EM Module 3
Again assuming that it is already built, what is the lowest price at which the Chinese plant would produce aluminum?
$1,166
Similarly, Butterflake's total costs of $1.60 per loaf were divided into $0.55 of fixed costs and $1.05 of variable costs. How low should Butterflake be willing to go in a price war?
$1.05 Butterflake will be willing to reduce prices to the point where they barely cover variable costs.
HiRise's total costs of $1.61 per loaf were split into $0.48 of fixed costs and $1.13 of variable costs. In a price war, how low do you think HiRise might be willing to go?
$1.13 HiRise will be willing to reduce prices to the point where they barely cover variable costs.
Suppose the farm equipment manufacturer from the previous question was able to charge $30,000 per tractor, and produces and sells 2,000 tractors per year at that price. As a reminder, the company originally spent $3 million in research and development costs. The company now spends $20 million at the beginning of each year to rent a factory, and $10,000 per tractor in materials and wages. If another manufacturer enters the market in the middle of a year and engages the company in a price war, what is the lowest price the company would be willing to charge for each tractor?
$10,000 The company should be willing to produce tractors as long as the price they sell for covers the variable costs of production.
The average total cost to bake 100 cookies is $0.17 per cookie. The marginal cost is constant at $0.10 for each cookie produced. The total cost to bake 100 cookies is:
$17.00 The average total cost of $0.17 per cookie includes both marginal cost ($0.10 per cookie) and fixed cost per unit ($0.07 per cookie). The total cost of baking 100 cookies is the average total cost multiplied by the number of cookies.
Patrick is considering opening a bowling alley in his town. The total costs to build the alley would be $2 million, which would include 24 lanes, machinery, the front desk, a snack bar, pins, bowling balls and shoes. Patrick estimates that customers would bowl roughly 5000 games per year on each of the lanes. In order to operate the alley, Patrick must have 6 employees working at all times. He anticipates keeping his business open 12 hours per day, 365 days per year and paying each employee $15/hour. How much would Patrick have to charge for each game bowled to turn a profit within a year?
$19.96 To recover his fixed costs in a single year, Patrick must charge almost $20 per game! This is far too much for a game of bowling. He will have to charge lower prices and recover his fixed costs over a longer period of time.
A farm equipment manufacturer has already spent $3 million in research and development to design a new model of tractor. To produce the tractors, the company will have to contract to rent a factory for a year at a cost of $20 million, and will then spend an additional $10,000 per tractor in materials and wages. The company estimates that it can sell 2,000 tractors per year at a certain price, and concludes that it should produce the tractors. What is the lowest price the company could be using in this calculation?
$20,000 The company needs to earn enough on each tractor to cover the fixed costs of operating for a year. $20 million spread over 2,000 tractors is $10,000 per tractor, so adding in the variable costs, the company needs to sell each tractor for $20,000
An IT entrepreneur is considering entering the PC support industry. She estimates that the annual costs associated with renting an office, computers, and phones are $45,000. Utilities, such as electricity, water and heat, will run her $600/month. To be competitive, she would need to pay her potential employees' wages of $20/hour. The total number of support hours these employees would cover for a year would be 5,742. What is the lowest price per hour at which the entrepreneur should consider entering the industry?
$29.10/hour Fixed costs are equal to ($45,000) + ($600 * 12 months) = $52,200 for rent, computers, phones and utilities. Variable costs are equal to ($20/hour * 5742 hours) = $114,840 for wages. Total costs are thus equal to $52,200 + $114,840 = $167,040. Divide these costs of $167,040 by 5,742 hours for an hourly minimum bill rate of about $29.
A tutoring business pays $15,000 per year in rent and utilities, which are all fixed costs. It sells 5,000 hours of tutoring per year, and for each hour of tutoring it incurs variable costs of $30 (to pay the tutor's wages). What is the average cost per hour of tutoring?
$33 Average cost can be calculated as fixed cost per unit ($15,000/5,000 = $3) plus variable cost per unit ($30). Another way to calculate it is to find total cost ($15,000 + $30*5,000 = $165,000) and divide it by quantity (5,000).
