Questions for Critical Thinking 4
BUSI: 620
Liberty University
Heather Welch
November 19, 2016
Running head: QUESTIONS FOR CRITICAL THINKING 4 1
QUESTIONS FOR CRITICAL THINKING 4 2
Salvatore Chapter 8
a.Discussion Questions: 2
(a)What is the distinction between marginal cost and incremental cost?
Marginal costs are the costs added by increasing the units being produced. Incremental costs are
an increase in costs resulting from a specific business decision, such as product development or
improvement as necessary to increase sales or expand.
(b)How are sunk costs treated in managerial decision making? Why?
Since sunk costs cannot be recovered no matter the managerial decisions of the future, they are
usually not considered in future endeavors of the company. This is because sunk costs are less
than the profits the company will bring.
b.Problems:
3. (a)
80 passengers (evening L.A. to NYC)
50 passengers (afternoon L.A. to NYC)
70 passengers (A.M. from L.A. to NYC)
50 passengers (Afternoon L.A to NYC)
Plane’s overnight cost (NYC)=$1,200
Plane’s overnight cost (L.A.)=$0
1-way ticket (all flights)=$200
Op. cost of plane (all flights)=$11,000
Fixed costs per day=$3,000
(a)(eve. L.A. to NYC)
11,000+3,000+1,200=15,200
80*200=$16,000
Company profit: $16,000-$15,200=$800
(b)(afternoon L.A. to NYC)
50*200=$10,000
Company loss: $10,000-$15,200=-$5,200
(c)(A.M. L.A. to NYC)
70*200=$14,000
QUESTIONS FOR CRITICAL THINKING 4 2
$11,000+$3,000=$14,000
Company breakeven: $14,000-$14,000=$0
(d)(Afternoon NYC to L.A.)
50*200=$10,000
Company loss per flight: $10,000-$14,000=-$4,000
No, the company makes $800 on the evening flight from L.A. to NYC, while only breaking even
on the morning flight from L.A. to NYC. In order for the company to stay afloat, it must turn a
profit and thus continue the evening flight.
(b) With the fixed costs of $3,000 per day in addition to the other operating costs, Airway
Express is suffering a profit loss and should discontinue service between L.A. and New York.
4. Considering that businesses strive to maximize profits and minimize unnecessary costs, it
stands to reason that the electric company would prefer to use the most efficient equipment
whenever possible, only utilizing older and more expensive equipment duriung the peak usage
times when there would otherwise be a shortage.
(a) Considering there is a higher cost associated with using the older equipment and the older
equipment is used during periods of peak demand, the implication is that short-run marginal
costs will increase when there is greater demand for electricity.
(b) It can be assumed that a CBA would be conducted to determine whether it is more cost
effective to maintain older equipment or to purchase new, more efficient equipment. In many
cases, businesses would only use old and less efficient equipment during peak demand times.
Maintenance on old machinery is likely less expensive than buying new. This means there is a
lower amount of sunk costs and a greater profit margin.
12 (a). For breakeven profit, the total revenue (TR) has to equal the total cost (TC). Output (OP)
QUESTIONS FOR CRITICAL THINKING 4 2
Total revenue=30(OP)
TC=fixed cost (FC)+variable cost (VC)
30OP=100,000+20OP
OP=100,000/10=10,000
OP=10,000 at breakeven
OP that leads to total profit (TP) of $60,000
TP=TR-TC
$60,000=30OP-$40,000-20OP
10OP=100,000
OP=10,000 when TP is $60,000
(a)For breakeven profit, the TR has to equal the TC
30OP=$100,000+10OP
OP=100,000/20=5,000
OP=5,000 at breakeven
OP that leads to a TP of $60,000
Profit (P)=TR-TC
$60,000=30P-100,000-10P
20P=160,000
P=80,000 when TP is $60,000 and Variable Cost (VC) is $10
Spreadsheet problem 1
Quantity Total
of Variable Total
Output Costs Costs
$ $
0- 30
$ $
120 50
$ $
230 60
$ $
348 78
$ $
490 120
$ $
5170 200
Note: Total Fixed Cost = $30
AFC
NA
$
30
$
15
$
10
$
8
$
6
AVC
NA
$
20
$
30
$
48
$
90
$
170
ATC
NA
$
50
$
60
$
78
$
120
$
200
M
C
N
A
$
20
$
10
$
18
$
42
$
80
QUESTIONS FOR CRITICAL THINKING 4 2
Quantity ofTotal Total costs AFCAVCATCMC
variable
output costs
0 $0 $30
1 $20 $50 30 20 50 20
2 $30 $60
3 $48 $78
4 $90 $120
5 $170 $200
Salvatore Chapter 9:
a.Problems: 7.
