Managerial Economics Essay

1026 words - 5 pages

Applied Problems

Chapter 1: Applied Problem 1

At the beginning of the year, an audio engineer quit his job and gave up a salary of $175,000 per year in order to start his own business, Sound Devices, Inc. The new company builds, installs, and maintains custom audio equipment for businesses that require high-quality audio systems. A partial income statement for Sound Devices, Inc, is shown below:

2010
Revenues
Revenue from sales of product and services $970,000
Operating costs and expenses
Cost of products and services sold 355,000
Selling expenses 155,000
Administrative expenses 45,000
Total operating cost and expenses $555,000
Income ...view middle of the document...

**
The total economic cost equals explicit cost plus implicit cost (Thomas & Maurice, 2011, p. 19).
Total economic cost = $793,000 + 190,000
= $983,000
b) Accounting profit equals the total revenue minus the explicit cost (Thomas & Maurice, 2011, p. 19).
Accounting profit = $970,000 – 793,000
= $177,000
c) The economic profit is total revenue minus total economic cost (Thomas & Maurice, 2011, p. 20).
Economic profit = $970,000 – 983,000
= $(13,000)
d) I don’t think that the audio engineer should have left his job because his economic profit is $13,000 less than what he would have made if he had stayed with his other job. He should have kept his other job and invested his money in other things. If he would have done this, he would have made $13,000 more in salary in addition to whatever profit he made from investing the $100,000 in other things.

Chapter 2: Applied Problem 2
Florida Citrus Mutual, an agricultural cooperative association for citrus growers in Florida, needs to predict what will happen to the price and output of Florida oranges under the conditions below. What are your predications? For each part, sketch a graph showing the appropriate demand and supply analysis.
a. A major freeze destroys a large number of the orange trees in Florida.
b. The scientists in the agricultural extension service of the University of Florida discover a way to double the number of oranges produced by each orange tree.
c. The American Medical Association announces that drinking orange juice can reduce the risk of heart attack.
d. The price of Florida grapefruit falls.

Answers
a) If a major freeze were to happen and destroy a large amount of oranges in Florida, I think the supply in oranges would decrease. If the supply decreases , I think the price will also increase.

b) With this scenario, I think the supply would increase and the price would decrease because of this.

c) Here I think the demand would increase especially in...

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