Economics Homework-Maurice-Chapter 1-2 Applied Problems Chapter 1 Problem 1 A.

total ops cost & expenses interest bank loan legal expense income tax Total Explicit Cost 555,000 45,000 28,000 165,000 793,000 C. Economic Profit Revenue less explicit & implicit 970,000 (983,000) B. Accounting Profit Revenue less explicit & implicit 970,000 (793,000) 177,000

salary he gave up personal savings used to start the business X 15% ROI Total implicit cost

175,000

15,000 190,000

(13,000)

Explicit cost + Implicit Cost 983,000 D. After a year of operating his own business, Sound Devices, the owners accounting profit was $177,000 while his economic profit put him in a negative $13,000. If he kept his job and just invested the $100,000 at 15% ROI, he would have made the $15,000.

Problem 3 A. Explicit cost /month Implicit cost/month 15,000+5,000 B. Opportunity Cost/month explicit + implicit costs 18,000

20,000

38,000

C. Burton Cummings cost of production is 38,000/month which exceeds his revenues by $13,000 (38,000-25,000). Instead of losing $13,000 per month, Burton should rent his rig for $15,000 per month and drive trucks for another firm for $5,000 per month. Using the resources he has would yield him $20,000 per month. Problem 6 a. The type of agency problem that is involved is called principal-agent problem. Marriott wants to maintain a level of quality in its hotel, however this require a great investment by the franchisees. Franchisees who are investing in these hotels will end up losing profits. Also, Marriotts avoidance of their responsibilities to maintain high quality hotels would lead to having their reputation damaged. b. Marriott should be concerned on the quality of the hotels that they are franchising. Even though they do not directly own it, their name is still associated with the owner. Furthermore, low quality and poor service on these franchises will directly affect Marriott. These sub-standard run franchises will damage Marriotts reputation and reduce the profitability. c. Since Marriott own its hotels in the resort, it is their responsibility to take care of their business. Providing a clean, quality and friendly atmosphere will provide them with the

reputation that would attract more business. Marriott will gain more business in the downtown areas due to repeat customers and through word of mouth by others. If the resort provides bad service and inefficient services, then people will find something else. The reputation of the Marriott depends highly on how much business it will have. A good reputation will lead to great profits. Problem 7 Even though the financial arrangement with Delta and United limited the growth in SkyWests economic profits in future years, the agreement decreased the risk associated with SkyWests profits. In the Fortune article, one financial analyst states, They (SkyWest) shield themselves from the factors that lead to volatility in earningsfuel prices, ticket prices, and load factors and bring investors the certainty they are looking for. The lower level of risk reduces the riskadjusted discount rate, and, for a given stream of profits, the value of the SkyWest rises.

Mathematical Exercise Problem 2 The present value is calculated as follows: Year 1 2 3 4 5 PV= Profit/(1+Rate)^number of years Expected profit Rate PV 10,000 12% $8,928.57 20000 12% $15,943.88 50000 12% $35,589.01 75000 12% $47,663.86 50000 12% $28,371.34 $136,496.66

Problem 3 Divorce Settlement Options: Option 1 Burt pays Loni $1,000,000 each year for 10 years Year payment Rate 1 2 3 4 5 6 7 8 9 10 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 8% 925,926 8% 857,339 8% 793,832 8% 735,030 8% 680,583 8% 630,170 8% 583,490 8% 540,269 8% 500,249 8% 463,193 6,710,081 Option 2 Burt Pays Loni $5,000,000 Rate 20% 833,333 20% 694,444 20% 578,704 20% 482,253 20% 401,878 20% 334,898 20% 279,082 20% 232,568 20% 193,807 20% 161,506 4,192,472

If the interest rate is 8 percent: PVOption A = $6,710,081 PVOption B = $5,000,000 No question about it, Loni should take option A and Burt should want to pay her $5,000,000 now. If the interest rate is 20 percent: PVOption A = $4,192,472 PVOption B = $5,000,000 In this situation, Loni should demand $5,000,000 in cash now, and Burt should try to talk her into taking $10,000,000 spread over ten years.

