Assignment Questions/ Proble ms

1. Outline and explain the rational actor paradigm. Give any two examples ofwhen it has not held.

2. Outline the advantages and disadvantages of using net present value and break even analysis as criteria for assessing a
firm’s investment decision.

3. An ice cream factory has set up shop in town. It paid $20ok for the land and

$10oK for custom machinery that cannot be relocated elsewhere. The factory can produce litres of ice cream with the
following operating schedule:

Volume (OOO’s litres) Operating cost schedule

100 $5ok

200 $15ok

300 $35ok

aoo $55ok

500 $75oK

600 $1.05M

a) Briefly explain the sunk cost fallacy.

b) What are the sunk costs for the firm?

c) Ifthe ice cream is sold for $2.50 per litre (hint: allow for OOO’s units), what is the optimum quantity the factory should
produce?

d) What is the profit or loss itwill make at the optimum quantity?

 

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