f07 ec51 ps2

f07 ec51 ps2 - Economics 51D 3 September 2007 PROBLEM SET 2...

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Economics 51D 3 September 2007 PROBLEM SET 2 1. Suppose you fly hot air balloons for a hobby and you decide to quit your job in order to start a business selling luxury hot air balloon rides for birthdays, weddings and so on. You hire this kind of weird, cranky guy named Carl to drive the chase vehicle that picks you up. Business is good in the first year and you sell $255,000 worth of balloon rides. Assume first that you lease the balloon for $40,000 per year, you pay Carl $35,000 per year, and your chase vehicle is a Hummer that you pay $22,000 per year to lease and operate. You also buy $38,000 worth of advertising and propane. Business Balloonist magazine (trade journal for these ventures) reports that the average luxury balloon ride business turns a $33,000 annual profit. A. If the job you quit was a bank manager making $85,000 per year, calculate your accounting profit and your economic profit from this business. B. Now assume that you borrow money and buy a hot air balloon instead of leasing it. The balloon costs $170,000, which you finance from the bank at a super-low 6% rate of interest. You could have invested the money in another business opportunity you had, a cotton candy concession on the Bryan Center Plaza, which would have earned a 9% return. You know that after a year of flying the balloon, you can sell it on the used market for about $135,000. Calculate your accounting and economic profits in this case. C. Carl tells you one day that he hired on as your chase vehicle driver because he was tired of being a corporate lawyer. He was earning $160,000 per year when he quit. How does Carl’s information affect your economic profit? 1
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2. Suppose a law firm specializing in torts hires Litigators and Paralegals in order to produce successful lawsuits. Litigators make motions and arguments, while Paralegals do the research that supplies Litigators with information. There are several different combinations of Litigators
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This note was uploaded on 03/31/2009 for the course ECON 5161 taught by Professor Fullenkampf during the Fall '07 term at Duke.

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f07 ec51 ps2 - Economics 51D 3 September 2007 PROBLEM SET 2...

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