...Candies, determine the relevant costs for the expansion decision, and distinguish between the short run and the long run costs. Recommend the key decision-making criteria that Katrina’s Candies should use for expansion decisions in the short run and in the long run. Provide rationale for your response. Relevant costs are those that are avoidable or can be eliminated by choosing one alternative over another. Relevant costs are also known as differential, or incremental, costs. In general, variable costs are relevant in production decisions because they vary with the level of production. Likewise, fixed costs are generally not relevant, because they typically do not change as production changes. However, variable costs can remain the same between two alternatives, and fixed costs can vary between alternatives. For example, if the direct material cost of a product is the same for two competing designs, the material cost is not a relevant factor in choosing a design. However, other qualitative factors relating to the material, such as durability, may still be relevant. Likewise, fixed costs can be relevant if they vary between alternatives. Consider rent paid for a facility to store inventory. Although the rent is a fixed cost, it is relevant to a decision to reduce inventory storage costs through justin-time production techniques if the cost of the rent can be avoided (by subleasing the space, for example) by choosing one alternative over another. The costs which should be used for decision...
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...around the country provide McDonald’s with economies of scale? McDonald’s use of a uniform menu around the country helps to provide it with economies of scale. “What determines the shape of the long-run average total cost curve… is scale” (Krugman & Wells, 2013), the size of a firm’s operations is often an important determinant of its long-run average total cost of production. Firms, like McDonalds, that experience scale effects in production find that their long-run average total cost changes substantially depending on the quantity of output they produce. There are increasing returns to scale (also known as economies of scale) (Krugman & Wells, 2013) for companies, like McDonalds, when long-run average total cost declines as output increases. On the other hand there are decreasing returns to scale (also known as diseconomies of scale) for companies like McDonalds, when long-run average total cost increases as output increases. Economies of scale means that something is made cheaper when it is produced in great quantities spreading the average total cost over a larger quantity. For McDonalds the uniformity of its menu means that it can produce large quantities of products and spread its average total cost over a large quantity and reduce the long-run average total cost for its products, thus they make the products for their uniform menu cheaper. McDonald’s use of a uniform menu gives them a larger output level and the ability to specialize workers task. This means...
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...in order to reduce the cost of the Medicare and Medicaid systems. Discuss both the short-run and long-run implications for the economic situation of the drug industry. Include in your answer the impact on prices, new development, etc. of drugs. Include appropriate graphs showing the difference between monopoly pricing and competitive pricing. The government can give a pharmaceutical company the exclusive right to produce a good by granting patents on drugs. Patents refer to the exclusive monopoly right over a particular drug that extends for a period of 20 years, creating barriers to entry where other firms cannot enter the market. The existence of high barriers to entry prevents firms from entering the market even in the long-run. Therefore, it is possible for the monopolist to avoid competition and continue making positive economic profits in the long-run. If congress remove patent protection for life saving drugs in order to reduce the cost of the Medicare and Medicaid system, there will be many implications in the short-run and long-run that will effect both the pharmaceutical companies and consumers both positive and negatively. Monopolies can maintain super-normal profits in the long run. As with all firms, profits are maximized when MC = MR. The level of profit depends upon the degree of competition in the market, which for a pure monopoly is zero. Profit maximization, MC = MR Monopolies can maintain super-normal profits in the long run. As with all firms, profits...
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...Aluminum Industry in 1994: Long Run Supply and Equilibrium Managerial Economics Alp Atakan This material is for the exclusive use in MGEC classes at Koc University. No other use is allowed without my permission. 1 Road Map • • Why is the price of Aluminum so Volatile? • Demand analysis Long-Run Supply Curve – – – – – Difference between short-run and long-run supply curves ATC and the exit price FR-ATC and the entry price Building the long-run supply curve What drives the long-run price path in a commodity market? 2 Demand Curve Answers the Question: What Quantity Will be Demanded at Different Possible Market Prices? Movements along a given demand curve tell us how quan4ty demanded changes with respect to changes in the good’s price Price ($ per unit) P0 Shi7s in the demand curve tell us how quan4ty demanded changes with respect to changes in demand drivers other than the good’s price (e.g, income) P0 P1 D0 D X0 X1 Quan?ty (units per period) Measure of sensi4vity: price elas:city of demand % QD = % P QD /QD dQD P = ⇥ D P/P dP Q X0 X2 D1 Quan?ty (units...
