Econ 528: Managerial Economics Final Exam Study Guide (Spring2020) - University of Louisiana at Lafayette

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1. Three graduate business students are considering operating a tofu burger stand in the Dalles, Oregon, windsurfing resort area during their summer break. This is an alternative to summer employment ... with a local fruit cannery where they would earn $7,500 each 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 $2,000 for insurance, and 25¢ per unit for materials and supplies. Their tofu burgers would be priced at $1.50 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 $1.50 price and ignore interest costs associated with the timing of the lease payments.) ANS: A. The accounting cost function is: Total Accounting Cost = TCA = Fixed leasing plus insurance costs + Variable materials plus supplies costs = $8,000 + $2,000 + $0.25Q = $10,000 + $0.25Q B. The economic cost function is: Total Economic Cost = Summer employment opportunity cost + TCA = 3(7,500) + $10,000 + $0.25Q = $32,500 + $0.25Q C. The economic breakeven point is reached when: Q = 26,000 units 2. Two graduate business students are considering opening a full-service car wash in Greenville, North Carolina, after graduation. This is an alternative to employment with a local manufacturing firm where they would each earn $70,000 per year. A fully equipped facility can be leased at a cost of $35,000 for the year. Additional projected costs are $15,000 for overhead, and $5 per automobile for materials and supplies. Full detail automobile cleaning would be priced at $25. 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 $25 price and ignore interest costs associated with the timing of the lease payments.) 3. ANS: A. The accounting cost function is: Total Accounting Cost = TCA = Fixed leasing plus overhead costs + Variable materials plus supplies costs = $35,000 + $15,000 + $5Q = $50,000 + $5Q B. The economic cost function is: Total Economic Cost = Employment opportunity cost + TCA = 2($70,000) + $50,000 + $5Q = $190,000 + $5Q C. The economic breakeven point is reached when: Q ......................................................................................CONTINUED [Show More]

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