Applied Problems CHAPTER 2 Problem 1 a. As the price of the French wine decreases, so will the price of other wines. This will happen so other company can compete with the French wine firm. b. With new wineries opening in California, I would expect the price of wine to decrease because the quantity demanded for wine will increase. c. While unemployment rate in the US decreases, I think the price of wine would decrease and the quantity demanded will increase due to people having a job and making more money. d. As the price of cheese increase, I expect the price of wine to decrease. A rise in the price of cheese will decrease demand for cheese, which should decrease demand for wine which in turn will decrease the price for wine.

e. With the new government anti-shatter regulations, I would expect the price of wine to increase due to the increase in prices of the wine bottles. f. With the new wine-making technology, I think the price of wine will decrease since it will be cheaper to produce. g. The increase in the price of wine vinegar will decrease the price of wine. h. Since older people drink less wine, demand would be falling in this case. As a result, the price would decrease. Problem 6 On the graph below, D0 is the initial demand for tickets to Disneyland and S is the supply of tickets to Disneyland. Since tourism has slowed down, this will cause a decrease in the demand, which is shown on D1. As for the new rides at Six Flags, the demand has been reduced to D2. These occurrences have resulted in lower ticket prices at Disneyland and lower attendance at the park. This is not a violation of the law of demand since price is falling due to a decrease (shift) in demand, not a movement along a given demand curve.

140 120 Price of Tickets 100

D0
80 60 40 20 0 Q3 Q2 Q1 Q0 Number of Tickets

D1

D2

Problem 8 a. Increase in the price of complement goods, such as soft drink and popcorn can cause the demand to shift leftward. Movie ticket prices fall and ticket sales fall. Figure A

35 30 Price of Movie Tickets 25 20 15 10 5 0 7 10 18 22 28 33 Quantity of Movie Tickets

D1 D0 P0

Demand

b. Decrease in the price of a substitute good causes demand to shift leftward. Movie ticket prices fall and ticket sales fall. (See Figure A) c. Pay-per-view movies on cable are more convenient to some consumers than going to the movie theater, therefore this takes away consumers from theater movies toward pay-per-view movies. Demand shifts leftward due to the change in tastes, and movie theater ticket prices fall and ticket sales fall. (See Figure A) d. The end of the strike increases the number of movie scripts available, lowering the price producers must pay to get a movie script. The decrease in price of an input (movie scripts) increases the supply of movies out of Hollywood. Supply shifts rightward. Movie ticket

prices fall and ticket sales rise. (See Figure B) e. As in part d, a decrease in the price of an input causes supply to shift rightward. Movie ticket prices fall and ticket sales rise. (See Figure B) Figure B

35

D0 D1

P0 30
Price of Movie Tickets 25 20 15 10 5 0 7 10

18

22

Quantities of Tickets

Problem 10 In the figure,

30 25

S1

the burning wood causes supply to shift leftward from S0 to S1. The substitution
0 Price of Firewood 20 15 10 5

S0

PE

D0
D1

from burning wood to gas

Category 1

Category 2

Category 3

Category 4

Quantity of Firewood

hearths is represented by the leftward shift in demand from D0 to D1. Comparing initial equilibrium point A to B, the price of firewood has remained unchanged while the quantity of firewood burned decreases. Problem 11 Demand and supply both increase simultaneously. An increase in customers (N) causes demand to shift rightward. An increase in the number of businesses in a market (F) causes supply to shift rightward. Equilibrium output definitely increases, but the effect of the Internet on equilibrium price is indeterminate. Problem 12 a. At $3,600 per metric ton, quantity demanded is 34 metric tons per year (= 124 0.025 3,600) and quantity supplied is 40 metric tons per year (= 50 + 0.025 3,600). So, the annual rate of inventory growth is 6 tons per year (= 40 34), which corresponds 0.5 ton per month.

b.

The global market-clearing price of primary aluminum is $3,480:

Qd Qs 124 0.025 P 50 0.025 P 174 0.05 P 3480 PE