the sale of Bright Side detergent? Explain using the appropriate P-value.
d. Does advertising by its three largest rivals affect sales of Bright Side detergent in a statistically significant way? Explain using the appropriate P-value.
e. What fraction of the total variation in sales of Bright Side remains unexplained? What can the marketing director do to increase the explanatory power of the sales equation? What other explanatory variables might be added to this equation?
f. What is the expected level of sales each week when Vanguard spends $40,000 per week and the combined advertising expenditures for the three rivals are $100,000 per week?
Part -3:
Applied Problem1:
In an article about the financial problems of USATaday, Newsweek reported that the per was losing about $20 million a year. A Wall Street analyst said that the paper raise its price from 50 cents to 75 cents, which he estimated would bring in antional $65 million a year. The paper's publisher rejected the idea, saying that could drop sharply after a price increase, citing IIr Wall Street lourncl's experience it increased its price to 75 cents. What implicit assumptions are the publisher and analyst making about price elasticity?
Part -4:
Applied Problem 1:
Wilpen Company, a price-setting firm, produces nearly 80 percent of all tennis balls purchased in the United States. Wilpen estimates the U.S. demand for its tennis balls by using the following linear specification:
Q = a + bP + cM + dPr
where Q is the number of tennis balls sold quarterly, P is the wholesale price Wilpen charges for a can of tennis balls, M is the consumers' average household income, and Pr is the average price of tennis rackets. The regression results are as follows:
DEPENDENT VARIABLE: Q R-SQUARE F-RATIO P-VALUE ON FType equation here.
OBSERVATIONS: 20 0.8435 28.75 0.001
PARAMETER STANDARD
VARIABLE ESTIMATE ERROR T-RATIO P-VALUE
INTERCEPT 425120.0 220300.0 1.93 0.0716
P -37260.0 12587 -22.96 O.OO93
M 1.49 0.3651 4.08 0.0009
PR -1456.0 460.75 -3.16 0.0060
a. Discuss the statistical significance of the parameter estimates a, b, c, and d using the p-values. Are the signs of b, c, and d consistent with the theory of demand?
b. What is the estimated number of cans of tennis balls demanded?
c. At the values of P, M, and Pr given, what are the estimated values of the price (E), income (Em), and cross-price elasticities (Exr) of demand?
d. What will happen, in percentage terms, to the number of cans of tennis balls demanded if the price of tennis balls decreases 15 percent?
e. What will happen, in percentage terms, to the number of cans of tennis balls demanded if average household income increases by 20 percent?
f. What will happen, in percentage terms, to the number of cans to tennis balls demanded if the average price of tennis rackets increases 25 prcent?
Part -5:
Applied Problem 1:
The Largo Publishing House uses 400 printers and 200 printing presses to produce books. A printer's wage rate is $20, and the price of a printing press is $5,000. The last printer added 20 books to total output, while the last press added 1,000 books to total output. Is publishing house making the optimal input choice? Why or why not? If not, how should the manager of Largo Publishing House adjust input usage?
Applied Problem 2:
The MorTex Company assembles garments entirely by hand even though a textile machine exists that can assemble garments faster than a human can. Workers cost $50 per day, and each additional laborer can produce 200 more units per day (i.e., marginal product is constant, and equal to 200). Installation of the first textile machine on the assembly line will increase output by 1,800 units daily. Currently the firm assembles 5,400 units per day.
a. The financial analysis department at MorTex estimates that the price of a textile machine is $600 per day. Can management reduce the cost of assembling 5,400 units per day by purchasing a textile machine and using less labor? Why or why not?
b. The Textile Workers of America is planning to strike for higher wages. Management predicts that if the strike is successful, the cost of labor will increase to $100 per day. If the strike is successful, how would this affect the decision in part a to purchase a textile machine? Explain.
Applied Problem 3:
Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling industry is an increasing-cost industry. In the long run what do you expect will happen?
a. Your firm's cost of production? Explain
b. The price you charge for your remodeling services? Why?
c. Profits in home remodeling? Why?
Part -6:
Applied problems 1:
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. A major freeze destroys a large number of the orange trees in Florida.
b. 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.
c. The American Medical Association announces that drinking orange juice can reduce the risk of heart attack.
d. The price of grapefruit falls.
Applied Problem 2:
Evaluate the following statemel'lts using graphical analysis. Provide a brief narrative explanation of your graph to support your evaluation. Make sure the axes and curves in your graphs are properly labeled.
a. "When demand for home heating oil increases, a shortage of heating oil will occur."
b. "A decrease in the supply of random access memory (RAM) chips for personal computers causes a shortage of RAM chips."
Applied Problem 3:
Rising jei 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:
a. The demand for air travel.
b. The demand for hotels.
c. The demand for rental cars.
d. The supply of overnight mail.
Applied Problem 4:
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:
Revenues
Revenue from sales of product and services . . . . . . . . . . . . . . . . . $970,000
Operating costs and expenses
Cost of products and services sold . . . . . . . . . . . . . . . . . . . . . . . 355,000
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,000
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Total operating costs and expenses . . . . . . . . . . . . . . . . . . . . . $555,000
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $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 for some of the capital equipment used in the business. In 2007, 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.
a. What are the total explicit, total implicit, and total economic costs in 2010?
b. What is accounting profit in 2010?
c. What is economic profit in 2010?
d. Given your answer in part c, evaluate the owner's decision to leave his job to start Sound Devices.