Now suppose that the fish and chips restaurant has already been opened. The entrepreneur paid the upfront fixed costs to set up the restaurant, and those fixed costs amount to about $1 per serving of fish and chips, as estimated. The actual variable costs, as were anticipated, are $4 per serving. Unfortunately, consumers don't want to pay as much for fish and chips as the entrepreneur anticipated. What is the lowest price the entrepreneur would be willing to charge for a serving of fish and chips?
$4 The fixed costs are sunk, and only variable costs should be taken into account at this point.
An entrepreneur wants to open a fish and chips shop selling fried fish and potatoes. The entrepreneur estimates that average cost per serving of fish and chips would be $5. Of that, $4 would be variable costs and $1 would be fixed costs per unit. What is the minimum price per serving the entrepreneur would need to be able to charge for it to make sense to open the shop in the first place?
$5 The entrepreneur needs to be able to recover total costs.
With Sorocoba A and Zaporozhye producing, which is the most likely worldwide price for aluminum?
$599 for all tons Prices must be high enough to cover the variable costs of any plant that is producing.
Again assuming that it is already built, what is the lowest price at which the Canadian plant would produce aluminum?
$668
What would its profit or loss (per loaf) be at that price?
-$0.48 Since total costs are $1.61, HiRise will lose 48 cents per loaf at a price of $1.13.
Patrick recognizes that customers will not likely pay more than $5.00 per game to bowl at his alley. If Patrick charges this amount, how many years will it take him to turn a profit? (Assume that customers will still demand to bowl 5,000 games each year on each lane at the alley)
-Just under 10 years If Patrick were to charge $5 per game, he would make ($5.00 per game)*(5,000 games per lane per year)*(24 lanes) = $600,000 per year in revenues. His costs would be equal to (6 employees)*($15 per hour)*(12 hours per day)*(365 days per years) = $394,200 per year. Thus, each year he would make $205,800 in profits. At this rate, it would take him $2,000,000/$205,800 per year = 9.72 years to recover his initial investment to build the alley.
At a price of $890 per ton, at what capacity (or capacities) does it make sense for the Chinese plant to produce?
0% capacity (shut down) Since the price of aluminum is lower than variable costs (1166), each ton of aluminum will cost more to produce than it will earn in revenue. The plant should not produce at all
A ticket broker purchases two tickets to an upcoming concert for $30 each, although the original ticket holder would have been willing to sell each ticket for $10. The ticket broker later sells the tickets to a new buyer for $50 each. If the new buyer would have been willing to pay up to $90 for each ticket, what fraction of the total value created is captured by the broker?
1/4 The ticket reseller captures $20 in profit on each ticket ($50 - $30). The total value created is $80 per ticket ($90 - $10).
At a price of $890 per ton, at what capacity (or capacities) does it make sense for the Ghanaian plant to produce? Select all that apply.
100% capacity Since the price of aluminum is higher than variable costs (887) , each ton of aluminum will earn more revenue than it will use up in cost. In this case, why not produce at full capacity rather than at partial capacity?
A hot dog stand operator wants to add a snow cone machine to his business. He anticipates that the snow cone machine will cost $500 and will last for 2 years before he needs to purchase a new one. Each snow cone he sells will incur variable costs of $0.50. If each snow cone sells for $2.50, how many snow cones would he have to sell each year for the machine to be worth the purchase?
125 Each snow cone will earn $2 more than its variable costs, so it will take 250 snow cones to recover the cost of the machine. That translates to 125 snow cones per year.
Consider the following cost structures for three oil producers: Fossils R UsGreen House OilsShale AlePlant and property$900,000$1,500,000$1,000,000Extraction costs (per barrel)$45$31$40Capacity per day100,000 barrels140,000 barrels80,000 barrels If the price for a barrel of oil is currently $42, what is the amount of barrels produced by these suppliers?
220,000 barrels Both Green House Oils and Shale Ale will produce at full capacity at a price of $42. Fossils R Us will not produce any oil.