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...inexperienced developer, was making plans to replace a rooming house he had inherited next to the University of Virginia campus in Charlottesville with a new 14-unit, 5-story apartment house. In his attempts to assemble the information, approvals, and resources necessary to go ahead, he runs into many problems associated with the development process. While Sexton is able to carry out most of the conceptual, investigative and planning stages of this development, he runs into many problems because of his inexperience and his initial plan changes over time. He runs into issues obtain financing, has to spend money to obtain a certificate of occupancy, underestimates the construction costs and has unrealistic targets to begin receiving rental income. As a result, he has to adjust the development costs and is faced with making an additional equity investment. His return compared with his setup is reduced over time due to some circumstances beyond his control, but also some that are a avoidable. Sexton has not been able to obtain permanent financing on acceptable terms and is now faced with missing the January 2005 target rental date and the possibility of incurring large additional carrying costs. Sexton should abandon the project and consider selling the existing structure now. Action Rationale The proposed action to abandon the project and sell the existing structure now is the best approach to solve Sexton’s problems for the reasons listed below. • Option 1 (Sell Existing...
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...Aluminum Industry in 1994: Long Run Supply and Equilibrium Managerial Economics Alp Atakan This material is for the exclusive use in MGEC classes at Koc University. No other use is allowed without my permission. 1 Road Map • • Why is the price of Aluminum so Volatile? • Demand analysis Long-Run Supply Curve – – – – – Difference between short-run and long-run supply curves ATC and the exit price FR-ATC and the entry price Building the long-run supply curve What drives the long-run price path in a commodity market? 2 Demand Curve Answers the Question: What Quantity Will be Demanded at Different Possible Market Prices? Movements along a given demand curve tell us how quan4ty demanded changes with respect to changes in the good’s price P0 Price ($ per unit) P0 Shi7s in the demand curve tell us how quan4ty demanded changes with respect to changes in demand drivers other than the good’s price (e.g, income) P1 D X0 X1 Quan?ty (units per period) X0 X2 D0 D1 Measure of sensi4vity: price elas:city of demand % QD = % P QD /QD dQD P = ⇥ D P/P dP Q % QD = % Y Measure of sensi4vity: other elas:ci:es ...
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... Unlimited wants and limited resources- 3. Constrained maximization- a. People will also try to minimize constraints 4. Creativity- indv max. their personal satisfaction given resource constraints Marginal Analysis and Benefits- more than dollars and cents 1. When to use it: in your own life and to change behavior 2. Sunken cost- costs and benefits that have already occurred a. Irrelevant to economic decision making b. Use opportunity cost rather than historic cost *Sunk cost fallacy: tendency to throw good money after bad 3. Opportunity cost: The value of the best alternate use 4. Indifference curves: preferences (all combinations of goods that yield the same utility.) Most people balance combinations/utility is max @ the pt of tangency btween the constraint and an indifference curve 5. If benefits are greater than the costs= DO IT 6. Explicit cost: opportunity cost that involves direct monetary payment 7. Implicit cost: opportunity cost that does not involve monetary payment (time) 8. Economic profit: takes into account implicit and explicit costs Accounting profit: only takes explicit cost into account 9. Risk premium: ppl will pick the option with the most certainty. Different Models -Happy-is-Productive: satisfied employees provide better service -Economic: highly compensated/paid employees provide better service -Good citizens: no need for incentive pay b/c ppl are intrinsically interested in a doing a good job;...
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...hypothesis hold in the short run or the long run? Explain. The long run is defined as a period of time sufficiently long so that all inputs to production can be freely varied. In contrast, the short run is a period of time sufficiently short so that at least one input is fixed (cannot be varied). For simplicity, let’s make the standard assumption that the variable input in the short run is labor and proceed by defining the hypothesis in terms of labor. The hypothesis of eventually diminishing marginal product states that as we increase labor while holding all other inputs fixed, we will eventually reach a point where the additional output gained with each increase in labor gets smaller and smaller. (e.g. the 5th baker increases output by 3 loaves, the 6th baker by 2 loaves, the 7th baker by 1.) Since the hypothesis is regarding what we expect to see when we vary one input while holding others fixed, this hypothesis is relevant in the short run and not in the long run. Mathematically, the marginal product of labor is MPL = q( L, K ) . L Under the hypothesis of eventually diminishing marginal product (of labor), the following will eventually hold: 2 q( L, K ) 0. L2 (Again, note that this is a partial derivative, so we are hypothesizing this will be true when capital is held fixed, a short-run situation.) 2) Under what conditions will we see an “S-shaped” total product curve? How does this shape relate to the shape of the short-run marginal cost curve? We will see an...
