Skip to content
Textbook Guides

Solution Manual For Managerial Economics: Foundations of Business Analysis and Strategy, 13th Edition

Need help with textbook problems? Solution Manual For Managerial Economics: Foundations of Business Analysis and Strategy, 13th Edition has all the answers and solutions to get you through.

Preview 16 of 109 pages

See the first 16 pages exactly as they appear in the document.

  1. Page 1
    Read page 1 as text

    Chapter 1 : Managers, Profits, and Markets 1 Chapter 1 : MANAGERS, PROFITS, AND MARKETS Answers to Applied Problems 1. To say that a decision rule or process does not work in theory is to say that the answer produced by the rule is not going to be the “correct” answer. In business decision making, managers get the “correct” answer when their solutions are ones that lead to the greatest level of profit. For example, it is rather easy to calculate the profit margin for a good or service and to make a pricing decision that will maximize the profit margin on the good or service. While that may be a very practical method of determining price, pricing to maximize profit margin does not in theory lead to the price that maximizes the profit or value of the firm—except by accident in extremely rare circumstances. The same can be said for making decisions that lead to the lowest possible unit or average cost of production. Unit cost is easy to measure, and so it is useful in practice, yet unit cost is not theoretically the correct measure of cost—i.e., managers cannot, except by accident, find the profit- maximizing price or output level by using average cost data. You will learn that the theoretically correct cost measure is marginal cost for making profit-maximizing decisions. Your training in managerial economics is designed to teach you the best and correct ways to make business decisions, so that you do not settle for the numerous incorrect methods that are still used in many businesses today. In other words, your goal should be to devise ways to make the theoretically correct decision methods work for your company. 2. a. Total explicit cost = $793,000 (= 555,000 + 45,000 + 28,000 + 165,000) Total implicit cost = $190,000 (= 175,000 + 0.15 × 100,000) Total economic cost = $983,000 (= 793,000 + 190,000) b. Accounting profit = $177,000 (= 970,000 – 793,000) c. Economic profit = –$13,000 (= 970,000 – 983,000) d. The owner’s accounting profit is $13,000 less than what he could have earned in salary and return on investment of his $100,000, i.e., his economic profit is –$13,000. Thus, he would have made $13,000 more if he had kept his job and invested his $100,000 in stocks of other businesses. 3. The $8,000 of lost income, even though not tax-deductible, is indeed part of the economic cost the doctor incurs by going to Mexico to treat patients, and the doctor should consider this $8,000 cost in making her decision to travel to Mexico. 4. a. Burton's explicit costs are $18,000 per month. His implicit costs are $20,000 per month ($15,000 + $5,000). b. Opportunity cost = explicit + implicit costs = $18,000 + 20,000 = $38,000 per month c. Burton Cummings’ costs of production (= $38,000/month) exceed his revenues by $13,000 (= 38,000 – 25,000). Rather than lose $13,000 per month, Burton could rent his rig (and receive $15,000 per month) and drive trucks for another firm (and earn $5,000 per month). With this use of his resources he would earn $20,000 per month. Or, Burton could try his luck as a singer in a rock band. 5. One cost of opening a tennis shop would be the forgone salary of the previous job. Given that Nadal’s or Venus’ foregone income would be much larger than that of a university coach, their opportunity cost would be higher. 6. a. Linking the board of directors' compensation to return on equity creates an incentive for management to pursue profit-maximization as a goal, thereby reducing the agency problem between managers and shareholders.