An entrepreneur wants to open a new gas station along a highway. The entrepreneur will have to pay $30,000 in fixed costs to set up the station, and will incur variable costs of $3.50 per gallon. If the gas can be sold for $4.00 per gallon, how many gallons will the entrepreneur need to sell to make this a viable business decision?
60,000 gallons The gas station will earn $0.50 above variable costs on each gallon, so to recover the fixed costs of opening the station, it will need to sell 60,000 gallons.
Once built, what is the lowest price at which the Ghanaian plant would produce aluminum?
887 - add all the variable costs together shown in chart
Which of the following firms would benefit most from having dominant market share on a national level?
A pharmaceutical company that produces a drug at very low variable cost once it has incurred enormous fixed costs in research and development on the drug. This company's fixed costs scale well as it expands nationally.
Although labor is typically viewed as a variable cost in the very short run, some labor costs may be fixed. Which of the following items represents an example of a fixed labor cost?
A salaried clerk who has a two-year employment contract Regardless of the change of outputs in the company, the clerk is still being paid at a fixed salary for two years.
Which of the following groups is NOT a competitor for Amazon? Overstock.com, another online shopping site The businesses that sell their products through Amazon.com UPS, a delivery service that Amazon uses to ship products to customers Amazon Prime customers that use the site to regularly shop
All of the above are competitors for Amazon. A business' competitors include not only other companies in its industry, but also parties with which the business competes to capture value, such as suppliers and customers.
A college has found that some of its graduating students accept offers from Amazon that pay less than offers at other companies. Which of the following is the most likely explanation for this scenario?
Amazon has been able to lower some of its employees' WTS for their labor. Students may be willing to work for Amazon for a lower salary because of the work culture, or benefits of having Amazon on their resumes, or for other reasons.
Which of the following industries is likely to have the most number of firms competing against one another?
An industry with high variable costs and low fixed costs Low fixed costs lead to larger numbers of competing firms.
What are certain common traps to watch out for in a relative cost analysis?
Assuming that "all is fair" in competitive intelligence Not accounting for differences in product mix across businesses Trying to get every cost point estimate right Devoting equal resources to finding out the cost of every line item Lumping together fixed and variable cost
Average Cost
Average Cost=Total Fixed Cost+Total / Variable CostTotal Quantity Produced
The theme park from the previous question has finished building its fun house. The project cost $240,000 in total and requires two employees to operate it each day costing $50 per employee per day. The park estimates that approximately 400 guests will enter the fun house per day, each paying $1 to enter. After how many years will the theme park break even from operating the fun house?
Between 2 and 3 years The park makes $400 in revenues each day from guests and must pay $50*2=$100 to its employees each day as costs of operation. Profits per day are thus equal to $400-$100=$300. With these profits, it will take the park 800 days to recover the total amount it spent building the fun house.
At these respective prices ($1.13 for HiRise and $1.05 for Butterflake), which firm would be gaining market share in a price war?
Butterflake Customers are willing to pay 5 cents more for HiRise, but Butterflake is willing to price 8 cents below HiRise. At these prices, customers will prefer to buy bread from Butterflake.
Which of the following regarding fixed costs is/are true? Select all that apply.
Companies that incur fixed costs primarily at the level of an individual store are likely to face difficulties scaling their businesses. Fixed costs do not always imply that the bigger firm will experience cost advantages.
Al's Autos, a car rental company, spends $2.1 million per year on car purchases, routine maintenance and other fixed costs. The company rents out cars at an average rate of $100 per day, and incurs variable costs of $70 per day for each rental. In past years, the business has rented out 100,000 cars per year. However, the city in which the company is located has become a less popular tourist destination, causing consumers to travel there less frequently. The rental company anticipates that it will have 25% fewer customers in coming years. What should Al's do?
Definitely stay in business Despite the large drop in rentals from 100,000 to 75,000, Al's is still able to cover both variable and fixed costs. It should remain in business for the time being, unless it continues to lose customers to the point at which it can no longer cover its total yearly costs.
If this company charges its clients $30 per hour, the average client's lawn takes two hours to mow, and the company serves 10 customers, what is its profit (taking into account fixed costs)?