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...Efficiency and Cost of Production The management team of AutoEdge is trying to weigh the advantages and disadvantages of leaving South Korea and reentering the United States. Sam Busch, the production manager of AutoEdge would the fixed and variable cost that AutoEdge will experience in South Korea and the United States, if the company chooses to conduct in either company. Sam Busch would also like the short run and the long run expenses of conducting business in the United States. After all the expenses, Sam Busch would to gain knowledge on the financial risks that AutoEdge faces if the production process, is relocated to the United States. Fixed Costs and Variable cost Fixed costs are expenses that remain unchanged over the short run and do not vary or change, in the volume of products produced or sold (Tracy, 2013). Fixed costs are equipment, properties, building and managerial overhead. The Fixed Cost also include the salaries of the Vice President, safety inspectors, security guards, accountants and shipping and receiving employees. Fixed costs are expenses that a company is obligated to pay even if the company produces zero products. Variable cost are expenses or costs that are sensitive to the change in volume of a products production rate and sales. Variable costs include materials, utilities, taxes, hourly salaries and transportation costs. Variable costs will decrease if the production or sales of products decrease and will increase when the production rate or...
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...Answers to the Problems and Applications 1. Which of the following news items involves a short-run decision and which involves a long-run decision? Explain January, 31, 2008: Starbucks will open 75 more stores abroad than originally predicted, for a total of 975. This decision is a long-run decision. It increases the quantity of all of Starbucks’ factors of production, labor and the size of Starbucks’ plant. February, 25, 2008: For three hours on Tuesday, Starbucks will shut down every single one of its 7,100 stores so that baristas can receive a refresher course. This decision is a short-run decision. It involves increasing the quality of Starbucks’ labor and so only one factor of production—labor—changes and all the other factors remain fixed. June, 2, 2008: Starbucks replaces baristas with vending machines. This decision is a short-run decision. It involves changing two of Starbucks’ factors of production, labor and one type of capital. But other factors of production, such as Starbucks’ land and other capital inputs such as the store itself, remain fixed. July, 18, 2008: Starbucks is closing 616 stores by the end of March. This decision is a long-run decision. It decreases the quantity of all of Starbucks’ factors of production, labor and the size of Starbucks’ plant. Labor (workers per week) | Output (surfboards per week) | 1 | 30 | 2 | 70 | 3 | 120 | 4 | 160 | 5 | 190 | 6 | 210 | 7 | 220 | 2. The table sets out Sue’s Surfboards’ total product...
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...Revenue | Total Cost | 0 | $0 | $4 | 1 | $20 | $14 | 2 | $40 | $26 | 3 | $60 | $40 | 4 | $80 | $56 | 6 | $120 | $94 | 7 | $140 | $116 | 8 | $160 | $140 | 9 | $180 | $166 | Choose one answer. | a. Marginal cost is $6. | | | b. Total revenue is greater than total variable cost. | | | c. Total revenue is greater than total cost. | | | d. Marginal revenue is less than marginal cost. | | | e. Both b and c are correct. | | Question 2 Marks: 1 Susan quit her teaching job, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10% interest per year, on equipment for her business. She also borrowed $12,000 from her bank at (10% interest) and spent it on equipment. For the past several months, she has spent $1000 per month on ingredients and other variable costs. She has also taken in $3500 in monthly revenue for the past several months. Choose one answer. | a. In the short run, Susan should shut down her business and in the long run she should exit the industry. | | | b. In the short run, Susan should continue to operate her business, but in the long run she should exit the industry. | | | c. In the short run, Susan should continue to operate her business, but in the long run she will probably face competition from newly entering firms. | | | d. In the short run, Susan should continue to operate her business, and she is also in long-run equilibrium...
