Questions for Critical Thinking 1

Questions for Critical Thinking 1 Chapter 1 Discussion Questions: 4. What might be the objective of a museum? Of a firm? What are the basic steps in all types of decision-making process? The objective of a museum might be to maximize the number of visitors or the size of its artwork collection, subject to its physical and financial limitations or constraints. On the other hand, a firm might seek to maximize profits subject to the resource, legal, environmental and other constraints it faces. While the goals and constraints of a museum and a firm differ, the decision-making process is basically the same. That is, both seek to maximize an objective in the face of some constraints, in the same general way and by utilizing the same general techniques. 9. How is concept of a normal return on investment related to the distinction between business and economic profit? The normal return on investment is included as part of profit by businessmen and accountants but as part of costs by economists. Thus, business profit minus the normal return on investment or implicit costs equals economic profit. It is economic profit that is important in allocating society’s scarce resources among competing uses. 11. What is the difference between unethical and unlawful behavior? What does an ethics officer do? Unethical business behavior is behavior that the firm does not allow its personnel to engage in, even though such behavior may not be unlawful. Unlawful behavior, on the other hand, is behavior that is not allowed by law and which would be punished under the legal system if engaged in. Thus, ethics is a source of guidance beyond enforceable law. Being based on values, however, it is often not clear what ethical behavior is and what it is not since different people may have different values. An ethic officer helps to draw-up the company’s ethical code and is responsible for seeing it enforced.

Problems: 4. A firm is contemplating an advertising campaign that promises to yield $120 one year from $100 spent now. Explain why the firm should or should not undertake the advertising campaign. At r = 15%, 120 = $104.35 1.15 At r = 20%, 120 = $100.00 1.20 At r = 25%, 120 = $96.00 1.25 At r=20%, the firm is indifferent between undertaking the advertising campaign or not because the present value of the return equals the cost. The firm should undertake the campaign if its rate of discount (r) is lower than 20%, and it should not if its rate of discount is higher than 20%. 6. Determine which of the two investment projects of Problem 5 the manager should choose if the discount rate of the firm is 20 percent. Project 1 PV = $100,000 + $100,000 + $100,000 + $100,000 120 (1.20)2 (1.20)3 (1.20)4 = $258,873.45 Project 2 PV = $249,413.26 Thus, with a discount rate of 20%, the firm should choose project 1.

9. A women managing a photocopying establishment for $25,000 per year decides to open her own duplicating place. Her revenue during the first year of operation is

$120,000, and her expenses are as follows: Salaries to hired help Supplies Rent Utilities Interest on bank loan

$45,000 15,000 10,000 1,000 10,000

(a) The explicit costs are $81,000. (b) The implicit costs are equal to $25,000. (c) The business profit equals total revenue minus the explicit costs $120,000 - $8l, 000 = $39,000. (d) The economic profit equals total revenues minus the explicit and implicit costs $120,000 - $106,000 = $14,000. (e) The normal return on investment equals the implicit costs of the entrepreneur of $25,000.

Chapter 2

Discussion Questions: 9. How would you react to a sales manager's announcement that he or she has in place a marketing program to maximize sales? When sales or total revenue is maximum, marginal revenue is zero. Since marginal cost is usually positive, marginal cost exceeds marginal revenue and the firm produces too much output to maximize total profit. Therefore, the marketing program of the firm should be scaled down until the marginal benefit of the program equals its marginal cost. 12. How much time should a consumer spend on shopping (searching) for lower prices? A consumer should shop for lower prices until the marginal benefit of the search is equal to the marginal cost of the search. The more valuable a consumer's time is, the smaller is the amount of optimal search time. 13. For which type of goods would you expect consumers to spend more time on comparative shopping, or shopping for lower prices? Given the marginal cost of comparative shopping, or shopping for lower prices, for the consumer, we would expect the consumer to spend more time searching for lower prices for more expensive items than for cheaper ones. The reason is that usually the more expensive the item, the greater is the potential benefit of the search.

Problems:

1(a) Derive the total-revenue, average-revenue, and marginal-revenue schedules from Q = 0 to Q = 4 by 1s. Average revenue (AR) = total revenue (TR) / Q Marginal revenue (MR) = change in total revenue / change in Q For example Q 2 3 Quantity Total Revenue 0 1 2 3 4

TR 14 18

AR 7 6

Average Revenue 0 8 14 18 20

MR 4 Marginal Revenue

8.00 7.00 6.00 5.00

8.00 6.00 4.00 2.00

7. Given the following total-cost schedule: ___Q________0_____1_____2_____3_____4_____ TC 1 12 14 15 20 Derive the average- and marginal-cost schedules. Q

TC 0 1 2 3 4

Average Cost 1 12 14 15 20

12.00 7.00 5.00 5.00

Marginal Cost 11.00 2.00 1.00 5.00

9. With the total-revenue schedule of Problem 1 and the total-cost schedule of Problem 7, show the profit-maximizing level of output? Profit is TR - TC. Obviously there is no revenue at production 0. At Production 1, profit is 8-12 = -4 (a loss). At production 2, profit is 14-14 = 0. At Production 3, profit is 18-15 = 3.

At production 4, profit is 20-20 = 0. The max profit point is at production of 3. 11. a) Identify the characteristics of the American business model. (b) Based on your understanding, what should be the characteristics of the Biblical business model? The American business model refers to the business practices used by American firms. It preaches maximizing the value of the firm subjects to the constraints it faces and shareholder supremacy. What should be the characteristics of the Biblical business model? The success of any business can be attributed to some basic principles. They are ones found in the Bible, which include embracing community outreach as well as respect for others, dignity and hospitality which are lessons taught in the Bible. Stewardship and servant leadership also are important attributes, The Bible influences business ethics to the extent that individual business leaders allow its teachings to inform their decisions and guide their business practices. Life is life. It's not segments. Values are values. Belief and behavior go together. A business can operate, not as a Christian business but as one that is based on those biblical principles. A good name is more desirable than great riches; to be esteemed is better than silver or gold (Proverbs 22:1, NIV). In other words, it's better to have integrity than a lot of money. Money fades, but your reputation lasts forever.