Each hour, the company earns $30 in revenue and pays $14 in costs—bringing in $16 net. With 10 customers, the company will mow for 20 hours, earning $600, and will spend $280 in variable costs and $200 in fixed costs, for a net profit of $120
At the most basic level, this business will have to purchase a lawn mower, hire someone to operate it, and pay for the gas. Here are the costs in more detail: If this company charges its clients $30 per hour, the average client's lawn takes two hours to mow, and the company serves 5 customers, what is its profit (taking into account fixed costs)? lawn mower: $200 fuel costs/hr:$4 labor wages/hr: $10
Each hour, the company earns $30 in revenue and pays $14 in costs—bringing in $16 net. With 5 customers, the company will mow for 10 hours, earning $300, and will spend $140 in variable costs and $200 in fixed costs, for a net loss of $40.
If this company charges its clients $30 per hour and the average client's lawn takes two hours to mow, what is the minimum number of clients the company needs to turn a profit?
Each hour, you bring in $30 in revenue and spend $14 on variable costs. That means you earn $16/hour (ignoring fixed costs), and so it will take you 200/16 hours to recover your fixed costs. That's 12.5 hours, which is more than 6 clients. The company would need at least 7 clients to earn more than its costs.
Which of the following developments will cause an increase in the value created by a firm? Select all that apply.
Employees at the firm are willing to take a pay cut to work for the company. (This would decrease suppliers' willingness to sell a key input, creating more value overall.) Consumer preferences change and average WTP for the company's products increases. (If customers' are willing to pay more, but the company leaves prices the same, it is creating more value for its customers without decreasing the value captured by the firm or its suppliers.)
A hotel spends $1 million per year on rent and other fixed costs. The hotel rents out rooms at a rate of $100 per night, and incurs variable costs of $50 per night for each occupied room. In past years, the hotel has rented out 21,000 rooms per year. However, the city has become a less popular tourist destination, causing consumers to travel there less frequently. The hotel anticipates that it will have 10% fewer customers in coming years. What should the hotel do?
Exit the industry. The hotel is now losing money each year. It is making enough money to cover its variable costs, but not enough to cover its total yearly cost. Therefore, it should stop paying rent and other fixed costs, and exit the industry.
Which of the following are fixed costs incurred by a supermarket, and which are variable?
FIXED: COST OF PHYSICAL CHECKOUT COUNTERS CASHIER SALARIES BUILDING INSURANCE COST TO CONSTRUCT PARKING LOT Variable: HOURLY WAGES FOR BUTCHERS AND BAKERS DELIVERY COSTS FOR ONLINE ORDERS
An entrepreneur is seeing if he should enter into a new market. His new plant would have double the capacity of the other plant currently in the market. He estimates that his average cost per product will be $400, $200 of those variable costs. He estimates that the other plant currently in the business has average costs of $600, $300 of those variable costs. Should he build his plant?
He should not build the plant. Since his average costs are higher than the incumbent company's variable costs, he should not enter the industry. If the entrant tried to do so, the incumbent could drop prices down to its own marginal costs.
By how much would HiRise's average cost reduce if it increased output (and sales) by 25%?
If HiRise were to increase its output by 25%, it would decrease its costs per unit by nearly 10 cents. Remember that only the fixed costs would change on a per-unit basis—although the overhead costs, for example, would fall from $0.12 to around $0.10, each loaf would still contain $0.88 worth of ingredients.
Which of the following regarding supply curves is NOT true?
In the short run, a steep fall in prices will force the least efficient producers to exit the industry. In the short run, a firm is only able to make decisions on its volume of production. Entry/exit decisions are long run considerations. Thus the least efficient producers will stop producing but will not be able to exit the industry in the short term.
As a company increases its output, which of these costs will increase, decrease, or remain the same?
Increase: TOTAL COSTS TOTAL VARIABLE COSTS Decrease: TOTAL COST PER UNIT (As fixed costs per unit decrease, total costs per unit will decrease) FIXED COSTS PER UNIT (As output increases, fixed costs will be spread across more units, and the per-unit fixed cost will fall). Remain the same: TOTAL FIXED COSTS VARIABLE COSTS PER UNIT
What if worldwide demand were 4000 tons - which would be the "last" plant that produces in this case?
