Rodriguez, Lucina

Lucina Rodriguez
DR. ESCOBEDO, ERNESTO
PMBA 6313
Week 2 Homework

4-1 Identify which of the following are extent decisions.

a. Decide whether to expand an existing product into a new region.
Discrete decision.
b. What discount should be given on products during the upcoming holiday sale?
Extent decision. You must evaluate the marginal increase in sales for each level of
discount. Is the profit generated from the price discount greater than the loss
from the discount?
c. Should the advertising budget be changed for the upcoming year?
Extent decision. If the increase in sales (revenue) is greater than the increase in
budget (MR>MC), then the budget should be increased. You should also examine
how sales would be affected if the budget is decreased.
d. Should you develop a new product for an existing product line?
Discrete decision. You must decide whether the product should be developed (yes
or no).

4-3 Children in poor neighborhoods have bleak outlooks on life and do not see much gain to
studying. A recent experiment is paying children in poor neighborhoods $100 for each “A” they
earn in a six-week grade reporting cycle. How does this affect behavior?

The amount to study to earn good grades is an extent decision. For most of these
children, the marginal costs exceeded the marginal benefits at low levels of effort.
With the cash payment, the marginal benefit rises and so they will put in more effort.

5-1 George’s T-Shirt Shop produces 5,000 custom printed T-shirts per month. George’s fixed
costs are $15,000 per month. The marginal cost per T-shirt is a constant $4. What is his break-
even price? What would be George’s break-even price if he were to sell 50% more shirts?

The break-even price is the average unit cost which equals $15,000/5,000 + $4 = $7.
If George sold 50% more, he would sell 7,500 units and the break-even price would be
$15,000/7,500 + $4 = $6.

5-2 Suppose an initial investment of $100 will return $50/year for three years (assume the $50
is received each year at the end of the year). Is this a profitable investment if the discount rate
is 20%?

Yes, the project has a positive NPV, so it is profitable

NPV = -$100 + 50/1.2 + 50/1.22 + 50/1.23
= -$100 + 41.67 + 34.72 + 28.94
= $5.33