Critical Thinking 1
Critical Thinking 1
BUSI 620
Liberty University
Shakeya Robbins
1
Critical Thinking 12
Salvatore’s Chapter 1:
Discussion Question 9: How is the concept of a normal return on investment related to the
distinction between business and economic profit?
When it comes to running a business, it is essential to know how to calculate the ratios
correctly. Also, it is necessary to understand the meaning behind the ratios. To determine the
minimum profit that is required to cover the costs of the inputs and expenses is to calculate
the
normal return on investments.
Business profit subtracts explicit costs and total revenue from each other. Economic
profit subtracts implicit and explicit from total revenue implicit meaning that the opportunity
costs and explicit meaning money costs. In other words, it calculates explicit costs a firm
must
spend to maintain production which include the wages of employees, rent, and material
costs.
Economic profit has both implicit and explicit costs, which means it will lower the
amount of the profit accounting. This calculation is used by economists to determine the
normal
return on investment because it is considered the chance costs of factors of production. The
value
of selling the property or renting the property an asset versus using it for production is an
example.
Problem 6: Determine which of the two investment projects of Problem 5 the manager
should choose if the discount rate of the firm is 20 percent.
First project: promises a profit of 100,000 in each of the next 4 years
Second project: promises a profit of 75,000 in each of the next 6 years
PV = R/ (1+k) 1 + R/ (1+k) 2 + ... + R/ (1+ n1 2 n k)
First Project: PV = $100,000/1.20 + $100,000/(1.20)2+ $100,000/(1.20)3 +
$100,000/(1.20)4
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Second Project: PV = $75,000/1.20 + $75,000/(1.20)2+ $75,000/(1.20)3 +
$75,000/(1.20)4+ $75,000/(1.20)5 + $75,000/(1.20)6
= $249,413.26
The manager should use the first project because the PV is higher than the PV for the second
project.
Problem 9: A woman managing a photocopying establishment for $25,000 per year decides
to open her own duplicating place. Her revenue during the first year of operations is
$120,000 and her expenses are as follows:
Salaries to hired help45,000
Supplies 15,000
Rent 10,000
Utilities 1,000
Interest on bank loan10,000
Calculate (a) Explicit Costs, (b) Implicit Costs, (c) Business Profit, (d) Economic Profit, and
(e) Normal Return on Investment.
(a)Explicit Costs: Salaries to hired help + Supplies + Rent + Utilities + Interest on Bank Loan
$45,000 + $15,000 + $10,000 + $1,000 + $10,000 = $81,000
(b)Implicit Costs: $25,000
(c)Business Profit: Revenue-Explicit costs
$120,000 − $81,000 = $39,000
(d)Economic Profit: Revenue- Explicit and Implicit Costs
$120,000 – ($81,000 + $25,000) = $14,000
(e)Normal Return on Investment= Business Profit-Economic Profit
MEAN
MEDIAN
MODE
VARIANCE
STANDARD DEVIATION
COEFFICIENT OF VARIANCE
TIME
9.2
9.0
9.6
2.5
1.6
0.2
AGE
14.3
14.0
14.0
4.2
2.1
0.1
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39,000-14,000= $25,000
Spreadsheet Problem: Using the data below, where column A represents student numbers,
column B the finishing time for a 1 mile race for students, and column C the age of the
students.
aUse the data analysis tools to plot a line graph of all the finishing times.
bCalculate the mean, median, mode, sample variance, sample standard deviation, and
coefficient of variation to statistically describe the data.
cUse Excel to find the covariance between the two variables. What does the covariance
indicate about the relationship between finishing time and age?
a
Tim
e
Age
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TIME AGE
COVARIANCE -2.4 -2.4
The covariance is -2.4, which signifies that the two variables (time and age) have an
inverse relationship.
Froeb et al.’s Chapter 3:
aIndividual problems: 3-1 and 3-3.
