RUNNING HEAD: Questions for Critical Thinking 1 1
Salvatore Chapter 1
Questions for Critical Thinking 1
Robbie Davis
Busi 620
Liberty University
RUNNING HEAD: Questions for Critical Thinking 1 2
Discussion Question 9
Return on investment is normally considered to be a part of profit by most accountants
and even entrepreneurs. But in turn economist consider return on investment as a cost. On the
other hand, Economic Profit is equal to the business profit minus normal return on investment.
Economic Profit is the essential profit needed to allocate resources among the competing uses.
6.) 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 +... n1 2 + Rn / (1+k)
First Project: PV = $100,000/1.20 + $100,000/(1.20)2+ $100,000/(1.20)3 +
$100,000/(1.20)4
= $258,873.45
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
Answer: The manager should consider using the first project because the PV is higher than
the PV for the second project.
15a.) Business Profit = TR -EC
EC= $8000 in interest, $80,000 on supplies, $40,000 on hired help, $10,000 on rent and $5000
on rent
=$200,000 - $143,000
= $57, 000
Economic Profit= TR-IC+EC
= $200,000- $42,000 + $143,000
= $200,000 - $185,000
= $15,000
RUNNING HEAD: Questions for Critical Thinking 1 3
b.) The TR of the pharmacy will decline to the point where the economic profit will become
zero. With the new competitor coming in at the end of the third year, then the store would have
generated $600,000 and at the end of the third year the rate would be $200,000. The total
economic cost at the end of the third year would be $555,000.
Economic Profit = $600,000 - $555,000
= $45,000
Total Revenue in Three Years = 600,000 - $45,000
= $555,000
c.) Risk–Bearing Theory of Profit
d.) After three years if Samantha sells the pharmacy for $50,000 and repays the $80,000 loan.
She is in the hole with -$30,000, which has a Present Value (PV) of -30000/1.15^3 =-19726.
Samantha invested $20,000 of her own initially, so the PV is just 20,000 Samantha’s total loss is
$39,726. Samantha made economic profit of $17,000 per year for three years.
PV = 17000/1.15 +17000/1.15^2 +17000/1.15^3 = $38,815.
Net gain for the pharmacy is $38,815 – $39,726 = -$911 profit loss.
Sarah will be in the negative from her investment so she should not buy the pharmacy.
***(See Excel spreadsheet) Note: The spreadsheet problem (b): Calculate a mean, …. to
statistically describe the data of both variables, Time and Age. ***
RUNNING HEAD: Questions for Critical Thinking 1 4
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=4 by 1’s.
Q TR AR MR
00 - -
1888
21476
31864
42052
52040
6183-2
Problem 7:
Froeb et al Chapter 3
Individual Problem 3-1
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
This is a false clause fallacy. Most homeowners falsely believe that if they pay more for a
home that the house will eventually sell for more. Salvatore (2015)
Salvatore Chapter 3
Discussion Question 9
If a manager announces that a new marketing plan will be put in place to maximize sales,
the company would want to make sure that the program is small or sized down enough to make
sure that the marginal revenue is set at zero. When a company’s sales are at its max the marginal
is zero. Per Salvatore (2015) When this happens the marketing program is producing too much
yield. For the company to achieve the best outcome, the marginal cost should equal revenue.
RUNNING HEAD: Questions for Critical Thinking 1 5
Q
TC
Q
0
1
2
3
4
0
1
TC
1
12
14
15
20
1
12
AC
-
12
7
5
5
2
14
MC
-
11
2
1
5
3
1
5
4
2
0
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 Chapter 4
Individual Problem 4-5
High Tech Facility
10,000 Claims
100,000 Variable Cost / 10, 000 claims = $10 variable cost for each claim
Total Cost: 20$ per claim
Low Tech Facility
24,000 Variable Cost / 20,000 claims = $12 fixed cost per claim
Total Cost: $18 per claim
RUNNING HEAD: Questions for Critical Thinking 1 6
If the company can lower the number of claims, then it would be a better business
decision to lay off employees from the low-tech facility. The main reason for this would be that
the fixed cost does not depend on production, so the fixed cost will not change even with a lower
number of claims. Since the variable cost is lower at the high-tech facility, the company would
save money by utilizing this facility.
Individual Problem 4-6
To be able to fully answer the question, one must determine the marginal benefit of
adding a copier in comparison to the marginal benefit of adding an employee.
*Marginal output of a copier = 100,000 pages / 2 copiers = 50,000 pages
*Marginal productivity of an employee = 50,000 / 5 workers = 10,000 pages
The output of a copier is 5 times more than the productivity of an employee. It would be more
beneficial for the company to purchase a copier even though a copier will cost more than twice
as much than hiring an employee.
Reference
Salvatore, D. (2015). Managerial economics in a global economy (8th ed.). New York, NY: Oxford
University Press. ISBN: 9780199397129.
