Question

Part I

Suppose you value a special watch at $100. You purchase it for $75. On your way home from class one day, you lose the watch. The store is still selling the same watch, but the price has risen to $85. Assume that losing the watch has not altered how you value it.

Should you pay $85 to buy a second watch? Why or why not? Explain.

Part II

You are the manager of a 24-hour copy shop that is closed on Sundays. You lease a building for $2,000 per month and hire three employees who each work eight-hour shifts at a wage of $10.00 per hour. The markets for labor and office space are tight in your area. To acquire the lease and hire workers, you signed contracts requiring you to give 12 months advance notice before abandoning your lease or laying off workers (if you fail to comply, the contracts force you to fully compensate your landlord and workers for the income they otherwise would have earned over the 12-month period). Paper costs you $0.02 per sheet. You currently sell 500,000 color copies per year at a price of $0.10 per copy and 1,000,000 black-and-white copies per year at a price of $0.05 per copy. Because of your high volume, each of your two copiers has a useful life of only one year. You just received a call from an employee who informs you that your color copier just broke down. The good news is that your black-and-white copier is brand-new; the bad news is that a new color copier will cost $30,000.

Q: Should you purchase a new color copier? (Show your calculations and explain why. Assume that customers who want color copies are unwilling to substitute black-and white copies.)

Answer 1

Part 1.

If losing the watch has not altered the value of the watch, and still we value it as same even after loosing it, we are having a surplus of $15 after buying it at a price of $85. Then purchase it for $85.

Part 2

Your price of labour and lease payment square measurement are irrelevant to the present call, because the contract needs you to form these payments over following year not withstanding whether or not you acquire a replacement colour setup.

The price of setup is $30,000. If you acquire a replacement setup, you'll earn 8 cents on every copy you sell (10 cents less paper prices of 2 cents), thus your progressive revenues from getting a replacement setup square measure is ($0.08)(500,000) = $40,000.

Since progressive revenues exceed progressive prices, you ought to acquire a replacement color setup. You earn $10,000 a lot of by getting a replacement setup than by not getting it.