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Session1 Problem Set

The document is a problem set assignment that contains 4 questions. It instructs students to submit their own work while being able to collaborate, and to show their steps to reach final answers. Questions ask about: 1) Whether a contract aligns incentives of a new VP and owners of a company. 2) The accounting costs, implicit costs, and total opportunity costs for a woman starting her own business based on sales projections and expenses. 3) Completing an online tutorial on costs and including a statement that it was finished. 4) Citing two other ways consumers may pay for goods with government-imposed price ceilings beyond the listed price.

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87 views1 page

Session1 Problem Set

The document is a problem set assignment that contains 4 questions. It instructs students to submit their own work while being able to collaborate, and to show their steps to reach final answers. Questions ask about: 1) Whether a contract aligns incentives of a new VP and owners of a company. 2) The accounting costs, implicit costs, and total opportunity costs for a woman starting her own business based on sales projections and expenses. 3) Completing an online tutorial on costs and including a statement that it was finished. 4) Citing two other ways consumers may pay for goods with government-imposed price ceilings beyond the listed price.

Uploaded by

Patty
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Smith

Problem Set #1
There will be an assignment for each problem set. You can find the
assignment submission pages in the Assignments area of the course.
You may collaborate with others, but please hand in your own work. In
general, show the steps necessary to reach your final answers. Work
will be graded on the basis of completeness and timeliness.
1.

The owners of a small manufacturing company have hired a


manager to run the company with the expectation that he will
buy the company after five years. Compensation of the new vice
president is a flat salary plus 75% of first $150,000 of profit, and
then 10% of profit over $150,000. Purchase price for the
company is set as 4.5 times earnings (profit), computed as
average annual profitability over the next five years. Does this
contract align the incentives of the new vice president with the
goals of the owners? Explain.

2.

Tara is considering leaving her current job, which pays $56,000


per year, to start a new company that manufactures a line of
special pens for personal digital assistants. Based on market
research, she can sell about 160,000 units during the first year at
a price of $20 per unit. With annual overhead costs and
operating expenses amounting to $3,160,000, Tara expects a
profit margin of 25 percent. This margin is 6 percent larger than
that of her largest competitor, Pens, Inc.
a. If Tara decides to embark on her new venture, what will her
accounting costs be during the first year of operation? Her
implicit costs? Her total opportunity costs (this includes implicit
and explicit costs)?
b. Suppose that Taras estimated selling price is lower than
originally projected during the first year. How much revenue
would she need to earn positive accounting profits? Positive
economic profits?

3.

Please complete the tutorial available at


http://sambaker.com/econ/, titled Total Cost, Variable Cost, and
Average Cost. Please include a statement that you completed the
tutorial.

4.

Defenders of communist economic systems may point out that


consumers pay lower prices for certain goods because the
government imposes a limit on what producers may charge. Cite
at least two other ways that consumers may be paying for
these goods under such a price ceiling.

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