  2. Page 2
  3. Page 3
    Read page 3 as text

    Chapter 1 : Managers, Profits, and Markets 2 b. Directors have better, easier, and cheaper access to information about the firm's revenues and costs. Shareholders are numerous and each one has only a relatively small stake in the profitability of the firm. It is generally easier for a shareholder simply to sell its shares and reinvest in another company. c. Accounting profit treats the cost of using shareholder equity capital as zero, and thus CEOs and directors will have little incentive to use equity capital efficiently. With a perceived cost of zero, equity capital will be overused and misallocated, which will drive down the economic profit and the value of the firm. Shareholders own the firm and they will suffer. 7. a. Some Marriott franchises are shirking their responsibility to maintain high quality hotels, and this shirking damages the reputation of all Marriott franchises. b. Poorly run franchises damage the Marriott reputation and reduce the profitability of hotels owned by Marriott. c. Where there is little repeat business, there is less incentive for a hotel to provide quality service. Where there is a lot of repeat business, franchises will have an incentive to maintain quality to attract repeat business. 8. Even though the financial arrangement with Delta and United limited the growth in SkyWest’s economic profits in future years, the agreement decreased the risk associated with SkyWest’s profits. In the Fortune article, one financial analyst states, “They (SkyWest) shield themselves from the factors that lead to volatility in earnings—fuel prices, ticket prices, and load factors—and bring investors the certainty they are looking for.” The lower level of risk reduces the risk-adjusted discount rate, and, for a given stream of profits, the value of the SkyWest rises. Answers to Mathematical Exercises 1. a. PV = NCF /(1 + r ) t = $1,000/(1.065) = $938.97 b. PV = $1,000/(1.065) 2 = $881.66 c. PV = $1,000/(1.065) 3 = $827.85 2. The present value is calculated as follows: 3. Option A : Ashton pays Demi $1,000,000 each year for 10 years (Ashton wishes to make each payment at year-end.) Option B : Ashton pays Demi $5,000,000 in cash now. If the appropriate interest rate is 8 percent: PV Option A = $1,000,000/(1.08) 1 + ⋅ ⋅ ⋅ + $1,000,000/(1.08) 10 = $6,710,081 PV Option B = $5,000,000 Clearly, Demi should take option A and Ashton should want to pay her $5,000,000 now. If the appropriate interest rate is 20 percent: PV Option A = $1,000,000/(1.20) 1 + ⋅ ⋅ ⋅ + $1,000,000/(1.20) 10 = $4,192,472 PV Option B = $5,000,000 In this case, Demi should demand $5,000,000 cash now, and Ashton should try to talk her into taking $10,000,000 spread over ten years.

  4. Page 4
    Read page 4 as text

    Chapter 1 : Managers, Profits, and Markets 3 4. Since the lease payment is a constant amount for each of the 100 years –and 100 years is a long time, we can get a very good approximation of the present value by using the formula for a perpetual stream of profit payments: . The approximate present value is $500,000 = $20,000/.04. Answers to Homework Exercises in Student Workbook 1. a. $47,177,000 d. $6,573,000 b. $5,880,000 e. $693,000 c. $53,057,000 f. –$907,000 2. a. $12,635,513 b. $11,336,861 3. a. monopolistic competition b. oligopoly c. perfect competition d. monopoly 4. SunKist is just one of many citrus producers. Consumers are generally not brand conscious with respect to fresh fruits and vegetables. 5. Lexus has market power because product differentiation, even within the market for luxury cars, gives Lexus some ability to raise price without losing all sales. In addition, a dealership in one city seldom loses sales to Lexus dealers in other towns or cities, unless they are only a short distance away.

  5. Page 5
    Read page 5 as text

    Chapter 2: Demand, Supply, and Market Equilibrium 4 Chapter 2 : DEMAND, SUPPLY, AND MARKET EQUILIBRIUM Answers to Applied Problems 1. a. Demand will decrease, so price will decrease. b. Supply will increase, so price will decrease. c. Demand will increase, so price will increase. d. Demand will decrease, so price will decrease. e. Supply will decrease, so price will increase. f. Supply will increase, so price will decrease. g. Supply will increase (when the price of a complement in production increases), so price will decrease. h. Demand will decrease, so price will decrease. 2. a. Supply will decrease, so price will increase and output will decrease. b. Supply will increase, so price will decrease and output will increase. c. Demand will increase, so price will increase and output will increase. d. This one is challenging. An increase in the price of Florida grapefruit could be interpreted as either a demand shifter (change in the price of a substitute in consumption) or a supply shifter (change in the price of a substitute in production) or BOTH simultaneously. If only demand decreases (supply constant), then price will decrease and output will decrease. If only supply increases (demand constant), then price will decrease and output will increase. If both happen simultaneously, then price will decrease but the change in output will be indeterminate . 3. a. An increase in demand for home heating oil causes demand for heating oil to shift rightward. In the absence of price controls, no shortage occurs because market price is bid up to P B . An increase in demand causes equilibrium price and quantity to rise. b. A decrease in supply of RAM chips does not cause a shortage in the absence of a price ceiling. A supply decrease shifts supply leftward, causing the equilibrium price of RAM chips to rise and equilibrium quantity to fall. 4. a. No effect on demand (no shift)—just a movement up the demand. b. Decrease demand for hotels. Price of heating oil Quantity of heating oil P D D' A B Q P A Q A Q B S P B Price of RAM chips Quantity of RAM chips P D A B Q P A Q A Q B S' S P B

