The Caledonian Company purchased a machine three years ago for 180,000. Depreciation using a straight line basis, assuming a life of six years and with no residual value, has been recorded each year in the financial statements. The present written-down value of the equipment is 90,000 and it has a remaining life of three years. Management is considering replacing this machine with a new machine that will reduce variable operating costs. The new machine will cost 70,000 and will have an expected life of three years with no residual value. The variable operating costs are 3 per unit of output for the old machine and 2 per unit of output for the new machine. It is expected that both machines will be operated at a capacity of 20,000 units per annum. The revenues from the output of both machines will, therefore, be identical. The current disposal value of the old machine is 40,000 and it will be zero in three years' time.

REQUIREMENT

Advise the directors of The Caledonian Company as to their optimum policy in this situation. Show all calculations and comment briefly on your treatment of each item(State each item is relevant cost or not relevant cost). State all assumptions made..

012345673G00dx {20 points} Answer the following questions based on the graph above. a. 0n Bill, the consumer has $3\") of income to spend on goods K and 1'. What changed the budget constraint from 3C1 to BEE? b. Construct a graph of the consumer's demand curve for good X, being sure to illustrate two specic pricenquantit'gir combinations along the demand curve. c. What happens to demand curve for good 'r' as the budget constraint pivots from 5C1 to BEE? Support your conclusion based specically.Ir on the graph. 1. (16 points) Olive has the utility function U(X, Y) = X1/3y2/3, where X is the quantity of apples consumed, and Y is the quantity of oranges consumed. Let income be I = 90. (a) Suppose that the price of apples is Po = 2 and the price of oranges is Py = 2. What are the quantities of apples and oranges demanded when Olive maximizes her utility subject to her budget constraint? (b) Suppose that the price of apples decreases to Py = 1 and the price of oranges stays constant at Py = 2. What are the quantities of apples and oranges demanded by Olive after this price change? (c) What is the substitution effect from the price change above? Hint: what is the ex- penditure minimizing way of achieving the utility level in part (a) at the prices in part (b)? ] (d) What is the income effect from the price change above? [Hint: what is the difference between the total effect in part (b) and the substitution effect in part (c)?]