eco204_summer_2009_practice_problem_10

eco204_summer_2009_practice_problem_10 - University of...

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Unformatted text preview: University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain ECO 204 Summer 2009 S. Ajaz Hussain Practice Problems 10 Please help improve the course by sending me an email about typos or suggestions for improvements Note: Please don't memorize these solutions in the expectation that similar questions will appear on tests and exams. Instead, try to understand how to derive the answer as you'll be tested on techniques and applications, not on memorization. Moreover, tests and exams will cover topics and techniques that may not be in these practice problems. You are urged to go over all lectures, class notes and HWs thoroughly. Question 1 (a) Consider a company with a single division. Derive an expression for the breakeven output, conducting sensitivity analysis and analyzing when the breakeven output will be positive. (b) Consider a company with two divisions. Derive an expression for the breakeven output, conducting sensitivity analysis and analyzing when the breakeven output will be positive. (c) Compare the breakeven quantity when a company has a single division versus when the company has multiple divisions. When is it easier to breakeven: when a company has a single or multiple divisions? (d) Consider a company with ten divisions. Derive an expression for the breakeven output. Question 2 Is the Prestige Telephone Company's commercial customers in a perfectly competitive market? Question 3 One of the questions in the PTC case was whether a commercial price of $1,000, with an expected 30% decrease in commercial hours would boost profits. We saw that this did not result in greater profits. (a) Suppose commercial hours are raised from $800/hr to $1,000/hr. What would the expected decrease in commercial hours have to be in order for the price increase to be profitable? 1 University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain (b) Suppose commercial hours are raised from $800/hr to $X/hr. Given an expected decrease in commercial hours of 30%, what is X in order for the price increase to be profitable? (c) Suppose commercial hours are raised from $800/hr to $1,000/hr. What would the expected decrease in commercial hours have to be in order for the price increase to eliminate losses? Question 4 From the analysis of the PTC case, can you say anything about PTC's returns to scale? Returns? 2 ...
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