# Expenses, Revenue and Profits

1. Calculate expenses, revenues and profits using the accounting method (assuming the business keeps operating)
2. Repeat (a) using the economic method (assuming the business keeps operating)
3. Should you continue operating the business until the end of the year? You may assume no change is going to affect the income and expense streams – i.e. there is no uncertainty.
4. Should you continue operating the business next year? You may assume no change is going to affect the income and expense streams – i.e. there is no uncertainty.
2. Explain the difference between the economic and accounting methods of measuring costs, revenues, and profits. Explain what each of these systems is useful for, and when conclusions drawn from it may be misleading.
3. Describe, in one paragraph each, the three most important, highly applicable to management, lessons you learned from this class. There is more than one right answer. This question is merely meant to make you reflect and think again about the class, what you got from it, and what you should focus on remembering and using.
4. Explain why it is customary for manufacturers to offer warranties although doing so costs money. Hint – think about uncertainty and risk.
5. You are the owner of a competitive firm. Prices of labor and capital are \$1 each. The production function is F(L,K)=L^0.25*k^0.25
1. calculate how many units of K and L you need to produce 100 units of product optimally (i.e. while minimizing costs), and what is your expenditure on inputs
2. calculate total costs as a function of the quantity produced.
3. calculate marginal costs, and find the optimal quantity to produce if market price is given by \$100.
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