eost versus expenditure Retum to the two period inventory setting of Table 14.2, where we framed a new produet opportunity in terms of ineremental revenue less ineremental eost.

a] Carefully explain the shadow prices on the initial inventory for the six cases in Table 14.1. Why is this shadow price the appropriate material eost in the ineremental eost frarne?

b] Give a variation on the assumed prices and quantities such that the appropriate material eost in the ineremental formulation is 8.1. OO not ehange any of the first period priees.

e] What happens in the setting of Table 14.2 ifwe set P+ = 15 and P· = 14? What does this teIl you about a formulation that uses these seeond period prices?

d] Is the historieal eost of the material a sunk eost? Can you provide a frame of the new produet decision that makes this most obvious?

e] Briefly discuss what happens in this setting if the firm faees a eonstant 40%

marginal tax rate on aeeounting ineome.

AppendixLO1