Assessment Questions/Problems
Q1. Outline and explain the rational actor paradigm. Give any two examples of when it has not held.
Q2. Outline the advantages and disadvantages of using net present value and break even analysis as criteria for assessing a firm's investment decision.
Q3. An ice cream factory has set up shop in town. It paid $200k for the land and $100K for custom machinery that cannot be relocated elsewhere. The factory can produce litres of ice cream with the following operating schedule:
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Volume (000's litres)
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Operating cost schedule
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100
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$50k
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200
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$150k
|
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300
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$350k
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|
400
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$550k
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500
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$750k
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|
600
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$1.05M
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a) Briefly explain the sunk cost fallacy.
b) What are the sunk costs for the firm?
c) If the ice cream is sold for $2.50 per litre (hint: allow for 000's units), what is the optimum quantity the factory should produce?
d) What is the profit or loss it will make at the optimum quantity?