Mng Eco wrk set 1 -------- Gail Thompson is evaluating two options. The first op
ID: 1159201 • Letter: M
Question
Mng Eco wrk set 1
-------- Gail Thompson is evaluating two options. The first option is to start an event planning business as a self-employed. Based on business plan, she computed the following annual estimates using very conservative assumptions: - Total revenue = $250,000 - Purchases = $145,000 - Utility costs = $37,000 Gail will operate the business by herself. She does not plan to hire any employees in the first year. She will operate the business from a building that she owns. The building has been paid in full. The second option is to work for an event planning company as an employee. Her annual salary would be $44,000. She could also rent her building for $24,000 per year. Using the concepts of accounting profit and economic profit, compare and contrast the two options. (15 points) Which option is the most profitable for Gail Thompson? (10 points)
------ Bon Appétit is a French restaurant that recently increased the average price of its meals by 4%. As a result, the number of customers dropped by 3%. Based on this information, what is the price elasticity of demand for meals at Bon Appétit? How will this 4% increase of the average price of meals impact total revenue at Bon Appétit? (10 points) Another French restaurant in the area that competes with Bon Appétit decided to reduce the average price of its meals by 3%. How will this decision likely impact the demand for meals at Bon Appétit? (5 points) Assume that the average disposable income in the area in which it operates increases by 5% over the last year. As a result, the number of customers at Bon Appétit increased by 3%. Based on this information, what is the income elasticity of demand for meals at Bon Appétit? Are meals at Bon Appétit considered normal goods? (10 points)
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Explanation / Answer
Ans
A Here revenue =250000
Purchase =145000
Utility cost =37000
Profit= revenue-cost=250000-145000-37000=68000
Second option
Accounting profit=44000
But she could also earn 24000 from rent so economic profit=44000+24000=68000
So according to Accounting sense she should prefer A because it results in greater accounting profit of 68000 than B. But according to economics both of these options are equally good because both lead to economic profit of 68000
2 price elasticity=proportionate change in demand/proportionate change in price=3/4=0.75.Total revenue rises because prices increases proportionately more than fall in consumption.
Income elasticity =proportionate change in quantity /proportionate change in income =3/5=0.6
Since income elasticity is positive meals are normal goods here.