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...attention of: Course tutor Number of pages: Jeremy Marker ID No 0908954 0908954@rgu.ac.uk Jeremy.marker@shawgrp.com MSc Project Management SU235: Project Planning and Control Project Delays and Over-Run 18th April 2010 Bassam Bjeirmi Bassam Bjeirmi 22 (Including front Section) Contents Introduction 1.0 Lack of Risk Management Systems 2.0 Design and Project Changes 3.0 Unreasonable Project scope 4.0 Over-ambitious estimates and task assessment 4.1 Delay Analysis Technique 4.2 Critical, Non-Critical Delay and Float 4.3 Excusable and Non-Excusable Delays 4.4 Compensable and Non-Compensable Delays 4.5 Concurrent Delays 4.6 Methodology Types of Delay Analysis 5.0 Inappropriate Contractors 6.0 Conclusion 7.0 References Page 1 2 4 5 6 7 8 9 9 9 10 11 13 14 Executive Summary The purpose of this assignment is to provide a report that shows evidence of the student’s understanding and the ability to apply the contents of Module SU235: Project planning and control Management, by digesting the course literature and applying the course specifics. By functionally discussing project planning and control methods on the course website forum, the student absorbed the methodology and processes of project planning and control. With this knowledge the student composed the following assignment based on “Cost Overrun” and “Delays” in projects, annotating methods and processes to overcome these problems. The student delineates the importance of managing project delays and overrun. Highlighting the...
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...may be cost objects. Answer: 2) Costs are accounted for in two basic stages: assignment followed by accumulation. Answer: 3) Actual costs and budgeted costs are two different terms referring to the same thing. Answer: 4) Accountants define a cost as a resource to be sacrificed to achieve a specific objective. Answer: 5) A cost object is always either a product or a service. Answer: 6) A department could be considered a cost object. Answer: 7) The same cost may be direct for one cost object and indirect for another cost object. Answer: 8) Assigning direct costs poses more problems than assigning indirect costs. Answer: 9) Improvements in information-gathering technologies are making it possible to trace more costs as direct. Answer: 10) Misallocated indirect costs may lead to promoting products that are not profitable. Answer: 11) The materiality of the cost is a factor in classifying the cost as a direct or indirect cost. Answer: 12) The cost of a customized machine only used in the production of a single product would be classified as a direct cost. Answer: 13) Some fixed costs may be classified as direct manufacturing costs. Answer: 14) The distinction between direct and indirect costs is clearly set forth in Generally Accepted Accounting Principles (GAAP). Answer: 15) Fixed costs have no cost driver in the short run, but may have a cost driver in the long run. Answer: 16) Costs that are difficult to change over the short run are always...
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... TIME: 2 HOURS ___________________________________________________________________ Part (I): Answer 2 of the Following Questions: - (15 Points) 1- Which of the following forecasting methods are appropriate for predicting business cycles? a- Trend projections.. b- Leading economic indicators. c- Lagging economic indicators. Explain. 2- Cite and discuss possible reasons a firm may actually find it self operating in the stage (II) diminishing returns of the short-run production function. 3- Write Short Notes On the Following: a. Law of diminishing return vs. law of return to scale. b. Elasticity of demand. c. Quantitative forecasting techniques vs. qualitative forecasting techniques. d. Short-run production function vs. long-run production function. e. Cobb-Douglas Production Function. 4- Define the law of diminishing returns. Why is this law considered a short-run phenomenon? 5- Discuss the benefits and drawbacks of the following methods of forecasting: a- Jury of executive opinion b- The Delphi method c- Opinion polls Each of these methods has its uses. What are they? 6- A staff at the water cooler:” My regression model of demand is better than the one the consultant prepared for us because it has a higher R2. Besides, my equation has three more independent variables and so is more complete than the consultant’s” comment on this statement .Would you agree...
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...Economies of scale Economies of scale are the cost advantages exploited by expanding the scale of production in the long run. The effect is to reduce long run average costs over a range of output. These lower costs represent an improvement in productive efficiency and can feed through to consumers in lower prices. But economies of scale also give a business a competitive advantage in the market-place. They lead to lower prices and higher profits! The table below shows a simple representation of economies of scale. We make no distinction between fixed and variable costs in the long run because all factors of production can be varied. As long as the long run average total cost (LRAC) is declining, economies of scale are being exploited. Long Run Output (Units) | Total Costs (£s) | Long Run Average Cost (£ per unit) | 1000 | 12000 | 12 | 2000 | 20000 | 10 | 5000 | 45000 | 9 | 10000 | 80000 | 8 | 20000 | 144000 | 7.2 | 50000 | 330000 | 6.6 | 100000 | 640000 | 6.4 | 500000 | 3000000 | 6 | Returns to scale and costs in the long run The table below shows a numerical example of how changes in the scale of production can, if increasing returns to scale are exploited, lead to lower long run average costs. | Factor Inputs | | Production | | Costs | | (K) | (La) | (L) | | (Q) | | (TC) | (TC/Q) | | Capital | Land | Labour | | Output | | Total Cost | Average Cost | Scale A | 5 | 3 | 4 | | 100 | | 3256 | 32.6 | Scale B | 10...
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