Inota The plants with variable costs less than Inota's can produce only 3976 tons. Inota is the last, most expensive plant necessary to reach 4000 tons of production.
You are earning $40,000 per year as a branch manager at Dunkin Donuts. You are planning on leaving your job and going back to college; upon learning this, your branch manager offers you a 10% increase in salary to stay. Knowing this, how does the opportunity cost of going to college change?
It increases because you are foregoing more money for college. The rise in salary increases the opportunity cost of going to college because you are foregoing a higher cost that you could have been earned by not going to college.
An entrepreneur has developed a method of manufacturing light bulbs that significantly reduces the costs of production. The entrepreneur should enter the industry if:
Its average cost per light bulb is less than existing manufacturers' variable cost per light bulb. Existing firms will be able to lower prices to the level of their variable costs. The entrepreneur will only want to enter if prices will be high enough to cover total costs.
Which of the following conditions could cause an industry to have a small number of firms? Select all that apply.
Network effects If a product exhibits network effects, the dominant suppliers in the industry grow more and more successful as existing customers draw in new customers. This leads to industries with a few large competitors rather than many small ones. High fixed costs High fixed costs can act as a barrier to entry. New firms will be less willing to enter an industry if they will have to incur large fixed costs in order to compete with incumbent firms.
An entrepreneur wants to open a new hotel. There is one other hotel operating in the region, and the entrepreneur has estimated that its costs per guest are approximately $50 per guest, of which $30 is variable cost. The entrepreneur forecasts that total costs per guest in the new hotel would be $42, of which $25 would be variable. Assuming consumers will be indifferent between the two hotels, should the entrepreneur open the hotel?
No The new hotel will have to charge at least $42 per guest to be profitable. However, the incumbent hotel will be willing to cut prices to $30.
Consider the following table: Company A /B Rent and Utilities $4,000 / $6,000 Materials $3,500 / $2,500 Current Output 6,000 / 7,500 The owner of Company A is considering starting a price war with Company B to eliminate some competition. Would it be a wise decision for Company A to enter a price war with Company B?
No because Company B's cost structure allows it to lower prices further than Company A.
Consider the following table: Company A / Company B Rent and Utilities $5,000 / $7,000 Materials $4,500 / $7,500 Current Output 6,000 / 10,000 The owner of Company B is considering starting a price war with Company A to eliminate a smaller competitor in its industry. Would it be a wise decision for Company B to enter a price war with Company A?
No, because Company B cannot price low enough to force Company A to exit the industry. It costs both firms $0.75 per unit. Thus, Company B cannot force A to leave the market by pricing lower than its variable cost-per-unit.
he table below shows fixed and variable costs per unit for an ice cream shop, "Company A," and its local competitor, "Company B." Company A Company B Rent and Utilities$1.25 per cone$1.50 per cone Ingredients$1.00 per cone$0.75 per cone Current Daily Output1000 ice cream cones700 ice cream cones. Costs for rent and utilities are fixed by contract, and the two shops produce the same flavor of ice cream. The owner of Company A is considering lowering the price of its ice cream, starting a price war with Company B in an effort to grab market share from its competitor. Would it be a wise decision for Company A to enter a price war with Company B?
No, because Company B's cost structure allows it to lower prices further than Company A. A price war would be won by the company that can lower its prices the most. The ability to lower prices is based off of the variable costs per unit.
Suppose that you are the CEO of a national pizza chain. Your business has experienced increases in production costs over the past few years due to a continual increase in the price of cheese. When the price increases first started, your business was able to maintain its profitability by passing the higher costs on to consumers in the form of higher pizza prices. Now, however, your consumers are refusing to pay more for your product. One of your company's executives suggests acquiring your supplier of cheese in order to control input costs. By doing so, she guarantees that your company will retain your customers and stop losing money. Should you take her advice?