Individual problem 3-1: You won a free ticket to see a Bruce Springsteen concert (assume
the ticket has no resale value). U2 has a concert the same night, and this represents your
next-best alternative activity. The tickets to the U2 concert costs $80, and on any particular
day, you would be willing to pay up to $100 to see this band. Assume that they are no
additional costs of seeing either show. Based on the information presented here, what is the
opportunity cost of seeing Bruce Springsteen?
Since the Bruce Springsteen concert is valued at $100, and the U2 concert costs $80, the
opportunity cost of seeing Bruce Springsteen is $100-$80= $20
Individual problem 3-3: Due to the housing bubble, many houses are now selling for much
less than their selling price just two or three years ago. There is evidence that homeowners
with virtually identical houses tend to ask more if they paid more for the house. What
fallacy are they making?
After reading this problem the fallacy that they are making is false clause fallacy. It is
false clause fallacy because the homeowners falsely thought that paying more for the house
mean
that they could sell the house for even more. One event came before another and had been
incorrectly viewed as evidence because the first event caused the second event.
Salvatore’s Chapter 3:
Discussion Question 9: How would you react to a sales manager’s announcement that he or
she has in place a marketing program to maximize sales?
Problem 7: Given the following total-cost schedule, Derive the average-and marginal-cost
schedules.
Q 0 1 2 3 4
TC 1 12 14 15 20
Q TC AC MC
0 1 - -
1 12 12 11
21472
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When a sales manager announces that the marketing program is being used to maximize
sales, I would recommend the marketing program to downsize due to the marginal revenue equal
zero. When this takes place, the marginal cost exceeds marginal which means that the marketing
program is making too much yield. For the best results, the marketing company marginal costs
should have the same value as marginal revenue.
Problem 1(a): Given the following total-revenue function: TR=9Q-Q2(a) Derive the total-,
average-, and marginal- revenue schedules from Q=0 to Q=6 by 1’s.
Q TR AR MR
0 0 - -
1 8 8 8
21476
31864
42052
52040
6183-2
a
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31551
42055
Problem 9: With the total-revenue curve of Problem 1 and the total-cost curve from
Q TR TC Profit
1812-4
214140
318153
420200
The profit-maximizing level of output: Q= 3
Froeb et al.’s Chapter 4:
Individual problems: 4-5 and 4-6.
Individual problem 4-5: Your new insurance firm processes claims through its newer,
larger high-tech facility and its older, smaller low-tech facility. Each month, the high-tech
facility handles 10,000 claims, incurs $100,000 in fixed costs and $100,000 in variable costs.
Each month, the low-tech facility handles 2,000 claims, incurs $16,000 in fixed costs and
$24,000 in variable costs. If you anticipate a decrease in the number of claims, where will
you lay off workers?
High tech facility:
10,000 claims
100,000 variable costs/ 10,000 claims = $10 in variable cost per claim
Total cost per claim= $20
Low tech facility:
24,000 variable costs/ 2,000 claims= $12 in fixed cost per claim
Total cost per claim= $18
Critical Thinking 1 8
Decreasing the number of claims the firm should use the high tech facility and lay off the
employees at the low tech facility. This is due to the fixed cost is not dependent on production
which means the fixed cost will never change.
Individual problem 4-6: A copy company wants to expand production. It currently has 20
workers who share eight copiers. Two months ago, the firm added two copiers, and output
increased by 100,000 pages per day. One month ago, they added five workers, and
productivity also increased by 50,000 pages per day. Copiers cost about twice as much as
workers. Would you recommend they hire another employee or buy another copier?
To accurately find the answer, the marginal benefit of adding a copier and the marginal benefit of
adding a worker must be calculated and compared.
Marginal output of a copier= 100,000 pages/ 2 copiers= 50,000 pages
Marginal productivity of a worker=50,000 pages/ 5 workers= 10,000 pages
The marginal output of the is five times more than the worker of the marginal productivity.
Because the output of the copier is over, twice the workers would be a more efficient decision to
purchase another copier.
