1. Brand Name Foods, Inc. has spent $8 million developing a new line of microwaveable meals. Production engineers estimate it will cost $4 million to retrofit existing plants to produce this product line. The marketing department suggests that the present value of net profits from all future sales of meals will be $10 million. On the basis of these numbers, management is recommending dropping the project since all costs will exceed net profits.
(a) Do you agree with this recommendation? Explain.
(b) The head of the accounting department indicates that if the meals are produced and marketed, $4 million of corporate overhead expenses will be assigned to the product. Does this new information change your answer to (a)? Explain.
2. Consider the following production possibilities table and frontier for wheat and lentils. Use this information to answer the following questions.
A 0 850
B 200 800
C 450 650
D 700 350
E 950 0
(a) If society is at point B, what is the additional opportunity cost of producing 250 more units of wheat? If society is producing at point C, what is the additional opportunity cost of producing 250 more units of wheat?
(b) In this production possibilities example, evidence exists of “increasing opportunity costs. Explain what is meant by “increasing opportunity costs” and why increasing opportunity costs exist.
(c) Explain why society would not choose to produce at point G and point H in the diagram shown above.
3. When the price of a top-of-the-line luxury sedan was $85,000 there were 6,184 sold. Several years later when the price was $116,000, although the cars were basically unchanged, there were 9,462 sold. Does this mean that the demand for these sedans slopes upward to the right (i.e., that it is positively sloped in two-dimensional space)? Carefully explain.
These 3 questions belong to Business Economics. The first question is about retrofitting a production line with new production technique which is about half the cost of current production line. The second question is about opportunity cost of producing wheat and lentils in certain scenarios. The third question is about a luxury class sedan which sold more as the price increased, an upward sloping demand curve.
Total word count is 440
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