BUS 640 Managerial Economics Week 1, 2, 4 and 5 Exercises

Week One ExercisesChapter 1Applied Problem 1At 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:Revenues 2010Revenue from sales of product and services $970,000Operating costs and expensesCost of products and services sold $355,000Selling expenses $155,000Administrative expenses $ 45,000Total operating costs and expenses $555,000Income from operations $415,000Interest expense (bank loan) $ 45,000Legal expenses to start business $ 28,000Income taxes $165,000Net income $177,000To 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 2010, 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 2010?b. What is accounting profit in 2010?c. What is economic profit in 2010?d. Given your answer in part c, evaluate the owner’s decision to leave his job to start Sound Devices.Chapter 2Applied Problem 2.Florida Citrus Mutual, an agricultural cooperative association for citrus growers in Florida, needs to predict what will happen to the price and output of Florida oranges under the conditions below. What are your predictions? For each part, sketch a graph showing the appropriate demand and supply analysis.a. A major freeze destroys a large number of the orange trees in Florida.b. The scientists in the agricultural extension service of the University of Florida discover a way to double the number of oranges produced by each orange tree.c. The American Medical Association announces that drinking orange juice can reduce the risk of heart attack.d. The price of Florida grape fruit falls.Applied Problem 4.Rising jet fuel prices recently led most major U.S. airlines to raise fares by approximately 15 percent. Explain how this substantial increase in airfares would affect the following:The demand for air travel.b. The demand for hotels.c. The demand for rental cars.d. The supply of overnight mail..8181819915771px;”=””>Week Two Exercises2. 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 isMC = 40Pwhere P represents a reduction of one unit of pollution in the mines. It also feels that forevery unit of pollution reduction the marginal increase in revenue (MR) isMR = 1,000 – 10PHow 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.Number of Number of radiossecurity guards stolen per week0 501 302 203 144 85 6a. 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. Ifthecostofastolenradiois$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?1. The director of marketing at Vanguard Corporation believes that sales of the company’s Bright Side laundry detergent (S) are related to Vanguard’s own advertising expenditure (A), as well as the combined advertising expenditures of its three biggest rival detergents (R). The marketing director collects 36 weekly observations on S, A, and R to estimate the following multiple regression equation:S = a + bA + cRwhere S, A, and R are measured in dollars per week. Vanguard’s marketing director is comfortable using parameter estimates that are statistically significant at the 10 percent level or better.a. What sign does the marketing director expect a, b, and c to have?b. Interpret the coefficients a, b, and c.c. Does Vanguard’s advertising expenditure have a statistically significant effect on the sales of Bright Side detergent? Explain, using the appropriate p-value.d. Does advertising by its three largest rivals affect sales of Bright Side detergent in a statistically significant way? Explain, using the appropriate p-value.e. What fraction of the total variation in sales of Bright Side remains unexplained?What can the marketing director do to increase the explanatory power of the sales equation?What other explanatory variables might be added to this equation?f. What is the expected level of sales each week when Vanguard spends $40,000 per week and the combined advertising expenditures for the three rivals are $100,000 per week?.8181819915771px;”=””>Week Four ExercisesChapter 82. At a management luncheon, two managers were overheard arguing about the following statement: “A manager should never hire another worker if the new person causesdiminishing returns.” Is this statement correct? If so, why? If not, explain why not.Chapter 92. The Largo Publishing House uses 400 printers and 200 printing presses to produce books. A printer’s wage rate is $20, and the price of a printing press is $5,000. The last printer added 20 books to total output, while the last press added 1,000 books to total output. Is the publishing house making the optimal input choice? Why or why not? If not, how should the manager of Largo Publishing House adjust input usage?4. The MorTex Company assembles garments entirely by hand even though a textile machine exists that can assemble garments faster than a human can. Workers cost $50 per day, and each additional laborer can produce 200 more units per day (i.e., marginal product is constant and equal to 200). Installation of the first textile machine on the assembly line will increase output by 1,800 units daily. Currently the firm assembles 5,400 units per day.a. The financial analysis department at MorTex estimates that the price of a textile machine is $600 per day. Can management reduce the cost of assembling 5,400 units per day by purchasing a textile machine and using less labor? Why or why not?b. The Textile Workers of America is planning to strike for higher wages. Management predicts that if the strike is successful, the cost of labor will increase to $100 per day. If the strike is successful, how would this affect the decision in part a to purchase a textile machine? Explain..8181819915771px;”=””>Applied Problems 5Complete the following problems from your text:Chapter 11: Applied Problem 8Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling industry is an increasing-cost industry. In the long run, what do you expect will happen toa.Your firm’s costs of production? Explain.b.The price you can charge for your modeling services? why?c.Profits in home remodeling? why?Chapter 13: Applied Problem 1Show work and explain analysis. Submit your answers to the instructor.1)When McDonald’s Corp. reduced the price of its Big Mac by 75 percent if customers also purchased French fries and a soft drink, The Wall Street Journal reported that the company was hoping the novel promotion would revive its U. S. sales growth. It didn’t. Within two weeks sales had fallen. Using your knowledge of game theory, what do you think disrupted McDonald’s plans?knowledge of game theory, what do you think disrupted McDonald’s plans?