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Questions for Critical Thinking 1

Questions for Critical Thinking 1

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Published by: chilltime on Dec 22, 2011
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05/09/2015

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Questions for Critical Thinking 1Chapter 1Discussion Questions:4. What might be the objective of a museum? Of a firm? What are the basic steps in alltypes of decision-making process?The objective of a museum might be to maximize the number of visitors or thesize of its artwork collection, subject to its physical and financial limitations or constraints. On the other hand, a firm might seek to maximize profits subject to theresource, legal, environmental and other constraints it faces. While the goals andconstraints of a museum and a firm differ, the decision-making process is basically thesame. That is, both seek to maximize an objective in the face of some constraints, in thesame general way and by utilizing the same general techniques.9. How is concept of a normal return on investment related to the distinction between business and economic profit?The normal return on investment is included as part of profit by businessmen andaccountants but as part of costs by economists. Thus, business profit minus the normalreturn on investment or implicit costs equals economic profit. It is economic profit that isimportant in allocating society’s scarce resources among competing uses.11. What is the difference between unethical and unlawful behavior? What does an ethicsofficer do?Unethical business behavior is behavior that the firm does not allow its personnelto engage in, even though such behavior may not be unlawful. Unlawful behavior, on theother hand, is behavior that is not allowed by law and which would be punished under thelegal system if engaged in. Thus, ethics is a source of guidance beyond enforceable law.Being based on values, however, it is often not clear what ethical behavior is and what itis not since different people may have different values. An ethic officer helps to draw-upthe company’s ethical code and is responsible for seeing it enforced.
 
Problems:4. A firm is contemplating an advertising campaign that promises to yield $120 one year from $100 spent now. Explain why the firm should or should not undertake theadvertising campaign.At r = 15%, 120 = $104.351.15At r = 20%, 120 = $100.001.20At r = 25%, 120 = $96.001.25At r=20%, the firm is indifferent between undertaking the advertising campaign or not because the present value of the return equals the cost. The firm should undertake thecampaign if its rate of discount (r) is lower than 20%, and it should not if its rate odiscount is higher than 20%.6. Determine which of the two investment projects of Problem 5 the manager shouldchoose if the discount rate of the firm is 20 percent.Project 1PV = $100,000 + $100,000 + $100,000 + $100,000120 (1.20)
2
(1.20)
3
(1.20)
4
 = $258,873.45Project 2PV = $249,413.26Thus, with a discount rate of 20%, the firm should choose project 1.9. A women managing a photocopying establishment for $25,000 per year decides toopen her own duplicating place. Her revenue during the first year of operation is
 
$120,000, and her expenses are as follows:Salaries to hired help$45,000Supplies 15,000Rent 10,000Utilities 1,000Interest on bank loan 10,000(a) The explicit costs are $81,000.(b) The implicit costs are equal to $25,000.(c) The business profit equals total revenue minus the explicit costs$120,000 - $8l, 000 = $39,000.(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.Chapter 2

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