1. Individual Problems 1-1 The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that she will buy the company after five years. For the first $150,000 of profit, the vice president's compensation is a flat annual salary of $50,000 plus 60% of company profits. Beyond the first $150,000 in profits, the vice president's compensation is the salary she receives at $150,000 profit plus 20% of company profits in excess of $150,000. On the following graph, use the purple points (diamond symbols) to plot the vice president's salary as a function of annual profit, for the profits levels of $0, $50,000, $100,000, $150,000, $200,000, $250,000, and $300,000. 250 225 Total VP Salary MANAGER SALARY (Thousands of dollars) 25 0 50 100 150 200 250 300 ANNUAL COMPANY PROFIT (Thousands of Dollars) The vice president has the option to purchase the company after five years. The purchase price for the company is set at 4 times earnings (profit), computed as average annual profitability over the next five years. In five years, the company is expected to be worth $10 million. On the following graph, use the green points (triangle symbols) to plot the vice president's expected profit from buying the company, for average annual profitability levels of $0, $500,000, $1,000,000, $1,500,000, and $2,000,000. 10 Profit from Buying Company PROFIT FROM PURCHASE OF COMPANY (Millions of dollars) N W 500000 1000000 1500000 2000000 2500000 ANNUAL COMPANY PROFIT (Dollars)Attempts .;. l | Keep the Highest I 3 8. Individual Problems 2-2 Suppose you recently sold your used car. Assume that no new production was involved in this transaction. Wealth was created because the value of your willingness to sell was 7 the buyer's willingness to pay. greater than Suppose you sold the car for $31,000. If the minimum price, or \"bottom line," you would accept for the car surplus is and the buyer surplus is he most the buyer is willing to pay is $32,000, then the seller .urplus created by the transaction is If the minimum price, or \"bottom line,\" you would accept for the car is $10,000 and the most the buyer is willing to pay is $32,000, then the seller urplus is E and the buyer surplus is . The total surplus created by the transaction is Suppose an individual is selling a car and has a \"bottom line'r of $26,000. Also suppose that another individual is looking to purchase a car. with a "top dollar" of 30,000. $ 3) Greater than b) Less than A wealthcreating transaction is possible, since the seller's bottom line is C) Equal to V the buyer's top dollar. The total surplus from such a purchase would be Suppose the government imposes a tax of $5,000 on the purchase of a car. a) Still . . . ' b) No longer W1th this tax, the wealth-creatlng sale of the car between these two buyers Will V take place. A business incurs the following costs: . Labor: $160/unit . Materials: $35/unit . Rent: $250,000/month Assume the firm produces 2 million units per month. The total variable cost, per month, is $ million. The total fixed cost, per month, is $ million. The total cost is $ million.10. Individual Problems 2-4 In 2013, France's labor unions won a case against Sephora to prevent the retailer from staying open late and forcing its workers to work "antisocial hours." The cosmetic store does about 20 percent of its business after 9 p.m., and the 50 sales staff who work the late shift are paid an hourly rate that is 25 percent higher than the rate paid to workers on the day shift. Many of the late-hour workers are students or part-time workers, who are put out of work by these new laws. a) Higher Forcing the retailer to close earlier forces the store's assets, such as the building and merchandise, to be moved froth lowerer -valued activities to a) Higher -valued activities. b) lower True or False: In order to profit from this law, an individual could purchase Sephora products during the day and sell them at a higher price during normal store hours. True O False