Question

2. Your Aunt is thinking about opening a hardware store. She estimates that it would cost 500k per year to rent the location and buy the stock. In addition, she would have to quit her 50k/year job as an accountant.

Define Opportunity cost. What is your aunt's opportunity cost of running the hardware store for a year? If your aunt thinks she can sell 510k worth of merchandise in a year, should she open the store? Explain.

3. You are the CFO for a firm that sells digital music players. Your firm has the following average total cost schedule:

Quantity	AVG Total Cost
600 players	300 $
601 players	301$

Your current level of production is 600 devices, all of which were sold. Someone calls desperate to buy one and offers 550 for it. Should you accept the offer? Why or why not?

7. Your cousin vinnie owns a painting company with the fixed cost of 200 dollars and following schedule for variable costs:

# of houses painted per month	1	2	3	4	5	6	7
Variable Costs	$10	$20	$40	$80	$160	$320	$640

Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the painting company?

Answer 1

2) Opportunity cost: The choice of choosing one alternative over the other and leaving the benefit of that left alternative

The opportunity cost of cost aunt to run hardware store she have to loose a 50k per year job. She will not open the store if she can get only a profit of (510-500)10K per year as it is a very less amount she would make and if she keeps her job she can earn 50k per year which is five times more than what she earn from a store.

3) No I will not accept the offer as the average total cost of producing one more device is increasing which means the total cost of producing one more device is increasing.

Total cost of 600 device = 600*300 = 180000

Total cost of 601 devices = 601*301 = 180901

Cost of producing one more additional device = 180901-180000 = $901

The cost what they offer 550$ is less than what firm should need to keep for producing. So reject the offer

7)

Quantity	Variable cost(VC)	Fixed cost(FC)	Total cost(TC) = VC+FC	Average variable cost(VC/Q)	average fixed cost(FC/Q)	Average total cost(TC/Q)
1	10	200	210	10	200	210
2	20	200	220	10	100	110
3	40	200	240	13.33	66.67	80
4	80	200	280	20	50	70
5	160	200	360	32	40	72
6	320	200	520	53.33	33.33	86.66
7	640	200	840	91.43	28.57	120