Levi Straus & Co

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Q1: Levi Straus & Co. paid $46,532 for a 110-year-old pair of Levis jeans—the oldest know pair of blue jeans—by outbidding several other bidders in an eBay Internet auction. Does this situation best represent producer—producer rivalry, consumer-consumer rivalry, or producer-consumer rivalry? Explain.

A1: At first glance, the example easily demonstrates consumer-consumer rivalry. Our textbook even declares, “A good example of consumer-consumer rivalry is an auction” (Baye, 2008, p13). Various consumers vying for the same product of which there is only one can easily drive the price higher and higher.

References:

Baye, M (2008). Managerial economic and business strategy. New York, NY: McGraw-Hill/Irwin.

Q2: What is the maximum amount you would pay for an asset that generates an income of $150,000 at the end of each of five years if the opportunity cost of using funds is 9 percent?

A2: We must determine the PV of the $150,000 over the 5 years.

PV= (150000/1.09^1)+(150000/1.09^2)+(150000/1.09^3) +(150000/1.09^4)+(150000/1.09^5) = $583,447.69

Therefore, if costs exceeded $583,447.69, then the asset would not be worth the price.

Q8: Jaynet spends $20,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm—one offer was for $100,000 per year, and the other was for $90,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 20 paintings per year at a price of $10,000 each:

A8:a: What are her accounting profits?
Accounting profit = total amount taken in from sales - dollar cost of producing goods
Accounting profit = $200,000 - $20,000 = $180,000

b. What are her economic profits?
Economic profits = Total revenue – total opportunity cost
Economic profits = $200,000 – $20,000(supplies & storage) - $100,000(best job offer)
Economic profits = $80,000

Q12: Tara is considering leaving her current job, which pays $56,000...
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