# Managerial Economics Applied Problems Chp 1 and 2

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• Published : June 18, 2012

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Chapter 1 – Applied Problem 1
§  Explicit costs are monetary costs of using market-supplied resources.

Explicit Costs| |
Cost of Products and Services| \$355,000|
Selling Expenses| \$155,000|
Interest Expense| \$45,000|
Legal Expenses| \$28,000|
Income Taxes| \$165,000|
Total Explicit Costs| \$793,000|

§  Implicit costs are non-monetary costs of using owner-supplied resources.

Implicit Costs| |
Forgone Salary| \$175,000|
Forgone Return on Investment (15%)| \$15,000|
Total Implicit Costs| \$190,000|

Total Economic Costs = \$793,000 + \$190,000  =  \$983,000

-          Total accounting profit is total revenue less explicit costs. \$970,000 - \$793,000 = \$177,000

-          Total economic profit is revenue less economic costs.         \$970,000 - \$983,000 = <\$13,000>

Prior to starting Sound Audio, the owner earned a salary of \$175,000 per year.  In year one, he realized an accounting profit of \$177,000, which is greater than his annual salary; however, the economic profit was a net loss of \$13,000.  Many business decisions are made based on accounting profits; however, we understand that opportunity costs are tangible and should be considered when contemplating alternate investments.  Notwithstanding, since many decisions are based on accounting costs, he did return a profit. Chapter 2 – Applied Problem 2

Florida Citrus Mutual, an agricultural cooperative association for citrus growers in Florida, needs to predict what will happen to the price and output of Florida oranges under the conditions below.  What are your predictions?  For each part, sketch a graph showing the appropriate demand and supply analysis.     A.     A major freeze destroys a large number of orange trees in Florida.

The major freeze destroyed a large supply of orange trees. With a decrease in supply and demand unchanged (ceteris paribus), price will increase until market...