Modified True or False: State whether each statement is true or false. If the statement is false, briefly explain why it is so, and then restate it to make it true. Spreading overhead is the process of dividing total fixed costs by more units of output, which implies that average fixed cost declines as quantity declines.

Modified True or False: State whether each statement is true or false. If the statement is false, briefly explain why it is so, and then restate it to make it true. Spreading overhead is the process of dividing total fixed costs by more units of output, which implies that average fixed cost declines as quantity declines.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter3: Benefits, Costs, And Decisions

Section: Chapter Questions

Problem 5MC

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Modified True or False: State whether each statement is true or false. If the statement is false, briefly explain why it is so, and then restate it to make it true. Zero economic profit implies zero accounting profit.
Modified True or False: State whether each statement is true or false. If the statement is false, briefly explain why it is so, and then restate it to make it true. Spreading overhead is the process of dividing total fixed costs by more units of output, which implies that average fixed cost declines as quantity declines. Diminishing returns, or decreasing marginal product, imply diminishing marginal cost. At the output level where MR = MC, if the corresponding P is above AVC but below ATC, the loss-minimizing move is to shut down or stop production. A firm that is breaking even, or earning a zero level of profit, is one that is earning exactly a normal rate of return, which implies that new investors are not attracted, but current ones are not running away either. Zero economic profit implies zero accounting profit. In the long run, if price is below average total cost, then it pays to just shut down. The shapes of long-run cost curves follow directly from the assumption of a fixed…
W7 Q5 A paper published in the Harvard Business Review points out a new way to calculate economic profit that could be more appropriate for service firms and other people-intensive companies. Instead of focusing on investment and return on investment, the focus is on employee productivity, in terms of both generating revenues and reducing costs. The approach is to first determine economic profit in the conventional way, except that we ignore taxes, so that economic profit is before tax, as follows: Economic profit = Operating profit − Capital charge Assume the following information for a hotel chain that wishes to adopt the new method. The firm has $100 million in operating profit, has $1 billion in investment, and uses a cost of capital rate of 5%, so the capital charge is $50 million and the economic profit is $50 million. Relevant calculations are contained in Part 1 of the following schedule: Part 1: Economic Profit (in thousands, except cost of capital rate) Revenue…
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