Assignment
1. At the beginning of the year, an audio engineer quit his job and gave up a salary of $ 145,000 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 2017, 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 2017?
b. What is accounting profit in 2017? What is economic profit in 2017?
c. Given your answer in part b, evaluate the owner's decision to leave his job to start Sound Devices.
2. Evaluate the following statements 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. True or false, "When demand for home heating oil increases, a shortage of heating oil will occur."
b. True or false, "A decrease in the supply of random access memory (RAM) chips for personal computers cause a shortage of RAM chips."
3. Appalachian Coal Mining believes that it can increase labor productivity and, therefore, net revenue by reducing air pollution in its mines. It estimates that the marginal cost function for reducing pollution by installing additional capital equipment is MC= 70P, where P represents a reduction of one unit of pollution in the mines. It also feels that for every unit of pollution reduction the marginal increase in revenue (MR) is
MR= 1,200 -10P.
How much pollution reduction should Appalachian Coal Mining undertake?
4. Twenty-first 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.
|
# of security guards
|
# of stolen per week
|
|
0
|
50
|
|
1
|
30
|
|
2
|
20
|
|
3
|
11
|
|
4
|
7
|
|
5
|
4
|
a. If each security guard is paid $400 a week and the cost of a stolen radio is $50, how many security guards should the firm hire?
b. If the cost of a stolen radio is $50, what is the most the firm would be willing to pay to hire the first security guard?
c. If each security guard is paid $400 a week and the cost of a stolen radio is only $30, how many security guards should the firm hire?
5. Bavarian Crystal Works designs and produces lead crystal wine decanters for export to international markets. The production manager of Bavarian Crystal Works estimates total and marginal production costs to be TC = 10,000 + 40Q + 0.0025Q2 and MC = 40 + 0.005Q, where costs are measured in U. S. dollars and Q is the number of wine decanters produced annually. Because Bavarian Crystal Works is only one of many crystal producers in the world market, it can sell as many of the decanters as it wishes for $50 apiece. Total and marginal revenue are TR = 60Q and MR = 60, where revenues are measured in U. S. dollars and Q is annual decanter production.
a. What is the optimal level of production of wine decanters? What is the marginal revenue from the last wine decanter sold?
b. What are the total revenue, total cost, and net benefit (profit) from selling the optimal number of wine decanters?
c. Is the optimal profit in answer b good enough to keep Bavarian Crystal Works in the market? Please comment on it.