In 2011, Britney taught music and earned $20,000. She also earned $4,000 by renting out her basement. On January 1, 2012, she quit teaching, stopped renting out her basement, and began to use it as the office for her new website design business. During 2012, she paid $1,500 for the lease of a Web server and $1,750 for high-speed Internet service. She received a total revenue from Web site designing of $45,000. Normal profit (usual return of such an entrepreneur) is $25,000 a year.
Calculate Britney's explicit costs, implicit costs, opportunity cost and economic profit in 2012. Did Britney operate her business at a profit or loss in 2012 (from economic viewpoint)? Explain.
1. Explain the concepts of fixed cost, variable cost, and avoidable cost.?2. Assume a company has $200 in fixed costs, marginal costs are $10, and the company produces 100 units per year. How low can the price go before it is preferred to shut down? Answer the question for the short run and for the long run
You currently pay $10,000 per year in rent to a landlord for a $100,000 house, which you are considering purchasing. You can qualify for a loan of $80,000 at 9% if you put $20,000 down on the house. To raise money for the down payment, you would have to liquidate stock earning you a 15% return. We neglect other concerns, like closing costs, capital gains, and tax consequences of owning.
1. Explain the concept of opportunity cost.
2. Explain the fixed cost and the the hidden cost fallacy.
3. Given the described situation, determine whether it is better to rent or own. Show all your calculations and logical arguments.
In 1986, John Deere was building a capital intensive factory to produce large, four-wheel-drive farm tractors. Then the price of wheat dropped dramatically, reducing demand for these tractors because they are used extensively for harvesting wheat. John Deere stopped construction of its own factory and attempted to purchase Versatile, a Canadian company that assembled tractors in a garage using off-the-shelf components. We can characterize John Deere' decision as a choice of one manufacturing technology over another.
You need to analyze for a hypothetical example whether John Deere should use Technology 1 (Own Production), Technology 2 (Versatile), or whether it should stop producing four-wheel-drive tractors based on the quantity the company predicts it would sell in the market.
The following information regarding prices and technologies should be used to analyze this case (all numbers are in thousands):
Technology 1: Fixed cost of $200 and marginal cost of $10.
Technology 2: Fixed cost of $150 and marginal cost of $20.
John Deere can sell a tractor for $30 (all numbers are in thousands).
1. Calculate the break even quantity for technology 1.
2. Calculate the break even quantity for technology 2.
3. Represent the total cost of technology 1, the total cost of technology 2, and the total revenue in a graph in which you place the quantity on the horizontal axis and the total cost / revenue on the vertical axis (create the graph using Powerpoint).
4. Analyze for which quantity it is optimal to use technology 1, for which technology 2, and in which circumstances it is optimal to abandon production.
1. Explain what are royalty rate contracts and fixed-fee contracts. What is the main difference between them?
2. Give an example of each of the two types of contracts. Explain which type of contract is used in your organization. (If you are not currently employed you can give a hypothetical example or an example from your experience).
3. Describe the differences in the incentive effects of the contracts. What are the advantages and the disadvantages of each of the contracts? Explain the reasons why one of them and not the other is used in your organization. Describe the consequences for your organization of changing the existing contract.