Salvatore’s Chapter 8
Discussion Questions
2. (a) What is the distinction between marginal cost and incremental cost? (b) How are sunk costs treated in managerial decision-making? Why?
10. What are the aim, usefulness, and shortcomings of (a) cost– volume– profit analysis and (b) the concept of operating leverage?
Problems
3. Airway Express has an evening flight from Los Angeles to New York with an average of 80 passengers and a return flight the next afternoon with an average of 50 passengers. The plane makes no other trip. The charge for the plane remaining in New York overnight is $1,200 and would be zero in Los Angeles. The airline is contemplating eliminating the night flight out of Los Angeles and replacing it with a morning flight. The estimated number of passengers is 70 in the morning flight and 50 in the return afternoon flight. The one- way ticket for any flight is $200. The operating cost of the plane for each flight is $11,000. The fixed costs for the plane are $3,000 per day whether it flies or not. (a) Should the airline replace its night flight from Los Angeles with a morning flight (Calculate and compare the profit under each flight)? (b) Should the airline remain in business (is asking: should Airway Express continue providing the flight between Los Angeles and New York? Even if Airway Express decides not to fly, it still has to pay the fixed costs of $3,000 per day. The evening flight with the return flight the next afternoon is counted as 1 day, not 2 days)?
11. The Goldberg- Scheinman Publishing Company is publishing a new managerial economics text for which it has estimated the following total fixed and average variable costs:
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Total fixed cost:
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Copy editing
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$10,000
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Typesetting
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70,000
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Selling and promotion
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20,000
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Total fixed costs
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$100,000
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Average variable costs:
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Printing and binding
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$6
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Administrative costs
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2
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Sales commissions
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1
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Bookstore discounts
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7
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Author’s royalties
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4
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Average variable costs
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$20
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Project selling price
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$30
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(a) Determine the breakeven output and total sales revenues and draw the cost– volume– profit chart, and (b) determine the output that would generate a total profit of $ 60,000 and the total sales revenues at that output level; draw the cost– volume– profit chart.
Spreadsheet Problem
For the following table, calculate in Excel the average fixed costs (AFC), the average variable cost (AVC), the average total costs (ATC), and the marginal costs (MC).
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Salvatore’s Chapter 9
Problems
7. From Figure 9- 4, determine the effect of a 33 percent import tariff on commodity X. (The tariff-inclusive price will be $3 (1+.33) = $4. What are the impacts of tariff on domestic consumption, domestic production, imports, and government’s tariff revenue? Show the numbers; for example, at figure 9-4, if you draw a line starting at Px=$4 and parallel to the X axis, it will cross the demand curve, Dx, at 500X. therefore, you know that the domestic consumption will decrease from 600X to 500X.)
11. Most book publishers pay authors a percentage of the revenue from book sales. Explain the conflict that this creates between publishers and authors.
Spreadsheet Problem
If the market supply function of a commodity is Qs = 3,250 and (a) the market demand function is Qd = 4,750 – 50P and P is expressed in dollars. Use Excel to calculate what the equilibrium price is by calculating values of Qd and Qs for P from 25 to 50 in 1’ s. (d) For (a) only, if TC = 0.005![]()
– Q, what is the profit in each case?
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Froeb et al.’s Chapter 9
9- 3 Snacks, Beer, and Marijuana
Snack food venders and beer distributers earn some monopoly profits in their local markets but see them slowly erode from various new substitutes. When California voted on legalizing marijuana, which side would you think that California beer distributors were on? What about snack food venders? Why? (Think about substitutes and complements. For example, marijuana and snack foods are strong complements, or so we are told.)
9- 4 Competitive Industries
Relative to managers in more monopolistic industries, are managers in industries that are more competitive more likely to spend their time on reducing costs or on pricing strategies?
Froeb et al.’s Chapter 11
11- 4 The Carry Trade
How does a decrease in U. S. interest rates affect the EU/ U. S. exchange rate?(Use the carry trade to predict the impact of lower U.S. interest rates on Euro/$)
11- 5 Dollar Devaluation
How will a dollar devaluation affect businesses and consumers in the twin cities of El Paso, United States, and Juarez, Mexico? (Make sure you explain the impact on the twin cities, not just 1 city.)
References
References are a required portion of this assignment!
