BUS 640 Managerial Economics Week One Exercises

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Week One
Exercises
Chapter 1
Applied Problem 1
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:

Revenues 2010
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 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 2
Applied 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.