Religious-pilgrimage system

Economic Problem Set 2 Week 4 KFSC, Fall 2020 Question 1: A cell phone manufacturer produces cell phones at a rate of 200 per day, at a unit or “average variable” cost of $150, with a sales price of $300, over a product lifetime of 2 years, with a production investment of $5 million and an advertising investment of $4 million. Assume 250 manufacturing days per year.

a. What is the average variable cost rate for each day of production?

b. What is the total variable cost over the life of the product?

c. What is the net production cost over the life of the product?

d. What is the revenue for a day of production?

e. What is the total revenue over the life of the product?

f. What is the net revenue over the life of the product?

g. What is the profit generated over the life of the product?

Question 2: Saudi Aramco produces petroleum at a rate of 5 million barrels a day, at a unit or average variable cost of $3 per barrel, and a sales price of $60. Assume 360 production days each.

a. What is the profit generated over a one year period with the current system?

b. If engineers at Saudi Aramco propose improvements in the oil refining

system at the cost of $600 million in order to reduce the unit or “average variable” cost by 10% over a 3 year period, what will the new profit rate be each of these years? Explain whether or not Saudi Aramco should make this production investment.

c. What is the lowest price of oil that the Saudi government can tolerate if it

needs $80 billion to cover the government costs each year?

d. If the price of oil falls to $50/barrel, and some of the oil ministers at OPEC

want to increase Saudi Aramco oil production to 6 million barrels/day, what would be the new annual profit rate? Should the Saudi Minister of Energy agree to this proposal?

Question 3 An Tamil/Indian cook from Chennai is opening a new restaurant in Ryadh that sells dosas. He plans on selling each dosa for 10 SAR and determines that it will cost him 7 SAR to make. The restaurant will cost him $300,000 SAR to purchase and equip with the equipment required. Assume he will open his restaurant 330 days out of the year.

a. What is the total variable cost of running this restaurant each year if he sells 80 dosas each day? What is the total cost over a 3 year period?

b. What is the sales revenue rate of running this restaurant each year if he sells 80 dosas each day?

c. If the new restaurant owner wants to pay off this initial purchase price in

5 years, how many dosas will he have to sell each day, assuming he will open his restaurant 300 days out of the year.

d. If the Indian cook would like to start cooking samosas at the cost of 4 SAR, a daily sales rate of 100, and a sales price of 6 SAR, how much should he be willing to invest in order to pay off this investment in 3 years?