Bob and Jane decide to open their own business selling ergonomically correct office furniture that J Show more Bob and Jane decide to open their own business selling ergonomically correct office furniture that Jane has designed. Assume they operate this business from leased office space near their home. Also assume that they lease their computer equipment and data base software. The actual production of the furniture is subcontracted to various commercial factories as customer orders arrive and the unassembled kits are shipped via UPS to clients throughout the U.S. Their target market is small businesses including those run out of home offices. They have so much faith in the potential of Janes designs that they quit corporate jobs in marketing and MIS administration (which jointly had earned them $250000 per year) and sink $500000 (.5 million) of their own funds into this venture at the start of their first year to place advertising in trade journals and on the internet. (Assume this $500000 had previously been invested in a diversified portfolio that had been averaging a 10% annual before tax rate of return.) At the end of the year they calculated that they had the following costs and revenues. Total Revenues: $5.0 million Costs: Payments to furniture subcontractors $3.5 million Shipping Costs .1 million Lease Payments on Office Space and Computer Equipment &Software $ .1 million Overhead Expenses: Insurance utilities etc. $ .1 million Advertising on Internet & Magazines (Purchased at start of year) $ .5 million Additional Sales Expenses (phones business travel $ .2 million Entertaining clients etc.) Total Listed Costs = $4.5 million a) Is Bob & Janes economic profit different from their accounting profit? If so how much economic profit did they earn during this first year of operation? b) What were Bob & Janes fixed costs during their first year of operation? 3) DETROIT Heres a million-dollar question: How does the global economy connect American car buyers and Russian bureaucrats? One person who can answer is Reg Modlin an emissions specialist at DaimlerChrysler AGs U.S. unit. Mr. Modlin like many other auto-industry executives worldwide has spent the past several weeks fretting about the soaring price of an obscure grayish metal called palladium. Many people havent even heard of it but for anyone who wants to make a cleaner car or sport-utility vehicle the precious metal is a must-have. Too bad the main source of the stuff is Russia. The Price of an Ounce Last month concerns that political infighting in Moscow might choke future supplies drove the price of palladium to nearly $1000 an ounce. Although there is less than an ounce of palladium in most vehicles it is used inside the catalytic converter that kind of price surge means palladium suddenly is becoming a big-ticket item for auto companies. Car makers brought much of this on themselves. In the mid-1990s they agreed to accelerate their adoption of tighter national emission standards as part of a deal to head off separate state-by-state rules which would have played havoc with manufacturing and distribution. Palladium looked like the best solution since it began cleaning exhaust sooner after starting up than platinum then the dominant metal in catalytic converters. Plus the price for little-used palladium hadnt gone above $200 a ounce in more than a decade while platinum had jumped above $400. Following this decision palladium prices jumped in the late 90s but remained below $400 an ounce until this year.However many automakers are projected to have a big increase in palladium consumption in 2000 as they began to roll out models to meet the tighter national emission rules as regulators turn their focus to explosively popular trucks and SUVs which have been subject to more-lenient rules. Palladium turns out to be particularly good at cleaning their exhaust. Although there is now a huge effort under way at many companies to find ways to use less palladium changing car designs in that way will take several years. a) Draw a supply demand diagram of the market for palladium which illustrates the price jump from $400 to $1000 per ounce that occurred between the 1999 model year and the start of the 2000 model year. Label your axes clearly and label all supply and demand lines in your diagram. Explain any shift in any supply or demand line that you included in your diagram. (Read the quote carefully for reasons behind the S or D shifts) b)Based on information in the above article is the demand for palladium elastic or inelastic? Explain your answer. i.e. What about palladium and its use in automobile manufacturing creates its high or its low elasticity of demand ? 4) Assume that the downward sloping line in the graph on the next page represents the amount of money that a typical snowboarder /skiier visiting Mount Mogul ski resort on a typical day would be willing to pay for successive lift trips up the mountain if lift trips were charged by the individual ride and all day passes were not available. (see below). a) Why does the typical skiers WTP (willingness to pay) schedule slope downward ? b) Suppose all skiers at Mount Mogul had the same WTP schedule as this skier and the resort operator charged $5 per ride up the lift. What is the elasticity of demand at this price? Show your calculations! c) Is $5/lift ride the per ride price which maximizes revenue? Explain using the elasticity concept in your answer. d) show (or clearly describe) the area on the graph that would correspond to consumers surplus earned by the typical boarder/skiier with this payment scheme. Explain your answer briefly. e) If the ski-resort owner eliminates the possibility of buying single ride lift tickets and instead sells only an all-day lift pass entitling the skier/boarder to as many trips up the mountain as desired what is the maximum price that could be charged without discouraging the skier from coming to Mount Mogul. ? See the graph below Show less

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