7/17/2019 Session1 Problem Set

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Smith

Problem Set #1

There will be an assignment for each problem set. You can nd theassignment submission pages in the Assignments area of the course. You may collaborate with others, but please hand in your own work. Ingeneral, show the steps necessary to reach your nal answers. Work

will be graded on the basis of completeness and timeliness.

1. The owners of a small manufacturing company hae hired amanager to run the company with the e!pectation that he willbuy the company after e years. "ompensation of the new icepresident is a #at salary plus $%& of rst '1%(,((( of prot, andthen 1(& of prot oer '1%(,(((. )urchase price for thecompany is set as *.% times earnings +prot, computed asaerage annual protability oer the ne!t e years. -oes thiscontract align the incenties of the new ice president with thegoals of the owners /!plain.

0. Tara is considering leaing her current ob, which pays '%2,(((per year, to start a new company that manufactures a line ofspecial pens for personal digital assistants. 3ased on marketresearch, she can sell about 12(,((( units during the rst year ata price of '0( per unit. With annual oerhead costs andoperating e!penses amounting to '4,12(,(((, Tara e!pects aprot margin of 0% percent. This margin is 2 percent larger thanthat of her largest competitor, )ens, Inc.

a. If Tara decides to embark on her new enture, what will her

accounting costs be during the rst year of operation 5erimplicit costs 5er total opportunity costs +this includes implicitand e!plicit costsb. 6uppose that Tara7s estimated selling price is lower thanoriginally proected during the rst year. 5ow much reenuewould she need to earn positie accounting prots )ositieeconomic prots

4. )lease complete the tutorial aailable athttp899sambaker.com9econ9, titled Total Cost, Variable Cost, and Average Cost. )lease include a statement that you completed the

tutorial.

*. -efenders of communist economic systems may point out thatconsumers pay lower prices for certain goods because thegoernment imposes a limit on what producers may charge. "iteat least two other ways that consumers may be :paying; forthese goods under such a price ceiling.