Equalibrium price of domestic production=$5
Equalibrium for free world trade=$3
Tariff inclusive price=$3(1+.33) =$4
At an untaxed price, which is $3, domestic suppliers will produce and sell 200 units, and
import 400 units.
At the taxed price of $4, domestic suppliers will produce and sell 300 units and import
200 units.
A 33 percent import tariff would increase domestic production by 50 percent, while
cutting the imports in half.
11. Considering the fact that both authors and publishers goals are to maximize profits, it makes
no sense to incentivize an author for higher sales. Both should be working together to increase
sales as this will increase their payout. The greater the number of sales, the less the publisher will
make per unit. This means that eventually, the publisher would not profit on the sales.
Spreadsheet problem 1
(a)
QUESTIONS FOR CRITICAL THINKING 4 2
a.
(d) Spreadsheet problem 2
Individual problems:
Froeb et al. Chapter 9:
P
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
QS
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
325
0
QD
350
0
345
0
340
0
335
0
330
0
325
0
320
0
315
0
310
0
305
0
300
0
295
0
290
0
285
0
280
0
275
0
270
0
265
0
260
0
Profit=TR-TC
31687.5
34937.5
38187.5
41437.5
44687.5
47937.5
51187.5
54437.5
57687.5
60937.5
64187.5
67437.5
70687.5
73937.5
77187.5
80437.5
83687.5
86937.5
90187.5
93437.5
96687.5
99937.5
103187.5
106437.5
109687.5
112937.5
QUESTIONS FOR CRITICAL THINKING 4 2
9-2. Snacks, Beer, and Marijuana
Beer distributors were likely against the legalization of marijuana as this would be a
substitute product and thus a large hit on the industry’s profit margin. Contrarily, snack food
vendors likely see marijuana as a complement in a similar way that beer is a complement. In
other words, beer distributors would be in competition with marijuana distributors, while snack
food vendors would profit from both industries.
9-4. Competitive Industries
Competition keeps the costs to the consumer lower, so companies must focus on pricing
strategies to remain competitive. Otherwise consumers will simply buy from another source.
Froeb et al. Chapter 11:
aIndividual problems:
11-4. The Carry Trade
Decreases in U.S. interest rates have a negative effect on the EU/U.S. exchange rate. As the
interest rates fall, the value of the dollar decreases, which makes products made in the U.S. less
desirable. Carry trade is when an investor buys low expecting to be able to sell for a profit. U.S.
made products become less attractive in both foreign and domestic markets. As the interest rate
decreases, there would be a negative affect on the value of the dollar. This is because there would
be lower demand for the American made products. The carry trade would then be used by foreign
investors as a way to purchase U.S. stocks while they are low and sell at a highr rate I the future.
11-5. Dollar Devaluation
U.S. producers can expect to make more money, while consumers can be expected to pay
more for foreign imports. Additionally, foreign producers are negatively affected, while foreign
consumers are benefited.
QUESTIONS FOR CRITICAL THINKING 4 2
The twin cities of El Paso are where an oil pipeline begins. Many of the residents depend on
the income from the oil industry. When the dollar is devalued, the twin cities of El Paso could
expect to see a decrease in the price of oil, thus depressing the local economy.
In Juarez, Mexico, a devaluation of the dollar would result in an increase in export prices.
