QUESTION FOR CRITICAL THINKING 1 1
Question for critical thinking 1
Mary-Ann R. Foster
Liberty University
October 26, 2014
QUESTION FOR CRITICAL THINKING 1 2
Question for Critical Thinking 1
Discussion Question #9.
How is the concept of normal return on investment related to the distinction between
business and economic profit?
According to investopedia.com economic profit or loss is calculated by subtracting
revenue cost received from the sale of an output and the opportunity cost of the inputs used
(Investopedia); whereas, business profits are calculated by subtracting the total revenue from the
total cost incurred. Normal return on investment is the minimal profit a company needs to cover
costs of inputs and all other expenses. The profit will be anything greater than zero. “When
profits are made in an industry in the short run, more firms are attracted to the industry in the
long run and this tends to drive profits down to zero” (Dominick Salvatore 17).
The main difference between business profit and economic profit is that the normal return is
considered a profit in business but considered cost in economic. Thus, business profit minus the
normal return on investment or implicit costs equals economic profit. Normal return is required
in business profit but not in economic profit.
Problems: 6, 9 and spreadsheet problem (p. 37).
Salvator's chapter 1 spreadsheet problem
(p.37)
Number Time Age
1 8.2 14
2 7.5 16
3 9.6 12
4 12.1 12
5 10.2 13
6 8.3 14
7 7.4 18
8 8.1 17
9 9.6 14
10 11.2 13
mean 9.2
median 9.0
mode 9.6
variance 2.5
s.d. 1.6
coefficient of variance 0.2
covariance -2.4
QUESTION FOR CRITICAL THINKING 1 3
ANS= Based on the information provided in the spreadsheet there is an inverse relationship
between the two data (time and age) because the covariance is -2.4.
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.
Project 1
PV = 100000/120 +100000/ (1.20) ^2+100000/ (1.20) ^3+100000/ (1.20) ^4
= $258,873.45
Project 2PV = $249,413.26
Therefore, the return will be less with a discount rate of 20%.
It would be suggested that the firm/manager should choose project 1
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 operation is $ 120,000, and
her expenses are as follows:
Salaries to hired help $45,000
Supplies 15,000
Rent 10,000
Utilities 1,000
Interest on bank loan 10,000
Calculate (a) the explicit costs, (b) the implicit costs, ( c) the business profit, ( d) the economic
profit, and ( e) the normal return on investment in this business.
Establishment 25000
1st yr of operation
12000
0
A. The explicit cost = =45000+15000+10000+1000+10000
B. The implicit costs
are = 25000 Which is her the 25000 per year
QUESTION FOR CRITICAL THINKING 1 4
C. Business profit= operation for the 1st year -explicit cost
=+C4-D6
D. Economic profit= total revenue-explicit +implicit cost
=+C4-(D6+D8)
E. Normal return = =+D8 is the same as the implicit cost
Establishment 25000
1st yr of
operation 120000
A. The explicit cost = $81,000
B. The implicit costs are = $25,000 Which is her the 25000 per year
C. Business
profit= operation for the 1st year -explicit cost
$39,000
D. Economic
profit=
total revenue-explicit +implicit
cost
$14,000
E. Normal return
=$25,000 is the same as the implicit cost
Please see hyperlink. C:\Users\Mary-Ann\Documents\Questions for critical thinking 1_Mary-
Ann R. Foster_620.xlsx
Salvatore’s Chapter 3
9. How would you react to a sales manager’s announcement that he or she has in place a
marketing program to maximize sales?
The manager should understand that marginal revenue is 0 when sales is at its highest,
therefore, management should be aware that marginal cost is often positive, because of that
marginal cost will exceed marginal revenue thus the company may produce too much to
maximize total profit. To avoid such actions should be taken to bring down marketing program
until marginal benefit equals marginal cost.
