Managerial Economics 1: When Did Burton Cummings Graduate

Managerial Economics 1. When Burton Cummings graduated with honors from Canadian Trucking Academy his father gave him a $350,000 tractor-trailer rig

Answer all the questions below fully. APA format is required.

Assignment Questions and Instructions

Answer all the questions below fully. APA format is required. Managerial Economics 1. When Burton Cummings graduated with honors from Canadian Trucking Academy his father gave him a $350,000 tractor-trailer rig. Recently, Burton was boasting to some fellow truckers that his revenues were typically $25,000 per month, while his operating costs (fuel, maintenance, and depreciation) amounted to only $18,000 per month. Tractor-trailer rigs identical to Burton's rig rent for $15,000 per month. If Burton were driving trucks for one of the competing trucking firms, he would earn $5,000 per month. a. How much are Burton's explicit costs per month? How much are his implicit costs per month? b. What is the dollar amount of opportunity cost of resources used by Burton Cummings each month? c. Burton is proud of the fact that he is generating a net cash flow of $7,000 ($25,000 - $18,000) per month since he would be earning only $5,000 per month, if he were working for a trucking firm. What advice would you give Burton Cummings? 2. Business Week recently declared, “We have entered the Age of the Internet” and observed that when markets for goods or services gain access to Internet, more consumers and more businesses participate in the market. Use supply and demand analysis to predict the effect of e-commerce on equilibrium output and equilibrium price of products gaining a presence on the Internet. 3. Determine the effect upon equilibrium price and quantity sold if the following changes occur in a particular market: a. Consumers’ income increases and the good is normal. b. The price of a substitute good (in consumption) increases. c. The price of a substitute good (in production) increases. d. The price of a complement good (in consumption) increases. e. The price of inputs used to produce the good increases. f. Consumers expect that the price of the good will increase in the near future. g. It is widely publicized that consumption of the good is hazardous to health. h. Cost reducing technological change takes place in the industry. For each of the pair of events indicated below, perform qualitative analysis to predict the direction of change in either the equilibrium price or equilibrium quantity. Explain why the change is indeterminate. a. Both a and h conditions occur simultaneously. b. Both d and e conditions occur simultaneously. c. Both d and h conditions occur simultaneously. d. Both f and c conditions occur simultaneously. 4. This module discusses ways in which the interests of the owners of a firm and the managers who are not owners may differ. What are some of the common differences in such interests? What are the implications of these potentially differing interests on the overall competitive performance of the firm? 5. Construct a graph showing equilibrium in the market for movie tickets. Label both axes and denote the initial equilibrium price and quantity as P0 and Q0. For each of the following events, draw an appropriate new supply or demand curve for movies, and predict the impact of the event on the market price of a movie ticket and the number of tickets sold in the new equilibrium situation: a. Movie theatres double the price of soft drinks and popcorn. b. A national video rental chain cuts its rental rate by 25%. c. Cable television begins offering pay-per-view movies. d. The Screen Writers’ Guild ends a 10-month strike. e. Kodak reduces the price it charges Hollywood producers for motion picture films.

Paper For Above instruction

Question 1: Burton Cummings' Costs and Opportunity Analysis

Burton Cummings' decision to operate his own trucking rig entails considering both explicit and implicit costs. Explicit costs are direct, out-of-pocket expenses associated with operating the business. In Burton's case, his explicit costs include fuel, maintenance, and depreciation, which amount to $18,000 per month. Additionally, the rental cost for an equivalent tractor-trailer is $15,000 per month, which can be viewed as an opportunity cost if he chooses to rent rather than own the equipment. Therefore, Burton's explicit costs total $18,000 per month, as these are the directly incurred expenses. The implicit costs, meanwhile, are the opportunity costs of Burton's own resources—particularly capital invested in the tractor-trailer and his time—if he could otherwise earn $5,000 per month working for a trucking firm. His opportunity cost of resources is therefore $5,000 per month, reflecting the forgone salary he could have earned elsewhere.

Question 1b: Opportunity Cost of Resources

The total opportunity cost per month involves both the explicit costs and the implicit costs. Explicit costs are $18,000, while the implicit costs—Burton's foregone earnings from not working for another firm—are $5,000. Summing these yields a total opportunity cost of $23,000 per month. This figure represents the economic cost of Burton's decision to operate his own rig instead of working for a trucking company.

Question 1c: Business Analysis and Advice

Burton's net cash flow from his trucking operation is $7,000 per month ($25,000 revenue minus $18,000 operating costs). However, considering the implicit cost of $5,000 he forgoes by not working for a firm, his economic profit—actual profit when considering opportunity costs—is only $2,000 ($7,000 cash flow minus $5,000 opportunity cost). Despite the favorable cash flow, Burton's earnings are marginal when accounting for opportunity costs. I would advise Burton to evaluate whether the additional effort and risks involved in running his own operation justify the marginal gain. If his net economic profit is low, it might be more advantageous to work for a firm earning $5,000 per month, reducing personal risk and alleviating responsibilities associated with ownership. Alternatively, if Burton anticipates increasing revenues or reducing costs, continuing owner-operation could be more profitable in the long term.

