## Questions for Critical Thinking 1

07 Nov

Questions for Critical Thinking 1

Salvatore Chapter 1:

• Discussion Question 9: How is the concept of a normal return on investment related to the distinction between business and economic profit?

• Problem 6: (Problem 5 details- The first project promises a profit of \$100,000 in each of the next four years, while the second project  promises a profit of \$75,000 in each of the next six years.) Determine which of the two investment projects of Problem 5 the manager should  choose if the discount rate of the firm is 20%.

• Problem 15: Integrating Problem: Samantha Roberts has a job as a pharmacist earning \$30,000 per year, and she is deciding whether to take another job as the manager of another pharmacy for \$40,000 per year or to purchase a pharmacy that generates a revenue of \$200,000per year. To purchase the pharmacy, Samantha would have to use her \$20,000 savings and borrow another \$80,000 at an interest rate of 10% per year. The pharmacy that Samantha is contemplating purchasing has additional expenses of \$80,000 for supplies, \$40,000 for hired help, \$10,000 for rent, and \$5,000 for utilities. Assume that income and business taxes are zero and that the repayment of the principle of the loan does not start before 3 years.

1. What would be the business and economic profit if Samantha purchased the pharmacy? Should Samantha purchase the pharmacy?

1. Suppose that Samantha expects that another pharmacy will open nearby at the end of 3 years and that this will drive the economic profit of the pharmacy to zero. What would the revenue of the pharmacy be in 3 years?

1. What theory of profit would account for profits being earned by the pharmacy during the first 3 years of operation?

1. Suppose that Samantha expects to sell the pharmacy at the end of 3 years for \$50,000 LESS than the price she paid for it and that she requires a 15% return on her investment. Should she still purchase the pharmacy?

1. Compare the present value of economic profit in each of the next three years and the loss of \$50,000 in the third year using 15% as the discount rate.

• Spreadsheet problem (p. 39): Using the data attached, (Excel doc QTC1_Spreadsheet) where column A represents student numbers, column B the finishing time for a 1 mile race for 10 students, and column C the age of the students.

1. Use the data analysis tools to plot a line graph of all the finishing times.
2. Calculate a mean, median, mode, sample variance, sample standard deviation, and coefficient of variation to statistically describe the data of both variables, Time and Age.

1. Use Excel to find the covariance between the two variables. What does the covariance indicate about the relationship between finishing time and age?

Froeb et al. Chapter 3:

• Individual Problem 3-1: You won a free ticket to see a Bruce Springsteen concert (assume the ticket has no resale value). U2 has a concert the same night, and this represents 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?

• Indiviudal Problem 3-3: Because of 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?

Salvatore Chapter 3:

• Discussion Questions 9: 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 (revenue) equal maximum profit (see figure 3-4 at the end of this paper)?

• Problems: 1(a): Given the following functions, derive the total-revenue, average-revenue, and marginal-revenue schedules from Q = 0 to Q = 4 by 1s.

Total-revenue (TR) = 9Q – Q^2

Average revenue (AR) = total revenue (TR)/Q

Marginal revenue (MR) = change in total revenue/change in Q

For example:

 Q TR AR MR 2 14 7 (=14/2) 3 18 6 (=18/3) 4 (=(18-14)/(3-2)

• Problem 7: Given the following total-cost schedule, derive the average- and marginal-cost schedules. Additionally, show the profit-maximizing level of output (profit=TR-TC).
 Q 0 1 2 3 4 TC 1 12 14 15 20

• Problem 9: With the total-revenue schedule of Problem 1 and the total-cost schedule of Problem 7, derive the total-profit function and show how the firm determines the profit-maximizing level of output.

Froeb et al. Chapter 4:

1. Individual problem 4-5: Your insurance firm processes claims through its new, larger high-tech facility and its older, smaller low-tech facility. Each month, the high tech-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?

1. Indiviudal problem 4-6: 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 work- ers. Would you recommend they hire another employee or buy another copier?