1. (10) Read the following statement on the Purpose of a Corporation:
http://bit.ly/2OZ98pN
from the Business Roundtable, a lobbying organization representing more than 180 U.S. Corporations. Economists model firm behavior under the assumption that firm’s maximize profits (or shareholder value). Do you think this is generally an accurate assumption? Given the statement from the Business Roundtable, do you think economists should alter the way they model firm behavior? Explain.
2. (8) Suppose a pharmaceutical company estimates that if they invest $1 billion on the research and development (R&D) of a new pharmaceutical, they expect to earn $500 million in accounting profit as a result (their stream of future revenue would be $500 million higher than all of their explicit costs, including the R&D costs). Based on this information, should this company invest the $1 billion to develop this pharmaceutical? What does this decision depend on? Be specific.
3. (12) Suppose you own a sandwich shop, appropriately named “MBA Sandwiches” (MBA = ‘My Big Amazing’) with fixed costs of $1,000/month and marginal costs of $2.50/sandwich.
If the price is $6/sandwich, 500 sandwiches would be sold. If the price is $5/sandwich, 760 sandwiches would be sold.
a.) (4) Use these figures to calculate the price elasticity.
b.) (8) Calculate the monthly profits and profit margins (profit/revenue) associated with the price of $6/sandwich and $5/sandwich. Given these calculations, what price should you charge for sandwiches? Explain.
4. (15) Now suppose you manage a business that produces high end dog food. Your business produces 3,000 dog food cans per day, and can sell all cans at $2.00/can regardless of how much is produced. Your firm currently employs twenty workers, each of whom earns $15/hour and work 8 hours per day. Inputs, like the meat for the food and the metal for the can, cost $1.00/can. Your overhead expenses, including rent, property taxes, insurance, etc., which doesnotvary with the number of cans produced, equals $250 per day.
a. (3) Calculate your company’s current daily profit.
You’re considering whether to produce additional cans of dog food. In order to do so you would need to hire more workers, each of whom would be paid $15/hr. Material costs remain constant at $1.00/can. You determine that if you hire a 21st
employee, your firm would produce an additional 200 cans per day, and that the number of additional cans from each additional worker would be decreasing by 40 (so a 22nd
employee could produce an additional 160 cans per day, a 23rd
employee could produce an additional 120 cans per day, etc.).
b. (4) Calculate the marginal costs (change to total cost/change to output) associated with producing additional cans for employees 21 through 25. Note each worker works 8 hours/days.
c. (4) If you could still sell each can for $2.50, how many employees should you hire, how many additional cans should you produce, and what is your company’s new daily profit?
d. (3) Suppose your company’s fixed costs were $300 per day instead of $250 per day. What is the profit maximizing number of employees and what is your company’s daily profit?