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Marginal analysis, sunk cost, choice

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1) What determines whether a resource is scarce? Why is the concept of scarcity important to the definition of economics?

2) (Marginal analysis) The owner of a pizzeria is deciding whether to increase the radius of the delivery area by one mile. What considerations must be taken into account if such a decision is to increase profitability?

**using the relationship between choice an opportunity cost for question 3-4
3) (Sunk cost and choice) Suppose you to a restaurant and buy an expensive meal. Halfway through, despite feeling quite full you decide to clean your plate. After all, you think you paid for the meal so you are going to eat ALL of it. What is wrong with this thinking?

4) (Opportunity cost) You can either spend spring break at home working for \$80 per day for 5 days or go to Florida for a week. If you stay home, your expenses for the week will be \$100 if you go to Florida total cost will be around \$700. What is your opportunity cost for going to Florida?

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Section 1:
A resource is termed to be 'scarce' if the demand for the resource exceeds the supply of the goods at zero prices. In other words, if the demand for a resource exceeds the supply at zero prices, then people will be more than willing to pay a higher price resulting in a positive market price (the point where the supply and demand curves meet). Simply put, a positive market price signals scarcity of a resource. Economics involves the study of choices made by society or an individual. Scarcity as a concept is key to economics as it ...

Solution Summary

1) What determines whether a resource is scarce? Why is the concept of scarcity important to the definition of economics?

2) (Marginal analysis) The owner of a pizzeria is deciding whether to increase the radius of the delivery area by one mile. What considerations must be taken into account if such a decision is to increase profitability?

**using the relationship between choice an opportunity cost for question 3-4
3) (Sunk cost and choice) Suppose you to a restaurant and buy an expensive meal. Halfway through, despite feeling quite full you decide to clean your plate. After all, you think you paid for the meal so you are going to eat ALL of it. What is wrong with this thinking?

4) (Opportunity cost) You can either spend spring break at home working for \$80 per day for 5 days or go to Florida for a week. If you stay home, your expenses for the week will be \$100 if you go to Florida total cost will be around \$700. What is your opportunity cost for going to Florida?

\$2.19
Similar Posting

I have 20 questions.

12 are multiple choice and 8 are true/false.

Thank you.

David

1. Determining the maturity and type of funds raised in financial markets is part of the:
A. Investment decision
B. Capital budgeting decision
C. Financing decision
D. Both A & B

2. Which of the following does not cause accounting profits measured in a period to differ from cash flow in the same period:
B. Payable liabilities
C. Prepaid expenses
D. Depreciation

3. Bonds are quoted in:
A. Real interest rates
B. Nominal interest rates
C. Annual percent rates
D. Effective annual interest rates

4. Which of the following is not a function of an underwriter:
A. Providing pricing and timing advice
B. Securing venture capital
C. Selling the stock issues to the public
D. Buying the stock issues from the company

5. Which of the following is not a disadvantage of having too much invested in working capital:
A. Current assets may be insufficient to cover short-term obligations to suppliers
B. The profitability of assets is lowered if too much cash assets are idle
C. Too generous credit terms may bring losses
D. Inventory investments are unable to earn their opportunity rate of return

6. Pro forma financial statements result from which component of the financial planning model:
A. Inputs
B. The planning model
C. Outputs
D. None of the above

7. Total cash flow from a project includes cash flows from:
A. Cash flows associated with new investment in plant and equipment
B. Cash flows associated with preexisting overhead costs
C. Neither A nor B
D. Both A & B

8. Projects that have high fixed costs usually have:
A. High variable costs
B. High cash outflows
C. High project betas
D. None of the above

9. The theory that expected real interest rates in different countries are equal is known as:
A. Interest rate parity theory
B. International Fisher effect
C. Expectations theory of forward rates
D. Law of one price

10. In a tax-free acquisition:
A. The selling shareholders are viewed as selling their shares.
B. The firm is taxed as though it had always been together.
C. The assets of the selling firm are revalued.
D. A gain or loss may be produced which affects future depreciation.

11. Which of the following is not true about Chapter 11 bankruptcy:
A. Senior creditor tend to favor liquidation
B. Junior creditors tend to favor reorganization
C. Creditor receive interest payments while the company is in bankruptcy
D. This process allows the company to continue to function as an ongoing business

12. As it relates to corporate governance, agency problems can generally be controlled by:
A. Monitoring of management
B. Contracts that relate management compensation to firm performance
C. Competition in the market for managerial employees
D. All of the above

13. T/F____ According to GAAP, assets and liabilities are usually "booked" at their book value.

14. T/F____ Cash flows occurring at different time periods are not comparable for financial decision-making.

15. T/F____ The average tax rate is the relevant tax rate for financial decision-making analysis.

16. T/F____ The actual rate of return earned on the bond investment or the realized holding period return on the bond may be higher or lower than the yield to maturity.

17. T/F____ Lower after-tax costs of debt lowers the WACC and increases the present value of stream of asset cash flows.

18. T/F____ The net present value of a project is zero when the discount rate equals the internal rate of return.

19. T/F____ Sunk costs are relevant in the analysis of a project's cash flow.

20. T/F____ Variability of returns is a measure of total risk.

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