10. Solve the problem
A business owner makes 1,000 items a day. Each day he or she contributes eight hours to produce those items. If hired, elsewhere he or she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days. a. Calculate the firm’s accounting profit for the month;
Revenue equals 1000 items per day * $15/item*30days = $450,000.Explicit costs are given as $150,000. Therefore, accounting profit = $450,000-$150,000 =$300,000 b. Explain the reason why it is greater than economic profit.
A company's total earnings, calculated according to Generally Accepted Accounting Principles (GAAP), and includes the explicit costs of doing business, such as depreciation, interest and taxes.
Accounting profits tend to be higher than economic profits as they omit certain implicit costs, such as opportunity costs.
Economic profit = revenue - implicit (opportunity) and explicit (monetary) costs;
Accounting profit = revenue - explicit costs.

2. Solve the problem
Suppose that you estimated the following demand curve.
Q = 90.5 − 3.36P + 0.002I
Q Represents quantity demanded, P represents price and I represents average income. You know that the current market price is $20 and average income is $20,000 a) Calculate current demand.
Q = 90.5 − 3.36( ) $20 + .002($20,000) = 63.3 b) Calculate the price elasticity of demand.
E = 3.36*(20/63.3) = 1.06 c) Calculate the income elasticity of demand
E = 0.002*(20,000/63.3) = 0.63

4.Solve the problem
Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $2.5 million for a plastic injection molding machine (which can be sold for $2.0 million) and $100,000 in plastic injection molds specifically for the toy (not valuable to anyone else). Labor and the cost of materials necessary to make each truck is about $3. This year, a competitor has developed a similar toy that has significantly reduced demand for the toy truck. Now, the original manufacturer is deciding whether they should continue production of the toy truck. If the estimated demand is 100,000 trucks: a. What is the break-even price for the toy truck? b. Should you shut down?

Break-even price is the price that you must charge to at least break even (make zero profit). It is equal to average avoidable cost per unit.
Break-even analysis:
2,000,000/100,000 = $20 per truck + $3 per truck = $23 per truck is the break-even price per truck

Relevant costs - all costs that vary with the consequence of a decision.
Relevant costs = 2,000,000 (not $2.6 because the $2.5M paid for the injection mold machine and the $100,000 in molds are sunk costs irrelevant to the discussion as they have already incurred)
Quantity = 100,000
To make shutdown decisions, we work with break-even prices rather than quantities. If you shut down, you lose your revenue, but you get back your avoidable cost. If revenue is less than avoidable cost, or equivalently, if price is less than average avoidable cost, then shut down.
If the company can sell the truck for $23, they should stay open. If they are unable to charge $23 per truck they should shut down.

5. Solve the problem
A company faces the following costs at the respective production levels in addition to its fixed costs of $50,000: Quantity | Marginal Cost | Sale Price | Marginal Return | 12345 | $10,000$11,000$12,000$13,000$14,000 | $20,000$20,000$20,000$20,000$20,000 | $10,000$9,000$8,000$7,000$6,000 | a. How would you describe the returns to scale for this company? b. Resolve it by using marginal analysis.

a) Increasing (average total costs are falling with output) b) Marginal cost (MC) is the additional cost incurred by producing and selling one more unit.
Marginal revenue (MR) is the additional revenue gained from selling one more unit.
If the benefits of selling another unit (MR) are bigger than the costs (MC), then sell another unit.
Sell more if MR > MC; sell less ifMR < MC. If MR ј MC, you are selling the right amount (maximizing profit).