Questions for Critical Thinking 4
Salvatore Chapter 8:
a. Discussion Questions: 2 : (a)What is the distinction between marginal cost and incremental cost? (b) How are sunk costs treated in manageria decision making? Why?
b. Problems: 3, Airway Express has an evening flight from Los Angeles to New York with an average of 80 passengers and a return flight next afternoon with an average of 50 passengers. The plane makes no other trip. The charge for the plan remainin in New York overnight is $1,200 and would be zero in Los Angeles. The aireline is contemplating eliminating the night flight out of Los Angeles and replacing it with a moring flight. The estimated number of passengers is 70 in the morning flight and 50 in the return afternoon flight. The one-way ticket for any flight is $200. The operating cost of the plane for each flight is $11,000. The fixed cost for the plane are $3,000. Per day whether it flies or not. (a) Should the airline replace its night flight from Los Angeles with morning flight? (b) Should the airline remain in business?
c. Problem 4, Electric utility companies usually operate their mostmodern and efficient equipment continuously (i.e. around the clock) and use their older and less efficient equipment only to meet periods of peak electricity demand. (a) What does this imply for the short-run marginal cost of these firms? (b) Why do these firms replace all their older equipment with new equipment in the long run.
d. Problem 12(a) and (b), With respect to the given data of Problem 11. (a) find the pbblisher’s breakeven output and the output that would lead to toal profit of $60,000 if, as a result of a technological breakthrough in printing, the publisher was able to lower its TFC to $40,000. (b) Find the publisher’s breakeven output and the output that would lead to a total profit of $60,000 if total fixed osts remained at $100,000 but average variable costs declined to $10.
Total fixed costs:
Selling and promotion
Total fixed costs:
Average variable costs:
Printing and binding
Average variable costs
Project selling price