  6. Page 6
    Read page 6 as text

    Chapter 2: Demand, Supply, and Market Equilibrium 5 c. Demand for rental cars decreases. d. Supply of overnight mail decreases. 5. Construct a demand and supply diagram like Panel A of Figure 2.12. a. Imposing rent controls creates a shortage of low-income housing, which decreases the quantity supplied at the lower rent imposed by the controls compared to the amount of housing supplied at the market-clearing (higher) rent level. b. No, the shortage created by rent controls means that more low-income families are willing and able to pay for rent-controlled housing than the amount of rent controlled housing that is available. Compare this to the situation before rent controls in which markets clear at higher rent levels. c. In the short run, families who are able to get housing at the lower rent levels may be better off. In many cases, however, families must pay large bribes “under the table” to get into the rent-controlled homes. And, as time passes, landlords have little or no incentive to make repairs to the rent- controlled units. Politicians may also gain from rent controls because it appears to be a compassionate policy to help the poor. The losers are the families who cannot get the rent- controlled housing even though they are willing and able to pay the higher market-clearing rent. d. History has shown that rent-controlled districts over time fall into a state of decay and ruin. Rent- controlled properties undermine the incentive for landlords to maintain the housing. With a shortage of low-income housing, low rent housing will be fully rented no matter what condition the roof or plumbing might be in. Furthermore, if landlords let the property decay sufficiently, renters will leave, and the property can be converted to some other use (commercial or industrial use) not subject to rent controls. e. Taxpayers, genuinely compassionate about providing more housing for low-income families, could offer builders subsidies to build low-income housing. In the absence of rent controls, this would shift supply rightward and equilibrium rents would fall. Also, there would be no shortage of low- income housing. Owners would have incentives to properly maintain roofs and plumbing. Of course building subsidies would cost real money; but everyone knows that there’s no such thing as a free lunch (well, maybe not everyone knows this). 6. In the graph, let D 0 be the initial demand for tickets to Disneyland and S 0 be the supply of tickets to Disneyland. Slowing tourism causes demand to decrease, as represented by the demand curve D 1 . The new rides at Six Flags further reduce demand to D 2 . These events all result in lower ticket prices at Disneyland as well as reduced attendance. This is not a violation of the law of demand since price is falling due to a decrease (shift) in demand, not a movement along a given demand curve.

  7. Page 7
    Read page 7 as text

    Chapter 2: Demand, Supply, and Market Equilibrium 6 7. In the graph, S 0 and D 0 are the supply and demand curves for auto insurance before Proposition 103 is passed. P E is the price of auto insurance. After Proposition 103 passes, P prop103 is the ceiling price established by passage of Proposition 103. The result is a shortage of auto insurance in California. This shortage gets worse over time as the costs of providing insurance rise because supply shifts leftward ( S 1 ) in- creasing the gap between Q d and Q s (at P = P prop 103 ). If Proposition 103 is defeated, no price ceiling will be forthcoming and no shortage will occur. The increasing costs of providing insurance will cause insurance rates to rise (from A to B ). 8. a. Increase in the price of a complement goods causes demand to shift leftward. Movie ticket prices fall and ticket sales fall. b. Decrease in the price of a substitute good causes demand to shift leftward. Movie ticket prices fall and ticket sales fall. c. Presumably, pay-per-view movies on cable are more convenient to some consumers than going to the movie theater, thereby changing some consumers’ tastes away from theater movies toward pay- per-view movies. Demand shifts leftward due to the change in tastes, and movie theater ticket prices fall and ticket sales fall. d. The end of the strike increases the number of movie scripts available, lowering the price producers must pay to get a movie script. The decrease in price of an input (movie scripts) increases the supply of movies out of Hollywood. Supply shifts rightward. Movie ticket prices fall and ticket sales rise. e. As in part d , a decrease in the price of an input causes supply to shift rightward. Movie ticket prices fall and ticket sales rise. 9. a. The new process causes an increase in supply, shown as a rightward shift in the supply of crude oil curve. The rightward shift in supply of crude oil does NOT cause a surplus because the equilibrium price of crude oil falls until quantity demanded equals quantity supplied. The market clears at the now lower price of crude oil. No surplus arises because the lower crude price results in an increase in quantity demanded of crude oil, which works to eliminate any surplus. The end result of the new process is to decrease the equilibrium price of crude oil and increase the quantity of crude oil consumed and produced in equilibrium. b. Even in the unlikely event that no new oil deposits are ever discovered, growing worldwide demand for crude oil would still be met. Rightward shifts in demand, supply constant, would simply drive up the equilibrium price of crude oil. No shortage would occur unless governments impose price ceilings on crude oil preventing its price from rising to market clearing levels. 10. In the figure, the environmental curbs on burning wood causes supply to shift leftward from S 0 to S 1 . The substitution from burning wood to gas hearths is represented by the leftward shift in demand from D 0 to D 1 . Comparing initial equilibrium point A to B , the price of firewood has remained unchanged while the quantity of firewood burned decreases. Price of auto insurance (dollars) Q uantity of auto insurance (# of cars insured) $ D 0 A B Q P prop 103 Q d Q s S 1 S 0 P E

