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Managerial Econ

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Ba 401 – Managerial Economics
Problem Set #1
Due: Sunday, February 1st

#1. (20 pts) Imagine that two years after receiving your college degree, your annual salary as an assistant store manager is $50,000, you own a building that rents for $14,400 yearly, and your financial assets generate $5,000 per year in interest. On New Year’s Day, after deciding to be your own boss, you quit your job, evict your tenants, and use your financial assets to establish a pogo-stick shop. At the end of the year, your accountant gives you the following information: * Total revenue = $180,000 * Expenses: * Cost of pogo sticks = $75,000 * Employees’ wages = $40,000 * Utilities = $6000 * Taxes = $7,000 * Advertising expenses = $7500

Answer the following questions: a. What are your explicit costs?
Cost of pogo sticks 75,000
Employees wages 40,000
Utilities 6000
Taxes 7000
Advertising 7500
Total = 135,500

b. What is your accounting profit?
Total revenue – total expenses = accounting profit
180,000 – (75,000 + 40,000 + 6,000 + 7,000 + 7,500)
180,000 – 135,500 = 44,500
Accounting Profit = 44,500

c. What are your implicit costs?
50,000 annual salary as an assistant store manager
14,400 yearly income of building rental
5000 per year of interest earned on financial assets
69,400 total implicit costs d. Explain why the reasoning for considering these implicit costs – after all, you didn’t actually have to pay them in cash.

e. What is your economic profit?

f. Was starting the pogo-stick shop a good financial decision why or why not?

#2. (20 pts) Fill in the following table and answer the questions that follow:

Units Produced (Q) | Total Benefits B(Q) | Total Costs C(Q) | Net BenefitsN(Q) | Marginal Benefit MB(Q) | Marginal Cost MC(Q) | Marginal Net Benefit MNB(Q) | 1 | 120 | 15 | |…...

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