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(solution) Hi tutor, Can you please help with my home work. For each


Hi tutor, Can you please help with my home work. For each question, please show the necessary derivation (if applicable) and highlight the answer. Please use your own words in excel. Thanks.


Dr. C. Chen ECON 3305 Managerial Economics

 

Homework 1

 

The homework covers Ch 1~3. It has to be your individual work. Copying answer from

 

others will violate ACADEMIC HONESTY policy to cause a failing grade. 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%)

 

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:

 

2015

 

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 2015, 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 2015?

 

b. What is accounting profit in 2015? What is economic profit in 2015?

 

c. Given your answer in part b, evaluate the owner?s decision to leave his job to start

 

Sound Devices. 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 Dr. C. Chen 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 decreases, and younger people drink more wine. Q4: Ch 2 (10%)

 

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 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? Dr. C. Chen 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

 

14

 

4

 

8

 

5

 

6

 

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? Q7: Ch 3 (15%)

 

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.

 


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