  8. Page 8
    Read page 8 as text

    Chapter 2: Demand, Supply, and Market Equilibrium 7 11. Demand and supply both increase simultaneously. An increase in customers ( N ) causes demand to shift rightward. An increase in the number of businesses in a market ( F ) causes supply to shift rightward. Equilibrium output definitely increases, but the effect of the Internet on equilibrium price is indeterminate. 12. a. Your sketch of demand and supply should look like:

  9. Page 9
    Read page 9 as text

    Chapter 2: Demand, Supply, and Market Equilibrium 8 b. At $5,000 per metric ton, quantity demanded is 30 metric tons per year (= 150 – 0.024 × 5,000) and quantity supplied is 52 metric tons per year (= –48 + 0.020 × 5,000). So, the monthly rate of inventory growth is 22 tons per month (= 52 – 30). c. The global market-clearing price of primary aluminum is predicted to be $4,500: Price is currently $5,000, which is too high to clear the market and Rusal is correct to predict a fall in aluminum prices. Answers to Homework Exercises in Student Workbook 1. Normal. The coefficient on M is positive. Thus is positive and housing is a normal good. 2. Substitutes. The coefficient on R is positive. Thus is positive, and three-bedroom apartments are substitutes for new housing. 3. Q d = 160 – 2 P 4. See the figure below:

  10. Page 10
    Read page 10 as text

    Chapter 2: Demand, Supply, and Market Equilibrium 9 5. Yes, because an increase in a factor price should cause Q s to get smaller (i.e., is negative). 6. Q s = – 40 + 2 P 7. See the figure above. 8. = $50 and = 60 9. Yes; yes. 10. CS = .5 × 60 × ($80 – $50) = $900; PS = .5 × 60 × ($50 – $20) = $900; SS = $1,800 10. Q d = 140 – 2 P 11. Q s = – 20 + 2 P 12. = $40 and = 60

  11. Page 11
    Read page 11 as text

    Chapter 3 : Marginal Analysis for Optimal Decisions 10 Chapter 3 : MARGINAL ANALYSIS FOR OPTIMAL DECISIONS Answers to Applied Problems 1. a. One way of reducing traffic deaths is to reduce speed. While it may be possible to eliminate all traffic deaths by allowing motorists to drive no faster than 15 MPH in cars equipped with driver and passenger air bags, most American drivers would not view a 15 MPH speed limit as optimal. Most drivers seem willing to accept some additional probability of death in return for faster speeds. The 70 MPH speed limit would be optimal if the marginal benefit of reducing speed limits equals the marginal cost of reducing speed limits. Just because reducing speed limits to 65 MPH would save even more lives does not, by itself, mean that further reduction in speed limits should be undertaken. The marginal benefit of speed reduction must be compared to the marginal cost. b. If it costs nothing to eliminate pollution (i.e., MC = 0), then the optimal level of pollution would indeed be zero. When the marginal cost of pollution abatement is greater than zero, as it is for virtually every type of pollution, the optimal level of pollution occurs at that level of pollution for which the marginal benefit to society of eliminating more pollution just equals the marginal cost of eliminating more pollution. In fact, it is possible to have too little pollution if pollution abatement activities have been undertaken such that the marginal cost of abatement exceeds the marginal benefit. c. To maximize net benefit, troops should be left in Iraq if the marginal benefit exceeds the marginal cost. Since marginal benefit and marginal cost are measures of additional (or extra) benefits and costs, benefits and costs already incurred do not matter (i.e., do not affect MB and MC ). Sunk costs or benefits do not enter the decision-making process, only incremental benefits and costs matter. d. See answer to part c . e. Insurance premiums are fixed costs. The optimal level has nothing to do with how high or how low fixed costs go. 2. Appalachian Coal Mining should minimize net cost by choosing that level of pollution ( P ) where the marginal benefit of pollution reduction equals the marginal cost of pollution reduction: 1,000 – 10P = 40 P P * = 20 units of pollution. 3. The second partner is basing his objection to the move on costs that are sunk. The money spent on office stationery, business cards, and a sign that cannot be moved to the new office are not marginal costs in the decision to move and should thus be ignored. In other words, the cost of the old cards, old stationary, and old sign are sunk costs to be ignored in making the decision to move the office, while any costs of purchasing new business cards, new stationary, or a new sign are part of the marginal cost of making the move. If, as the first partner seems to believe, MB exceeds MC for making the move, then net benefit rises even though new cards, stationary, and a sign must be purchased. 4. a. 2 b. $500 (= $25 × 20 radios not stolen due to hiring 1 guard) c. 4