Question 2: Impact of E-commerce on Market Equilibrium

The advent of e-commerce significantly influences supply and demand dynamics. By lowering transaction costs and expanding market access, e-commerce increases both the number of consumers and the variety of goods and services available. On the demand side, greater accessibility broadens the consumer base, leading to an increase in demand for online products, which shifts the demand curve outward/rightward. As more consumers participate, the equilibrium output of online products rises, and, depending on supply flexibility, prices may decrease due to heightened competition. The supply curve may also shift rightward if firms are able to scale up production efficiently in response to increased demand. Consequently, e-commerce typically drives up the equilibrium quantity sold while exerting downward pressure on prices in many cases, benefiting consumers with lower prices and more choices, while firms face increased competition and possibly thinner profit margins.

Question 3: Effect of Market Changes on Equilibrium

a. Increase in consumers’ income for a normal good

This results in increased demand, shifting the demand curve rightward, leading to higher equilibrium price and quantity.

b. Rise in the price of a substitute in consumption

Consumers switch to the good, increasing demand, which shifts the demand curve outward, raising both price and quantity.

c. Increase in the price of a substitute in production

The supply of the good in question decreases as its production becomes more expensive, shifting the supply curve leftward, causing higher prices and lower quantities.

d. Increase in the price of a complement in consumption

Demand for the good decreases because the complementary good is now more expensive, shifting demand leftward and reducing both price and quantity.

e. Increase in input prices used for production

Higher input costs lead to decreased supply, shifting the supply curve leftward, resulting in higher prices and reduced quantities sold.

f. Expectations of future price increase

Anticipating higher prices, consumers may buy more now, increasing current demand and raising current prices and quantities.

g. Publicized health hazards

Demand declines as consumers perceive the product as risky, shifting demand leftward, decreasing both equilibrium price and quantity.

h. Technological advances reducing costs

Improved technology reduces production costs, shifting supply rightward, lowering prices and increasing quantity sold.

Qualitative Analysis of Simultaneous Events

a. Both a and h conditions occur simultaneously

The demand increases due to rising income, while supply increases because of technological improvements. These effects tend to increase quantity sold, but price could remain stable if the shifts balance each other; the net effect on price is indeterminate.

b. Both d and e conditions occur simultaneously

The demand for the good decreases (higher substitute price), and supply decreases (higher input costs). The combined effect on quantity is ambiguous: it could increase, decrease, or stay stable depending on the magnitudes of changes. The price is likely to rise due to supply reduction dominating demand reduction.

c. Both d and h conditions occur simultaneously

The demand decreases (higher complement price), and supply increases (cost-reducing tech). Quantity effects are indeterminate without magnitude specifics; prices likely fall, but the net effect on quantity depends on which influence dominates.

d. Both f and c conditions occur simultaneously

Expectations of future price increases boost current demand, increasing current price and quantity. An increase in input prices decreases supply, raising prices, but decreasing quantity. The overall effect depends on which shift is stronger—current prices likely increase, quantities could vary.

Question 4: Owner-Manager Interest Divergence

Owners typically seek profit maximization, higher share value, and long-term sustainability. Managers, especially those not owning the firm, may prioritize personal objectives such as job security, higher salaries, or reduced workload—sometimes at the expense of owner interests. This divergence can manifest in overinvestment in perquisites, risk aversion, or short-term decision-making that prioritizes personal bonuses over long-term profitability. These conflicting interests can impair the firm’s strategic direction, reduce competitiveness, and create agency problems—where managers do not act in the best interest of owners. Effective governance mechanisms, such as performance-based incentives, transparency, and alignment of managerial and owner interests, are essential to mitigate such conflicts and improve overall firm performance.

Question 5: Market Equilibrium for Movie Tickets

In the initial scenario, the equilibrium is determined at point P0 and Q0, where the supply and demand curves intersect. When an event affects either supply or demand, this intersection shifts accordingly. For example, if movie theatres double the price of soft drinks and popcorn, the increase in accessory item prices may decrease demand for movie tickets, shifting the demand curve leftward, leading to a lower equilibrium quantity and possibly a lower or unchanged price depending on magnitude. Conversely, a significant reduction in rental rates by a chain will shift demand outward, increasing both price and quantity. Introduction of pay-per-view options by cable TV competes with theaters, likely decreasing demand and lowering ticket prices and quantities. The strike ending increases film production, boosting supply and reducing ticket prices but increasing quantities sold. Kodak's reduction in film prices makes it cheaper to produce movies, increasing supply, and lowering ticket prices with higher quantities sold. These shifts demonstrate how various events influence market equilibrium dynamics.

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