1.

The Company has two territories--North and South. The territories have the following revenues and expenses:

North                    South

Sales                                                                          $ 500,000         $ 550,000
Variable costs                                                          200,000    275,000
Traceable fixed costs                                           150,000    180,000
Allocated common corporate costs           135,000        170,000  
Net operating income (loss)                        $    15,000 $ (75,000 )

The management time is thinking about eliminating of the South Division due to its apparent unprofitability. If the South Division were to be eliminated, its traceable fixed costs could be avoided. Total common corporate costs, however, would be unaffected by this decision. Given this information, the elimination of the South Division would result in an overall company net operating income (or loss) of:

2.

The Company makes 40,000 servo motors to be used in the production of its hand held drills. The average cost per motor at this level of activity is:

Direct materials                                               $ 5.60
Direct labor                                                        $ 5.50
Variable manufacturing overhead        $ 4.75
Fixed manufacturing overhead              $ 4.45

An outside supplier recently began producing a comparable motor that could be used in the drill. The price offered to Company for this motor is $18. If Company decides not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. Direct labor is a variable cost in this company. The annual financial advantage (or disadvantage) for the company as a result of making the motors rather than buying them from the outside supplier would be:

3. ABC Company produced and sells portable window ABC units. ABC Repair has the annual capacity to manufacture and sell 80,000 ABCs, but is currently only manufacturing and selling 60,000 units. The following data relates to the company's annual operations (at 60,000 units):

                                                                                   Per Unit
Selling price                                                           $ 125
Manufacturing costs:
          Variable                                                          $ 25
          Fixed                                                                $ 40
Selling and administrative costs:
          Variable                                                          $ 10
          Fixed                                                                $ 15

The area would like to purchase 3,000 ABC units from ABC Repair but only if they can get them for $75 each. Variable selling and administrative costs on this special order will drop down to $2 per unit. This special order will not affect the 60,000 regular sales and it will not affect the total fixed costs. The annual financial advantage (or disadvantage) for the company as a result of accepting this special order from area should be:

1. Consider the labor supply and labor demand functions below, where w is the hourly wage and h is the hours worked per day.

Labor supply: w=5+2.5´h

Labor demand: w=26-0.5´h

1. Compute the daily profit of the firm assuming that other factors of production are all costless. Show all the steps. Also, draw the labor supply and labor demand lines, and identify the economic profit area. (15 points)

2. What if labor demand is less elastic; e.g., labor demand: w=26-h? Would daily profit increase? Show all the steps. (15 points)

2. An economy consists of two regions, the North and the South. The short-run elasticity of labor demand in each region is –0.75. Labor supply is perfectly inelastic within both regions. The labor market is initially in an economy-wide equilibrium, with 400,000 people employed in the North and 200,000 in the South at a wage of $10 per hour. Suddenly, 5,000 people immigrate from abroad and initially settle in the South. They possess the same skills as the native residents and also supply their labor inelastically.

1. What will be the effect of this immigration on wages in each of the regions in the short run before any migration between the North and the South occurs? Illustrate the changes using labor demand and labor supply graphs. (15 points)

2. Suppose 1,000 native-born persons per year migrate from the South to the North in response to every dollar differential in the hourly wage between the two regions. What will be the ratio of wages in the two regions after the first year native labor responds to the entry of the immigrants? (10 points)

3. Consider the following production function: Y=0.075´E^0.75´K^0.25 for a developing country, where Y is the output, E is labor input and K is capital input. Instead of thinking of immigration from a developing to a developed country, suppose a developed country invests large amounts of capital (foreign direct investment, or FDI) in our developing country.

1. How does an increase in FDI affect labor productivity in the developing country? How will wages respond in the short-run? (15 points)

2. What are the long-run implications of FDI, especially in terms of potential future immigration from the developing country? (10 points)

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