  12. Page 12
    Read page 12 as text

    Chapter 3 : Marginal Analysis for Optimal Decisions 11 5. a. The following graph illustrates such a situation. Clean-up activity is plotted along the horizontal axis and marginal benefits and costs along the vertical. For any amount of clean up greater than A *, MC exceed MB , and that amount of clean-up activity is “too much.” b. The following graph illustrates such a situation. Notice that the shape of MB reflects Breyer’s assertion that most of the benefit of clean-up comes at relatively low levels of clean up activity. The shape of MC puts most of the clean-up cost at relatively high levels of clean-up. 6. “ Never give up ”: You should give up an activity when MC > MB for extra units of the activity. “ Anything worth doing is worth doing well ”: How “well” you choose to do something should be determined by weighing costs and benefits at the margin. “ Waste not, want not” : If saving a unit of a resource costs more than the value of the resource (usually measured by the price of a unit of the resource), it is NOT optimal to “save” the resource. For example, if a manufacturer must spend $100 to prevent $15 worth of a raw material from being wasted, then it is optimal to “waste” the raw material.

  13. Page 13
    Read page 13 as text

    Chapter 3 : Marginal Analysis for Optimal Decisions 12 7. a. With a payroll of $160,000, the manager should hire five people with high school diplomas and two people with bachelor's degrees. This choice maximizes the number of customers served because the last dollar spent on each type of employee yields the same addition to the number of customers served; MB HS / P HS (60 / $20,000) = MB B / P B (90 / $30,000) = 0.003. b. No, she is not making the correct decision. If the manager hires three employees of each type, the marginal contributions of the last person hired are the same for both types of employees (80), but the marginal contribution per dollar is higher for a high school diploma (80/$20,000) than for a bachelor's degree (80/$30,000). By hiring more employees with a high school diploma and fewer with a bachelor's degree, the manager can spend the same amount on payroll and increase the number of customers served. c. With a budget of $240,000, she should hire six people with high school diplomas and four people with bachelor's degrees. 8. a. Q * = 6,000 wine decanters MR 6,000 = $70 b. TR 6,000 = 70 × 6,000 = $420,000 TC 6,000 = 10,000 + 40(6,000) + 0.0025(6,000) 2 = $340,000 Profit = $420,000 – $340,000 = $80,000 c. The 6,001 st decanter adds $70 to total revenue and slightly more than $70 to total cost. Therefore the 6,001 st unit would (slightly) reduce profit. 9. a. 5 b. 4 c. 3 Answers to Mathematical Exercises 1. a. MB = 170 – 2 x ; MC = – 10 + 4 x b. NB = 170 x – x 2 – 100 + 10 x – 2 x 2 = 170 – 2 x + 10 – 4 x = 180 – 6 x = 0; x* = = 30 c. NB = 170(30) – (30) 2 – 100 +10(30) – 2(30) 2 = 2,600 2. a. MB = 100 – 4 x ; MC = x 2 – 12 x + 52 b. NB = 100 x – 2 x 2 – (1/3) x 3 + 6 x 2 – 52 x – 80 = 100 – 4 x – x 2 + 12 x – 52 = 48 + 8 x – x 2 = 0

