ECON1013 - FALL 2011

ASSIGNMENT

Question 1.

Kate uses a sewing machine to alter and repair clothes for one year in her own small business, Kate's Tailoring. She earns $20,000 during the year for various sewing projects. In the course of the year, she spends $2,000 on materials (cloth and thread); she pays $1,300 to rent a small workspace from the neighbourhood dry cleaners; and the value of her sewing machine depreciates by $200.

If Kate had closed her business at the beginning of the year, she knows that she could have sold her sewing machine for $1,000, put the money in the bank, and earned $50 in interest. She also knows that if she had taken a full-time job instead of running this tailoring business, she could have earned $12,000 per year.  

1. In dollars, what is the accounting profit of Kate's Tailoring?
2. In dollars, what is the economic profit of Kate's Tailoring?

Question 2.

You win a lottery. You have the choice of two ways to be paid. If you pick Payout Scheme X, you get $2,750 today. If you pick Payout Scheme Y, you get three payments: $1,000 today, $1,000 one year from today, and $1,000 two years from today. Which choice has the greater present value if all banks pay 10% interest per year now and in the future?

Question 3.

Christopher has $200,000 to invest, and he is considering the following business opportunity. He would use his $200,000 to buy a mechanical self-service car wash. He'll earn $40,000 per year from customers who drive through and use the water and soap jets to wash their cars. He'll spend $5,000 per year on maintenance and repair of that machine and $6,000 per year on supplies and utilities (water, soap, and electricity), and the car wash itself will depreciate by $7,000. That is, if he tried to sell it at the end of year, he would get only $193,000 for it. Since this car wash is self-service (drivers pay by using an automatic teller), he won't have to hire an attendant. If Christopher doesn't buy the car wash, he could leave his $200,000 in the bank, where it would earn 10% per year.

3.1. What is Christopher's accounting profit from this self-service car wash business?

3.2. What is his economic profit from this car wash business?.4.3. Christopher's only goal is to earn as much profit as possible. Should he invest his $200,000 in the car wash business opportunity?

Question 4.

Until recently Rosemarie worked as an accountant, earning $30,000 annually. Then she inherited a piece of commercial real estate that had been renting for $12,000 annually. Rosemarie decided to leave her job and operate a Peruvian restaurant in the space she inherited. At the end of the first year, her books showed total revenues of $260,000 and total costs of $230,000 for food, utilities, cooks, and other supplies. Her economic profit at the end of one year is:

Question 5.

Table: Present Value of Projects A, B, C, and D

(Table: Present Value of Projects A, B, C, and D) Given the information in the accompanying table, if the interest rate were 2%, which project would you choose?

Question 6.

Sara runs a small business assembling personal computers. This table shows her total cost at different levels of output.

6.1. What is Sara's fixed cost?

6.2. Calculate Sara's average fixed cost (AFC) when she produces four computers.

6.3. Calculate Sara's variable cost (VC) when she produces four computers.

6.4. Calculate Sara's average variable cost (AVC) when she produces four computers.

6.5. Calculate Sara's average total cost (ATC) when she produces four computers.

6.6. Calculate Sara's marginal cost (MC) of producing the fourth computer.

6.7. Calculate Sara's marginal cost (MC) of producing the fifth computer.

Question 7.

Pucker Lemonade, Inc., is a small company that produces bottled lemonade. Pucker's fixed cost includes the monthly rental cost of the lemon-smashing machines, the bottling machines, and the production plant. Pucker's variable cost is the cost of other inputs--lemons and other ingredients, maintenance of the machines, and wages for the workers who work at the plant. The following table shows Pucker's estimated cost for output, measured in truckloads of lemonade that the company produces each month.

7.1. If Pucker uses four lemon-smashing machines, what is the total cost of producing 10 truckloads of lemonade per month?

7.2. The current lease on Pucker's lemon-smashing machines is about to expire and the manager needs to decide how many of these machines to lease for the coming month. If Pucker needs to produce 20 truckloads of lemonade, how many machines should the company lease in the long run?