QUESTIONS
1. Define and compare the following types of cost:
a. Sunk Cost versus incremental cost
b. Fixed cost versus variable cost
c. Incremental cost versus marginal cost
d. Opportunity cost versus out-of-pocket cost
13. Overheard at the water cooler: "I think our company should take advantage of economics of scale by increasing our output, thereby spreading out our overhead costs." Would you agree with this statement ( assuming this person is not your boss)? Explain.
PROBLEM 2
Mr. Lee operates a green grocery in a building he owns in one of the outer boroughs of New York City. Recently, a large chemical firm offered him a position as a senior engineer designing plants for its Asian operations. (Mr. Lee has a master's degree in chemical engineering.) His salary plus benefits would be $95,000 per year. A recent annual financial statement of his store's operations indicates the following:
__________________________________________________________________________
Revenue $625,000
Cost of goods sold 325,000
Wages of workers 75,000
Taxes, insurance,
maintenance, and
depreciation on
building 30,000
Interest on business
loan (10%) 5,000
Other miscellaneous
expenses 15,000
Profit before taxes $175,000
______________________________________________________________________________
If Mr. Lee decides to take the job, he knows that he can sell the store for $350,000 because of the goodwill built with a steady clientele of neighborhood customers and the excellent location of the building. He would still hold on to the building, however, and he knows he could earn a rent of $50,000 on this asset. If he did sell the business, assume he would use some of the proceeds from the sale to pay off his business loan of $50,000. He could then invest the differenc e of $300,000 (i.e., $350,000 -$50,000) and expect to receive an annual return of 9 percent. Should Mr. Lee sell his business and go t work for the chemical company?
In answering this quesiton, also consider the following information.
a. In his own business, Mr. Lee works between 16 and 18 hours a day, 6 days a week. He can expect to work between 10 and 12 hours a day, 5 days a week, in the chemical company.
b. Currently, Mr. Lee is assisted by his wife and his brother, both of whom receive no salary but share in the profits of the business.
c. Mr. Lee expects his salary and the profits of his business to increase at roughly the same rate over the next 5 years.
CHAPTER 8 QUESTIONS
2. Explain the importance of free entry and exit in the perfectly competitive market. That is, if free entry and exit did not exist, what impact would this have on the allocation of resources and on the ability of firms to earn above-normal profits over time?
9. "Economic profit" is a theoretical concept used to help explain the behavior of firms in competitive markets. Suggest ways in which this concept can actually be measured.
11. Explain why a price-setting firm will always set its revenue-maximizing price below the price that would maximize its profit.
PROBLEM 2
Indicate whether each of the following statements is true or false and explain why.
a. A competitive firm that is incurring a loss should immediately cease operations.
b. A pure monopoly does noot have to worry about suffering losses because it has the power to set its prices at any level it desires.
c. In the long run, firms operating in perfect competition and monopolistic competition will tend to earn normal profits.
d. Assuming a linear demand curve, a firm that want to maximize its revenue will charge a lower price than a firm that wants to maximize it profits.
e. If P>AVC, a firm's total fixed cost will be greater than its loss.
f. When a firm is able to set its price, its price will always be less than its MR.
g. A monopoly will always earn economic profit because it is able to set any price that it wants to.
0 comments:
Post a Comment