EXERCISE 1

Anthony Figueroa is a CPA, who works for an accounting consulting firm. His annual salary income is $70,000. Anthony is considering opening up his own consulting firm. He estimates that the annual rent for an office would cost him $20,000; a secretary would cost $24,000 per year. If he would rent office equipment, he would have to pay $11,000 per year. The purchase of required supplies, payment of electricity bills, water and telephone bills, would cost approximately $5,000 a year. Anthony estimates that the revenues that he would generate with consulting services would be $120,000 a year.

a. Calculate Anthony his explicit cost for operating his consulting firm for a year

b. What does Anthony's accounting cost?

c. What is Anthony's implicit cost?

d. Should Anthony Figueroa start his own practice? Explain why.

EXERCISE 2

Suppose that the economist of Corporation XYZ estimates the following long run cost function for a product M that the company produces and sells.

TC = 5Q² + 10Q +180

The market price for product M is fixed at P = $70

a. What is the total fixed cost?

b. What is the total variable cost function?

c. Suppose that Company XYZ would like to minimize average total cost. What volume of output of

product M should be produced?

d. At P = $70, calculate whether the firm has economic profits, economic loss, or normal profits. Explain why.

EXERCISE 3

Indicate whether each of the following involves an upward or downward shift in the long-run average cost curve or, instead, involves a leftward or rightward movement along a given curve. Also indicate whether each will have an increasing, decreasing, or uncertain effect on the level of average cost.

A rise in wage rates.

A decline in output.

An energy-saving technical change.

A fall in interest rates.

An increase in learning or experience.

EXERCISE 4

Ponce Software, Inc. produces innovative interior decorating software that it sells to design studios, home furnishing stores, and so on. The yearly volume of output is 15,000 units. The selling price and costs per unit are as follows:

Selling Price		$250
Costs:
Direct material	$40
Direct labor	60
Variable overhead	30
Variable selling expenses	25
Fixed selling expenses	20	-$175
Unit profit before tax		$75

Management is evaluating the possibility of using the Internet to sell its software directly to consumers at a price of $300 per unit. Although no added capital investment is required, additional shipping and handling costs are estimated as follows:

Direct labor	$30 per unit
Variable overhead	$5 per unit
Variable selling expenses	$2 per unit
Fixed selling expenses	$20,000 per year

Calculate the incremental profit that Ponce Software Inc. would earn by customizing its instruments and marketing them directly to end-users.

EXERCISE 5

Three graduate business students are considering operating a fruit smoothie stand in the Old San Juan Harbor Area, during their summer break. This is an alternative to summer employment with a local firm, where they would each earn $6,000 over the three-month summer period. A fully equipped facility can be leased at a cost of $8,000 for the summer. Additional projected costs are $1,000 for insurance and $3.20 per unit for materials and supplies. Their fruit smoothies would be priced at $5 per unit.

a. What is the accounting cost function for this business?

b . What is the economic cost function for this business?

c. What is the economic breakeven number of units for this operation? (Assume a $5 price and ignore interest costs associated with the timing of lease payments.)

EXERCISE 6

Mara Ramrez is the manager of a Copy franchise in Rio Piedras, Puerto Rico. Ramrez s projects that by reducing copy charges from 5 to 4 each, Copy's $600-per-week profit contribution will increase by one-third:

a. If average variable costs are 2 per copy, calculate Copy's projected increase in volume.

b . What is Ramrez's estimate of the arc price elasticity of demand for copies?