ECON 3305 Managerial Economics Homework 1 The homework covers Ch 1~3.. For each
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Question
ECON 3305 Managerial Economics Homework 1
The homework covers Ch 1~3.. For each question, please show the necessary derivation (if applicable) and highlight the answer. Limit your answers within 5 pages. No cover sheet is required.
Q1: Ch 1 (15%)
During a year of operation, a firm collects $300,000 in revenue and spends $200,000 on labor expense, raw materials, rent, and utilities. The firm’s owner has provided $750,000 of her own money instead of investing the money and earning a 10% annual rate of return.
How much are the explicit (accounting) costs, the implicit costs, and the total economic costs?
How much are the firm’s accounting profit and economic profit?
If the owner was working for a full time job with annual salary of $30,000 before she quitted the job to operate the business, do you think she made the right decision from
the perspective of long-run economic profit? Please explain your answer briefly.
Q2: Ch 1 (10%)
An article in The Wall Street Journal reported that large hotel chains, such as Marriott, are tending to reduce the number of hotels that they franchise to outside owners and increase the number the chain owns and manages itself. Some chains are requiring private owners or franchisees to make upgrades in their hotels, but they are having a difficult time enforcing the policy. Marriott says this upgrading is important because “we’ve built our name on quality.”
a. What type of agency problem is involved here?
b. Why would a chain such as Marriott tend to own its hotels in resort areas, such as
national parks, where there is little repeat business, and franchise hotels in down-town areas, where there is a lot of repeat business? Think of the reputation effect and the incentive of franchises to maintain quality.
Q3: Ch 2 (25%)
Suppose you are the manager of a California winery. How would you expect the following events to affect the market equilibrium price (up or down) you receive for a bottle of wine? Please state the shift (leftward or rightward) of demand or supply.
a. The price of comparable French wines increases.
b. One hundred existing wineries close in California.
c. The price of a glass bottle increases significantly due to new government anti-shatter
regulations.
d. Researchers discover a new wine- making technology that reduces production costs. e. The average age of consumers increases, and older people drink less wine.
Q4: Ch 2 (10%)
Evaluate the following statements using graphicalanalysis. 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 causes a shortage of RAM chips.”
Q5: Ch 3 (10%)
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?
Q6: Ch 3 (15%)
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.
# 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?
Q7: Ch 3 (15%)
Please answer the following three questions referred to the table: a. What is marginal benefit for the 4th unit of the activity?
b. What is the net benefit of the 5th unit of the activity?
c. What is the optimal level of activity?
Level of ActivityBenefit Total Total Marginal Marginal Net xX 200 30 100 230 270 50 65 450 255 30 500 75Explanation / Answer
(Q1)
(i)
Accounting (exlicit) costs = Cost of labor, raw materials and utilities = $200,000
Implicit cost = Interest income foregone = $750,000 x 10 = $75,000
Economic cost = Accounting cost + Implicit cost = $(200,000 + 75,000) = $275,000
(ii)
Accounting profit = Revenue - Accounting costs = $300,000 - $200,000 = $100,000
Economic profit = Revenue - Economic costs = $300,000 - $275,000 = $25,000
(iii)
Quitting the job would increase implicit cost and economic cost by $30,000, therefore economic profit will fall by $30,000.
New economic profit = $25,000 - $30,000 = -$5,000
Since economic profit would be negative in this case, she did not make the right decision.
NOTE: As per Chegg Answering Polic, first question is answered.
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