No—in doing so, you may retain your customers, but you will still continue to lose money overall. Your colleague is forgetting to include opportunity costs in her reasoning. Even if you acquire the supplier, you will continue to lose money from an economic point of view. This is because you could have sold the cheese to others for a higher price than what you are receiving for it by putting it in your pizzas.
Despite having sufficient snow, a local ski mountain has decided to close in early March for the end of the ski season. What is the most likely reason to shut down in this situation?
Owners expect that revenue earned won't cover variable costs. If the revenue is not enough to cover operating costs, the ski resort would have no reason to stay open.
You are a potential new entrant to the electric power market we just looked at and you are trying to decide whether or not to go ahead with building your power-generation plant. What market factors might you want to know more about as you make your decision? Select all that apply.
Prices Costs Output
A ticket reseller purchases a ticket to a football game for $40 and offers it for sale at a price of $75. A consumer is willing to pay $90 at most for the ticket, and purchases it at $75. What does the $50 difference (between $40 and $90) represent?
Profit + consumer surplus The difference between WTP and price is consumer surplus, and the difference between price and cost is the profit.
Profits of a firm can be written as:
Profits=(Price Per Unit−Cost Per Unit)∗Quantity Produced
Which of the following regarding economies of scale is true?
Scale economies can be either positive or negative, or both, based on a firm's size. A firm or industry can exhibit both economies and diseconomies (negative economies) of scale depending on its level of output. Economies of scale tend to benefit firms/industries most as they increase output from low levels, while diseconomies of scale occur as they continue to increase production from high to even higher levels.
Suppose that worldwide demand for aluminum in a particular year was one ton. Which plant would produce it?
Sorocaba would produce the ton of aluminum, since it has the lowest costs. Sorocaba can charge anywhere between $588 and $599. If the price rises to $599, Zaporozhye will be willing to produce as well. If the price is below $588, Sorocaba will prefer to shut down.
What happens if worldwide demand for aluminum was 222 tons? Which plants would produce aluminum? Select all that apply.
Sorocoba A Zaporozhye
Which of the following is true about "volume businesses?"
Such businesses typically have very high minimum efficient scales of operation. Such businesses need to produce large volumes to spread their fixed costs over large volumes in order to have any chance of recovering their large fixed investments.
A company books $100 million in revenue for fiscal year 2015, the most it has ever earned. However, the company earns a far lower profit than it did the previous year. What could explain this discrepancy?
The company saw the cost of its inputs increase substantially over the past year. With higher revenues, lower profits can only be explained by higher costs.
Which of the following costs should an archery equipment manufacturer consider when deciding whether to introduce a new type of arrow? Select all that apply.
The cost of materials that will go into each arrow The new machinery the company will need to purchase in order to manufacture the arrows The rent that will be paid for a facility to manufacture the arrows in x: The research and development costs that the company incurred while designing the new arrow. The costs of a marketing research study the company ran in order to determine demand for the arrows
Under what circumstances should the entrepreneur in the previous question open the new hotel? Recall that the incumbent hotel has costs of $50 per guest, of which $30 is variable, and consumers would be indifferent between the two hotels.
The entrepreneur should open the new hotel if it can be operated at an average cost per guest of $30 or less. Since the incumbent will be willing to lower prices to $30, the new hotel will only be profitable if its total costs per guest are $30 or less.
An entrepreneur is considering starting a new business to produce and sell gourmet cookie dough. The entrepreneur estimates that average total costs per pack of dough would be $7, of which variable costs per pack would be $5. An incumbent bakery in the neighborhood sells cookie dough for $10 per pack. The entrepreneur estimates that this bakery spends $8 in total costs on each pack of dough, $7 of which is variable costs. Should the entrepreneur start the new business?
The entrepreneur should start the new business as long as customers are willing to pay at least as much for his cookie dough as for the incumbent's product. Since the entrepreneur's average cost per unit is equal to the established competitor's variable cost per unit, the entrepreneur should pursue the venture if customers' are willing to pay at least $10 for the entrepreneur's dough.
