Question

Individual Problems 5-1

George's T-Shirt Shop produces 8,000 custom-printed T-shirts per month. George's fixed costs are $24,000 per month. The marginal cost per T-shirt is a constant $9.

George's break-even price is _______ per shirt.

Suppose George sells 50% more T-shirts per month.

At this quantity of shirts, George's break-even price is _______ per shirt.

Individual Problems 5-2

Suppose an initial investment of $80 will return $30/year for three years (assume the $30 is received each year at the end of the year).

At a discount rate of 25%, this investment ________ profitable.

Individual Problems 5-3

Perhaps the most important kind of capital is human capital. For example, most lawyers spend years learning to practice law. Lawyers are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work. Suppose the government nationalizes the market for legal services, resulting in lower compensation for lawyers. Assume lawyers cannot easily move to other countries.

True or False: The investment in human capital for lawyers is subject to post-investment hold-up.

True

False

Individual Problems 5-5

Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $2.50 million in a plastic injection molding machine (which can be sold for $2 million immediately) and $200,000 in plastic injection molds specifically for the toy (not valuable to anyone else). The cost of labor and materials necessary to make each truck runs about $4. This year, a competitor has developed a similar toy, significantly reducing demand for the toy truck. Now, the original manufacturer is deciding whether it should continue production of the toy truck.

If the estimated demand is 100,000 trucks, the break-even price is _______ per truck.

Answer 1

Answer:

1]

Break even price is that level of price where the firm makes zero profit.

Here fixed cost per unit tshirt = 24,000/8,000=$3

Variable cost per shirt=$9

Hence break even price per shirt = $3 + $9 = $12

Now if George sells 50% more tshirt then total shirt sold = 8000+0.5*8000 = 12000

Now fixed cost per shirt=24,000/12000=$2

Breakeven price per shirt will be = $2 + $9 = $11

George's break-even price is $12 per shirt.

At this quantity of shirts, George's break-even price is $11 per shirt.

2]

The present value of the return is 30/1.25+30/1.25^2+30/1.25^3 = 24 + 19.2 + 15.36 = 58.56 < 80

SInce the present value for the return is less than the initial investment, the investment is not profitable.

3]

The investment in human capital for lawyers is subject to post-investment hold-up.

Answer: True

4]

The total cost of the truck is

TC = 2500000 + 200000 + 4Q

The total revenue is

TR = PQ

Therefore, total profit is

TR = PQ – 2700000 – 4Q

For break even point total profit must be zero

PQ – 2700000 – 4Q = 0

P = 2700000 – 4Q / Q

Assuming Q = 100000

P = 2700000 – 4(100000) / 100000 = 26

the break-even price is $26 per truck.