QUESTION FOR CRITICAL THINKING 1 5
Problems
1a: Derive the total-revenue, and marginal-revenue schedules from Q= 0 to Q= 6by 1s
r revenu
0 0
1 12 12 12
2 20 11 10.00
3 28 9 8.00
4 36 8 6.00
5 44 7 4.00
6 52 6 2.00
7. Given the following total cost schedule: Derive the average and marginal cost schedules
Q 0 1 2 3 4
1 1 12 14 15 20
ANS
Q TC Average Cost Marginal Cost
010 0
1 12 12.00 11.00
2 14 7.00 2.00
3 15 5.00 1.00
4 20 5.00 5.00
Q TC A Cost M Cost
0 1
1 12 12
=+Table2[[#This Row],[TC]]-
B4
2 14
=+Table2[[#This Row],[TC]]/Table2[[#This
Row],[Q]]
=+Table2[[#This Row],[TC]]-
B5
QUESTION FOR CRITICAL THINKING 1 6
3 15
=+Table2[[#This Row],[TC]]/Table2[[#This
Row],[Q]]
=+Table2[[#This Row],[TC]]-
B6
4 20
=+Table2[[#This Row],[TC]]/Table2[[#This
Row],[Q]]
=+Table2[[#This Row],[TC]]-
B7
C:\Users\Mary-Ann\Documents\Questions for critical thinking 1_Mary-Ann R. Foster_620.xlsx
9. With the total revenue curve of problem 1 and total cost curve of problem 7, derive the
total profit function and show how the firm determines the profit maximizing level of
output.
Profit = TR-TC
P0= 0
P1= =+B5-B16
P2= =+B6-B17
P3= =+B7-B18
Profit = TR-TC
P0= 0
P1= 0
P2= 6
P3= 13
Profit = TR-TC
Productivity at 0 =0
At P1 profit = 12-12 =0
At P2 profit =20-14 =6
At P3 profit= 28-15=13
C:\Users\Mary-Ann\Documents\Questions for critical thinking 1_Mary-Ann R. Foster_620.xlsx
Individual problems
3-1 Concert opportunity cost you won a free ticket to see a Bruce springs-teen concert
(assume the ticket has no resale value). U2 has a concert the same night, and this represents
QUESTION FOR CRITICAL THINKING 1 7
your next- best alternative activity. Tickets to the u2 concert cost $ 80, and on any
particular day, you would be willing to pay up to $ 100 to see this band. Assume that there
are no additional costs of seeing either show. Based on the information presented here,
what is the opportunity cost of seeing Bruce Springsteen?
Cost incurred= 100.00
Actual Cost=80.00
Therefore the opportunity cost of seeing Bruce Springsteen is
100-80=20.00
Ans.= $20.00
3- 3 Housing bubble due to the housing bubble, many houses are now selling for much less
than their selling price just two to three years ago.
There is evidence that homeowners with virtually identical houses tend to ask for more if
they paid more for the house. What fallacy are they making?
The fallacy that the author is making is that the selling price should be equal to the
buying price. The selling price is not been related to the current demand and supply in market,
nor is the current value of the houses been properly assessed. The error is that, the sellers are
under the assumption that the house value have remained the same even though it is clear that
that there has been a housing bubble which caused value to fall. Thus sellers are avoiding the
reality of the decline in property prices and making the fallacy of relating the selling price to the
buying price of property.
4- 5
Processing insurance claims your 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?
QUESTION FOR CRITICAL THINKING 1 8
Each Month High tech equals
Claims= $10,000.00
fixed cost incur $100,000.00
Variable Cost $100,000.00
Each month low tech
Claims= $2,000.00
fixed cost incur $16,000.00
Variable Cost $24,000.00
High tech average variable cost for processing claim=
$10.00
Low tech average variable cost for processing claim=
$12.00
Because the Low-tech facility has a higher average variable cost it would be wise to lay off
worker from that facility.
C:\Users\Mary-Ann\Documents\Questions for critical thinking 1_Mary-Ann R. Foster_620.xlsx
4.6
Copier Company 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?
output increase = 100000
productivity increase 50000
copiers added 2
workers added 5
Marginal productivity cost of a copier =
output increase/copiers added
QUESTION FOR CRITICAL THINKING 1 9
=50000
Marginal productivity cost of a worker =
productivity increase / workers added
=10000
Based on the above calculations copiers are 5x more productive than workers however copiers
only cost two times more.
In conclusion based on the above calculations it is recommended that the company invest in
another copier.
C:\Users\Mary-Ann\Documents\Questions for critical thinking 1_Mary-Ann R.
Foster_620.xlsx
QUESTION FOR CRITICAL THINKING 1 10
References
Dominick Salvatore. Magerial economics in a global economy. New York: Oxford University
Press Inc, 2012.
Investopedia. Economic Profit (or loss). 22 October 2014. 22 October 2014.
<http://www.investopedia.com/terms/e/economicprofit.asp>.
