Essay on Questions for Critical Thinking 1

1553 Words Apr 22nd, 2013 7 Pages
a. Discussion Questions: 9 b. Problems: 6, 9, and spreadsheet problem (p.37)

9) How Is The Concept Of A Normal Return On Investment Related To The Distinction Between Business And Economic Profit?

The difference between the business and economic profit is that in economic profit, profit or loss is calculated by subtracting opportunity cost of the inputs used from the revenue of sales. On the other hand, accounting or business profit is the difference between the total revenue and total costs incurred to earn that revenue. Now, in business accounting normal return is the minimum profit that is required to cover the costs of inputs and all of the expenses associated with it. It can be a profit just greater than the breakeven
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Froeb and McCann’s Chapter 3:

a. Individual problems: 3-2 and 3-3

3-2 Opportunity Cost of Renting

You currently pay $10,000 per year in rent to a landlord for a $100,000 house, which you are considering purchasing. You can qualify for a loan of $80,000 at 9% if you put $20,000 down on the house. To raise money for the down payment you would have to liquidate stock earning a 15% return. Neglect other concerns, like closing costs, capital gains, and tax consequences of owning, and determine whether it is better to rent or own.

Since this is an example of the hidden-cost fallacy I will rent instead. The interest payments on the loan are $7,200 per year, even though owning may appear to be a good deal, you must also subtract the opportunity cost of the down payment. You give up $3,000 in expected return each year if you sell the stock. So the cost of owning is $10,200 per year.

3-3 Opportunity Cost of Steel

Your firm usually uses about 200 to 300 tons of steel per year. Last year, you purchased 100 tons more steel than needed (at a price of $200 per ton). In the meantime, the price of steel jumped to $250 per ton delivered (which means that any firm selling the steel must pay any shipping costs), and the price has since stabilized at that price. The