Shoe-a-holic Cathy started her own line of custom made, hand embellished wedding shoes. She opened up her own shop paid $2500 in fixed licensing fee. She used about $3000 in raw materials and made $3500 . At the end of the first month, Carly, her sister
looked at her financials and told her that she was losing money and should shut down. Cathy is heartbroken. As an economics guru, what would you advise her to do?
Carly is considering $2500 in fixed costs as a part of her calculations, which is why she advises Cathy to shut down. However, fixed costs should not be a part of the decision making in this case because they are sunk and no longer avoidable by stopping production. Even if Cathy shuts down, she cannot get any of the $2500 back. On the flip side, she is actually making a profit of $500 ($3500-$3000 . and therefore should not shut down.
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In the market for automobile insurance, adverse selection implies that
A) those who are insured might take greater risks. B) those who are uninsured might take greater risks. C) insured and uninsured alike will take greater risks. D) drivers with greater risks are more likely to buy insurance.
If Happy Feet chooses to No Ad and Best Nails then chooses to Ad, Happy Feet earns ________ million in net profit and Best Nails earns ________ million.
Happy Feet wants to prevent Best Nails from entering the nail salon market. The above game tree illustrates the different strategies and corresponding payoffs for the two firms. Both Happy Feet and Best Nails have the same strategies of advertising (Ad) or not advertising (No Ad). The payoffs represent net profit in millions.
A) $1; $4 B) $5; $1 C) $4; $1 D) $2; $3
Price controls on resources generally lead to surpluses
a. True b. False Indicate whether the statement is true or false
Chris received a consumer surplus of $50 when he purchased a watch for $100 . This implies he was willing to pay _____ for the watch
a. $215 b. $150 c. $100 d. $50