Eco 524 Section 96

Week 1 Exercise Scenario

Submitted By:

Andrea Vasquez

Submitted to:

Bari Courts

ECO 524 Section 96

Spring Term II- 2015

March 15, 2015

Scenario 1

1. Which costs are relevant when deciding whether to proceed with the project?

The relevant costs when deciding whether to proceed with the project are cost of ingredient for second trial and patent protection cost.

1. Which costs are relevant when deciding how many doses of the drug to produce (assuming the drug makes it to production)?

The relevant cost when deciding how many doses of the drug to produce are new production line cost, the cost for the ingredients, packaging and distribution cost, and advertisement and promotion cost.

1. Is there any other information for which you would need to ask the company to complete your analysis?

The other information relevant to the analysis are pricing of the drug, cost of capital, and salvage value of new production line.  

Scenario 2

1. What is the marginal cost per bushel of apples produced?

Marginal cost = total cost/ total output

Example: (350-200)/(100-0) = 1.5

1. If the market price of a bushel of apples is $5.50, and is unaffected by the farmer’s production decision, then the marginal revenue of a bushel of apples is $5.50. In that case, how many bushels of apples should the farmer produce?

The farmer must produce 400 bushels as the marginal cost is less than $ 5.50, which is the marginal cost for the farmer up to 400 bushels.

1. If the government imposes a tax on the sellers that results in the sellers receiving $1 less per bushel sold, what amount of apples should the farmer choose to produce?

If the farmer receives $4.50, then the farmer should produce 300 bushels because the marginal cost is less than $4.50.

Scenario 3

1. Given this data, what can you say about where the $100,000 increase should go?

The $100,000 increase should go to internet advertising because it attracts more customers than the other modes for the same amount of money spent.