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# Questions For Critical Thinking 1 Essay

1569 words - 7 pages

a. Discussion Questions: 9
b. Problems: 6, 9, and spreadsheet problem (p.37)

9) How Is The Concept Of A Normal Return On Investment Related To The Distinction Between Business And Economic Profit?

The difference between the business and economic profit is that in economic profit, profit or loss is calculated by subtracting opportunity cost of the inputs used from the revenue of sales. On the other hand, accounting or business profit is the difference between the total revenue and total costs incurred to earn that revenue. Now, in business accounting normal return is the minimum profit that is required to cover the costs of inputs and all of the expenses associated with it. ...view middle of the document...

(d) The economic profit equals total revenues minus the explicit and implicit costs\$120,000 - \$106,000 = \$14,000.(e) The normal return on investment equals the implicit costs of the entrepreneur of \$25,000.

Froeb and McCann’s Chapter 3:

a. Individual problems: 3-2 and 3-3

3-2 Opportunity Cost of Renting

You currently pay \$10,000 per year in rent to a landlord for a \$100,000 house, which you are considering purchasing. You can qualify for a loan of \$80,000 at 9% if you put \$20,000 down on the house. To raise money for the down payment you would have to liquidate stock earning a 15% return. Neglect other concerns, like closing costs, capital gains, and tax consequences of owning, and determine whether it is better to rent or own.

Since this is an example of the hidden-cost fallacy I will rent instead. The interest payments on the loan are \$7,200 per year, even though owning may appear to be a good deal, you must also subtract the opportunity cost of the down payment. You give up \$3,000 in expected return each year if you sell the stock. So the cost of owning is \$10,200 per year.

3-3 Opportunity Cost of Steel

Your firm usually uses about 200 to 300 tons of steel per year. Last year, you purchased 100 tons more steel than needed (at a price of \$200 per ton). In the meantime, the price of steel jumped to \$250 per ton delivered (which means that any firm selling the steel must pay any shipping costs), and the price has since stabilized at that price. The cost of shipping steel to the nearest buyer would be \$20 per ton. In the meantime, a business next door just went bankrupt and the bank is offering a special deal where you can buy another 100 tons of steel for \$180 per ton. Assume that the interest rate is 0%. Which of the following are correct?

a. Sell your 100 tons at the going market price of \$250 and make a profit of \$30 per ton (\$50 less \$20 cost of shipping).
b. Buy the 100 tons next door at \$180 and resell at a price of \$250 less \$20 shipping, for a net profit of \$50 per ton.
c. Hold onto your 100 tons and wait until it is needed for production.
d. Buy the 100 tons next door at \$180 and hold onto it until it is needed in production

To get the right answer I will need to identify the hidden costs of transporting the steel. In that case I will say both C (Hold onto your 100 tons and wait until it is needed for production) and D (Buy the 100 tons next door at \$180 and hold onto it until it is needed in production) are correct. Answer A is incorrect because you would have to buy steel in the future for your own production needs, therefore, if you sold now and repurchased in the future would never recover the \$20 shipping cost.

Salvatore’s Chapter 3:

a. Discussion Questions: 9
b. Problems: 1(a), 7, and 9

9) How would you react to a sales manager's announcement that he or she has in place a marketing program to maximize sales? Does maximum sales equal maximum profit?...

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