BUSGR 510: Exam 1
2. Suppose I want to open my own restaurant. Currently I am working as a
Financial Analyst at a top bank earning $175,000 a year, which I will have
to quit to open a restaurant. I am also going to invest $100,000
of my savings which were earning an average annual rate of 6%. What
is my opportunity cost(implicit cost) of opening the restaurant.
3. Suppose you can hire 10 workers for $12 each, but to hire the 11th
worker you will have to pay all your workers $15 each. What is the
marginal cost of hiring the 11th worker.
4. Briefly explain the term post investment holdup. Give an example.
How can this problem be solved (Give any one brief solution)
5. ACME Coal paid $5000 to lease a railcar from the Reading Railroad
Company. Under the terms of the lease, 50% of the payment made
is refundable if the railcar is returned within two days of signing the
(a) Upon signing the lease and paying the $5000, how large are ACME’s
fixed costs. What are its sunk costs? Explain briefly
(b) One day after signing the lease, ACME realizes that it has no use
for the railcar. However a farmer has a bumper crop of wheat and
has offered, on the same day, to sublease the railcar from ACME
at a price of $4500. Should ACME accept the offer? Explain why
or why not.
6. East Side Corporation sells Tshirts
in the wholesale market. The
has monthly fixed costs of $2000, and it sells the shirts for $5 per
shirt. Its AVC and MC is $2.50 per Shirt.
(a) How many Shirts will it have to sell in order to break even
(b) Suppose the company wants to have profits of $20000. What
monthly quantity will it have to sell to accomplish this.
7. Suppose a firm’s demand curve is given by P = 50 − 0.25Q. Find the
(value of) price elasticity of demand for the demand curve when the
price is $10. Is demand elastic or inelastic?
8. Suppose the marginal cost of production for a company is $6 at its
current production levels. Suppose the price elasticity of demand is
constant at 2
between prices of $10 to $15, if current prices are $10,
is the company pricing at the correct optimal level? If not, should it
increase or decrease prices and to what level?
9. In these two cases, you can use any example.
(a) Explain what would happen to prices in a market equilibrium if
there is an increase in the demand for a product. Give an example
of a real life situation pertaining to this.
(b) Explain what would happen to prices in a market equilibrium if
there is an increase in the supply for a product. Give an example
of a real life situation pertaining to this.
10. State Porters five forces. Give an example of a real life business
situation in which the business has been able to act strategically to sustain
a competitive advantage.
11. Download the file Starz.xls from Blackboard, and also Memo 1.
the questions in memo 1 you
will need to do your work in the excel
spreadsheet as well as provide a typed page of relevant explanations
(about half a page double spaced), and submit both to me. To estimate
the demand curve you need to perform a regression using excel.
Open excel, go to tools, under tools go to data analysis and you should
be able to see regression under that. If you dont see a data analysis
option under tools, you will need to perform an add in refer
document I have posted under assignments titled ”Instructions for
Analysis Toolpack”. Once you have this, in data analysis go
to regression, this will open up a box under
input y range, put (right
click and highlight) in the price column including the header, under
input x range put in the quantity(subscribers) column including the
header, check labels, confidence level 95%, name a worksheet ply and
click OK. You should see the results the
constant is the intercept term
of your demand equation, the coefficient with subscribers is your slope.
Use this to calculate elasticities in excel. Answer all the questions in
12. Degree of Operating Leverage (DOL) is a ratio concept that gives
an idea of the effect on profits of a small change in quantity
assuming that price, fixed cost and average variable costs remain the
same. The formula for DOL = %_(profits)
%_Q . %_(profits) can be written
profits = _Q(P−AV C)
Q(P−AV C)−FC .Thus DOL = Q(P−AV C)
Q(P−AV C)−FC .
(a) For a given price P=$5, AVC = $3 and FC=$20000, what is the
DOL if the manufacturer is producing 15000 units?
(b) Using the value of DOL calculated in (a) above, calculate the
profits for a 10% increase and 10% decrease in quantity.
(c) From the DOL formula, you can see that a manufacturing plant
with higher fixed costs and lower variable costs will have a higher
DOL relative to a plant with higher variable costs and lower fixed
costs i.e. a capital intensive production process will have a higher
DOL than a labor intensive process which means that a capital
intensive production process will increase profits at a faster rate
(relative to quantity) than a labor intensive process. Suppose
a company is currently producing 1000 units of a bottled power
drink priced at $5. It is using a manufacturing process with a
fixed cost of $1450 and variable cost of $2.75 per unit (i.e. AVC).
i. Calculate the DOL and the break even point for this production
process. Is the company breaking even yet?
ii. If the company installs updated machinery its fixed costs rise
to $2000 and AVC drops to $2.25. Calculate the DOL and
break even point.
iii. At what production level should the company switch from the
old machinery to the upgraded one?