Salvatore’s Chapter 1:
a.Discussion Question: 9.
9.How Is The Concept Of A Normal Return On Investment Related To The Distinction
Between Business And Economic Profit?
The major difference between business and economic profit is the implicit costs. The addition of
implicit costs are used in production procedures. These implicit costs are involved in the firms
inputs. In other words, business profit is the revenue of the firm minus explicit costs and
economic profit is the revenue minus explicit and implicit costs (Salvatore, 2012)
b. Problems: 6, 9, and spreadsheet problem (p. 39).
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. The formula to determine the net present value of each
project is: PV = R/ (1+k) 1 + R/ (1+k) 2 + ... + R/ (1+k) n1 2 n
Project 1PV
=$100,000/ (1.20) ^1 + $100,000/ (1.20) ^2 +$100,000/ (1.20) ^3+$100,000/ (1.20) ^4
= 83,333+ 69,444 + 57,870 + 48,225
= 258,872
Project 2PV
=$75,000/(1.20)^1+$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
= 62,500+52,083+43,402+36,169+30,141+25,117
=249,412
It is recommended that the manager chooses Project 1 with a higher PV.
9. A women managing a photocopying establishment for $25,000 per year decides to open her
own duplicating place. 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.
Explicit Costs = $45,000 + $15,000 + $10,000 + $1,000 + $10,000 = $81,000
Implicit Costs = Opportunity Cost – which is her salary foregone = $25,000
Business Profit- $120,000 - $81,000 = $39,000
Economic Profit- $120,000 - $81,000 - $25,000 = $14,000
Normal return on investment- $25,000
Spreadsheet Problem (p. 37).
Mean 9.2 14.3
Median 9.0 14.0
Mode 9.6 14.0
Variance 2.5 4.2
Standard
Deviation 1.6 2.1
Coefficient
of
Variance 0.2 0.1
Covariance -2.4
The covariance is a inverse relationship in which the strength is shows by the relation between
the finishing time and age.
Froeb et al.’s Chapter 3:
Individual problems: 3-1and 3-3.
3.1- $100 (Bruce Springsteen) - $80 (U2) = $20 (Opportunity Cost)
3.2- Homeowners with identical houses asking for more are making the false clause fallacy.
These homeowners believe that because they paid more than others they can sell their house for a
higher price. The order of the events is being viewed as evidence in this argument and that is not
correct (Salvatore, 2011).
Salvatore’s Chapter 3:
a.Discussion Questions: 9.
b.Problems: 1(a), 7, and 9.
a.How would you react to a sales manager's announcement that he or she has in place a
marketing program to maximize sales? Does maximum sales equal maximum profit?
My reaction to a sales manager deciding to change a marketing program to maximize sales
would be to point out that the total revenue with be affected along with the sales increase. The
total revenue will cause the marginal revenue to have a zero slope. The best decision is to find a
balance between marginal benefits and costs.
1(a): Given the following total revenue function: TR= 9Q-Q^2. Derive the total-revenue,
average-revenue, and marginal-revenue schedules from Q = 0 to Q = 6 by 1’s.
Q TR AR MR
0 0
18888 (=(9x1)-12)8 (=8/1)8 (=(8-0)/(1-0))
2147614 (=(9x2)-22)7 (=14/2)6 (=(14-8)/(2-1))
3186418 (=(9x3)-32)6 (=18/3)4 (=(18-14)/(3-2))
4205220 (=(9x4)-42)5 (=20/4)2 (=(20-18)/(4-3))
7. Derive the average-, and marginal-cost schedules:
Q TC AC MC
0 1
112121112 (=12/1)11 (=(12-0)/(1-0))
214727 (=14/2)2 (=(14-12)/(2-1))
315515 (=15/3)1 (=(15-14)/(3-2))
420555 (=20/4)5 (=(20-15)/(4-3))
9. With the total-revenue schedule of Problem 1(a) and the total-cost schedule of Problem 7,
derive the profit function and show how the firm determines the profit-maximizing level of
output. Total profit (π¿is the difference between total revenue (TR) and total cost (TC). That
is, =TR-TC. Using the information provided; the total profits are as follows:
Level TR-TC
0 0-1 -1
1 (8-12) -4
2 (14-14) 0
3 (18-15) 3
4 (20-20) 0
The maximizing level is level 3 which produced a positive result as opposed to other levels with
negative results.
Froeb et al.’s Chapter 4:
Individual problems: 4-5 and 4-6
4.5- Lay off workers at older, smaller low-tech facility due to the higher average variable cost
compared to the high tech facility.
High tech facility- $100,000/10,000- $10
Low tech facility- $24,000/2,000= $12
4.6- It is recommended that the company purchases another copier although it is more expensive.
A copier has proven to produce more documents based on the calculations shown below:
1 copier= 50,000 pages per day
1 worker= 10,000 pages per day
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