Christine is a tax accountant in the United States. Due to the complexity of the U.S. tax code, many Americans often experience difficulties filing their taxes each year. Thus, in the past, Christine has made a large sum of money on the side offering her services during tax season. This year, however, a new computer software is being sold, designed to assist Americans with their taxes for a fraction of the cost that Christine has been charging her customers. At first glance, the software appears to be quite popular. What impact will this new software have on Christine's profitability?
The impact on Christine's profitability is unclear. It's unclear how the presence of the software will affect Christine's profitability. While the introduction of the software will almost surely force Christine to charge a lower price for her services to compete, Christine's profitability also depends on her own costs. If Christine is able to use the service to improve her own productivity, her costs may also go down. If costs fall low enough, Christine may be able to maintain the same profitability or even improve her profitability if the software allows her to save time per customer and take on more customers.
A shop near the ocean sells kites for people to fly on the popular beach nearby. Each kite costs the shop $10, $8 of which is variable costs (for materials and wages for the kite-maker). Another kite-maker wants to enter the market. The potential entrant can make kites for $7 each in variable costs, but adding in the cost of opening a store, the total cost per kite would be $10. Should the new kite-maker open a shop?
The kite-maker should open a shop only if customers will be willing to pay at least $2 more for the new kites than they are willing to pay for the existing kites. The new kite-maker should compare its total costs ($10 per kite) to the incumbent's variable costs ($8 per kite). Since the incumbent will be willing to lower its prices to $8, the new kite-maker should only enter the market if customers' WTP for the new kites is at least $2 higher than their WTP for the existing kites.
Which of the following represents an economic cost, but not an accounting cost, of building and running a summer resort? (Select all that apply.)
The wages lost by the owner in pursuing his own venture, instead of working for an already established resort. The money foregone by using the land on which the resort will stand, instead of selling it or using it for another venture.
An increase in the popularity of corn ethanol as a fuel increases the demand for corn around the world, causing the price to rise. What is the reason behind the higher price?
To meet higher demand, the industry relies more on less cost efficient producers of corn. As more corn is demanded, the additional corn will be produced by less efficient suppliers, and prices will increase to cover their costs.
A manufacturing company has seen a decline in its physical sales over the past few years, leaving a portion of its fixed infrastructure underutilized. What are some reasonable measures the company could potentially take to maintain its profitability? Select all that apply.
Try to cut fixed costs in other areas where possible Rent out the underutilized space to other companies for additional revenues
Once a plant is already in operation, which costs determine whether it makes sense for a plant to produce aluminum at a given price?
Variable costs Once the plant is built, only the variable costs should be taken into account when deciding whether to produce. as long as the price of aluminum exceeds your plant's variable costs, you should produce aluminum
A factory currently manufactures and sells 800 boats per year. Each boat costs $5,000 to produce. $4,000 of the per-boat costs are for materials and other variable costs, while the per-boat fixed costs (incurred on yearly rent, administrative, and other fixed costs) are $1,000. If boat orders increase to 1000 boats per year, how do per-unit costs change?
Variable costs are unchanged at $4,000 per boat and fixed costs fall to $800 per boat The $800,000 in fixed costs is now spread across 1,000 boats. This results in $800 in fixed costs per boat. Variable costs are unchanged.
Which of the following are fixed costs incurred by a theme park, and which are variable?
Variable: COSTS OF FOOD AND DRINK HOURLY WAGES FOR CLOWNS AND CARTOON CHARACTERS Fixed MAINTENANCE OF RIDES AND ATTRACTIONS COST TO BUILD A NEW FUN HOUSE SALARIES OF LAWYERS ADVERTISING COSTS
A startup company is currently selling each unit of its product for $10.00 less than its total costs per unit. If the startup has an opportunity to expand its customer base by 10% through a marketing campaign, should the company consider the campaign?
Yes, if the additional customers would lower the average cost enough to make the firm profitable. As output increases, fixed costs per unit will decrease. This may lead to low enough average costs that the firm will be profitable.
As an entrepreneur, you should only enter a market if:
Your average cost is less than your competitors' variable cost per unit. Incumbents will be willing to sell their product for prices as low as their variable cost, whereas it is not profitable to enter a market if you will not be able to recover your total costs.