  14. Page 14
    Read page 14 as text

    Chapter 3 : Marginal Analysis for Optimal Decisions 13 This factors to ( x + 4)(– x + 12) = 0 x = –4, x = 12 x * = 12 maximizes NB c. NB = 100(12) – 2(12) 2 – (1/3)(12) 3 + 6(12) 2 – 52(12) – 80 = 496 3. Z = 3 x + xy + y + λ(70 – 4 x – 2 y ) = 3 + y – λ4 = 0 = x + 1 – λ2 = 0 = 70 – 4 x – 2 y = 0 Dividing the first equation by the second, ; 3 + y = 2 x + 2; y = 2 x –1 Substituting this solution into the third equation: 70 – 4 x – 2(2 x –1) = 0 and solving for x = 9; y = 2(9) –1 = 17 B max = 3(9) + 9(17) + 17 = 197 4. Z = 6 x + 3 y + λ(288 – xy ) = 6 – λ y = 0 = 3 – λ x = 0 = 288 – xy = 0 ; y = 2 x ; substituting into the third equation, 2 x ( x ) = 2 x 2 = 288; x = = 12; y = 2(12) = 24. Min c = 6(12) + 3(24) = $144 5. a. Marginal benefit is the derivative of TB with respect to A : . At point C , MB = 8 – 0.008(200) = $6.40. The rest of the points can be similarly verified. b. Marginal cost is the derivative of TC with respect to A : . At point C , MC = 1+ 0.012(200) = $3.40. The rest of the points can be similarly verified. c. NB = TB – TC = 8 A – A – 0.004 A 2 – 0.006 A 2 = 7A – 0.010 A 2 . The derivative of NB equals MB – MC . d. Yes.

  15. Page 15
    Read page 15 as text

    Chapter 3 : Marginal Analysis for Optimal Decisions 14 Answers to Homework Exercises in Student Workbook 1. a. a. 2.50 b. 7.00 c. 150 d. 7.50 e. 5 f. 4.50 b. 50; NB ; $225 c. 0; 0; 0; negative d. TB ; TC ; NB e. TC ; TB ; NB 2. Your table should look like: Level of Activity A Total Benefit Total Cost Marginal Benefit Marginal Cost Net Benefit 0 0 0 -- -- 0 1 $ 31.75 $ 2.50 $ 31.75 $ 2.50 $ 29.25 2 60.75 6.25 29.00 3.75 54.50 3 87.25 11.25 26.50 5.00 76.00 4 111.40 18.00 24.15 6.75 93.40 5 133.60 26.30 22.20 8.30 107.30 6 154.60 35.40 21.00 9.10 119.20 7 174.10 49.20 19.50 13.80 124.90 8 192.10 66.95 18.00 17.75 125.15 9 209.20 88.95 17.10 22.00 120.25 10 223.45 114.95 14.25 26.00 108.50 11 235.90 145.45 12.45 30.50 90.45 12 247.10 180.05 11.20 34.60 67.05 a. A * = 8 b. Undertaking the 5 th unit of activity causes total benefit to increase by $22.20, but total cost increases by only $8.30. Since more is added to total benefit than is added to total cost, net benefit rises when the 5 th unit of activity is undertaken. Thus, 4 units cannot be optimal since net benefit can be further increased by increasing the activity level by one unit. c. By reducing output to 11 units, total benefit decreases by $11.20 and total cost decreases by $34.60. Since total cost falls by more than total benefit falls, net benefit rises by reducing output to eleven units. Therefore, twelve units could not be optimal since net benefit can be increased.

  16. Page 16
    Read page 16 as text

    Chapter 3 : Marginal Analysis for Optimal Decisions 15 d. A * = 8. Yes it is the same as in part a . 3. a. X * = 3; Y * = 2; TB * = $185,000 (= 75,000 + 110,000) b. X * = 5: Y * = 6; TB * = $306,000 (= 100,000 + 206,000) 4. a. increasing; total; increases; total; increasing; increase; equal b. decreasing; total; decreases; total; decreasing; decrease; equal 5. The money spent getting the Brazilian plant operating is now a sunk cost for the purposes of deciding whether to continue operating the plant. Sunk costs should be ignored in this decision. The plant should continue operating if the marginal benefit from operation exceeds the marginal cost from operation. 6. A graph should be drawn showing a downward sloping MB curve for saving additional owls and an upward sloping MC curve for saving additional owls. Saving owls past the point of intersection of MB and MC means that more than the optimal number of owls are being saved. 7. a. The publisher should ignore the costs of setting the type since these costs are sunk costs that cannot be recovered. b. The publisher should ignore the $1 million advertising cost since it is a fixed amount that does not vary with the number of copies printed. 8. a. 1 round of golf and 5 tennis matches. b. 0 rounds of golf and 4 tennis matches.

93 more pages in the full document

Unlock it once and it stays in your library, ready to chat with or turn into flashcards.

Unlock the full document

More Economics study materials

See all

Study this document with CramX

Once it is in your library, every tool can work from it.