ASSIGNMENT1: ENGINEERING ECONOMICS (BEE-9) MARKS: 70(15%)

INSTRUCTIONS

 SUBMIT ASSIGNMENT IN NEXT WEEK’S LECTURE (18thFeb, 2020)

 ASSIGNMENT SHOULD BE IN PRINT FORM ONLY.
 PRINT THE ASSIGNMENT (Back-to-Back) AND ANSWER ON THE SAME.

STUDENT NAME: Danyal Saqib REG.NO: 217551 SEC: BEE-9C

Q-1 Answer the Following with brief justification: (16)

The three economic criteria for choosing the best alternative are minimize input, maximize
output, and maximize the difference between output and input.

For each of the following situations, what is the appropriate economic criterion?
(a) A manufacturer of plastic drafting triangles can sell all the triangles he can produce at a fixed
price. As he increases production, his unit costs increase as a result of overtime pay and so
forth.
The manufacturer's criterion should be to maximize the difference between output and input.
He can sell all the items being produced at a fixed price, and ultimately neither the input nor
output is fixed. Hence, the aim should be to maximize the profit.

(b) An architectural and engineering firm has been awarded the contract to design a wharf for a
Petroleum company for a fixed sum of money. The engineering firm's criterion should be to
minimize the input.
The output or the result is fixed, and thus the goal should be to utilize this input most
efficiently.

(c) A book publisher is about to set the list price (retail price) on a textbook. The choice of a low
list price would mean less advertising than would be used for a higher list price. The amount of
advertising will affect the number of copies sold. The publisher's criterion should be to
maximize the difference between input and output.
The input and output are both variable. Thus, a price point should be determined such that the
number of copies sold and the price of the textbook yields the maximum profit.

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(d) At an auction of antiques, a bidder for a particular porcelain statue would be trying to
minimize the input.
The output is fixed i.e the porcelain statue. Hence the goal should be to minimize the price at
which the antique is bought.

(e) The engineering school held a raffle of an automobile with tickets selling for 50 cents each
or three for $1. When the students were selling tickets, they noted that many people had
trouble deciding whether to buy one or three tickets. This indicates the buyers' criterion was to
maximize the difference between input and output.
The price per ticket decreases if three tickets are bought for $1. However, trouble in the
decision making indicates that the goal was not to maximize output minimize the input, but to
maximize the profit.

(f) A student organization bought a soft-drink machine for use in a student area. There was
Considerable discussion over whether they should set the machine to charge 50 cents, 75 cents,
or $1 per drink. The organization recognized that the number of soft drinks sold would depend
on the price charged. Eventually the decision was made to charge 75 cents. Their criterion was
to maximize the difference between input and output.
This is because they chose the point between price and drinks sold that would yield the
maximum profit, as there is an inverse relation between price and demand (Law of Demand).

(g) In many cities, grocery stores find that their sales are much greater on days when they have
advertised their special bargains. However, the advertised special prices do not appear to
increase the total physical volume of groceries sold by a store. This leads us to conclude that
many shoppers' criterion is to minimize the input.
The output or goal desired by the shopper’s is fixed, but the shopper’s priority is ultimately to
minimize the input.

(h) A recently graduated engineer has decided to return to school in the evenings to obtain a
master's degree. He feels it should be accomplished in a manner that will allow him the
maximum amount of time for his regular day job plus time for recreation. In working for the
degree, he will minimize the input.
The time he invests in his degree is the input, and he will be seeking to minimize the input so as
to have maximum time left for his regular day job and recreation.

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Q-2 Identify the alternatives, outcomes, criteria, and process for the selection of your
college major? Did youmake the best choice for you? (08)

Alternatives:
Physics, Mathematics, Computer Science, Electrical Engineering

Outcomes:
To get a degree that results in better job prospects, job satisfaction, and further study
opportunities.

Criteria:
Maximizing the difference between output and input i.e minimize the economic and time
investment while maximizing the job prospects, satisfaction, and further study opportunities.

Process:
Gathering data from people already in the different fields, making a rubric for the costs, and the
outcomes, and listing the pros and cons of each of the major. Ultimately, the major with the
highest score was chosen.

Q-3 Venus Computer can produce 23,000 personal computers a year on its daytime shift.
The fixed manufacturing costs per year are $2 million and the total labor cost is $9,109,000. To
increase its production to 46,000 computers per year, Venus is considering adding a second
shift. The unit labor cost for the second shift would be 25% higher than the day shift, but the
total fixed manufacturing costs would increase only to $2.4 million from $2 million.
(06)
(a) Compute the unit manufacturing cost for the daytime shift.
(b) Would adding a second shift increase or decrease the unit manufacturing cost at the
plant?

(a)
(2 × 106 ) + (9,109,000)
𝑈𝑛𝑖𝑡 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = 𝑈𝑑 =
23,000
𝑈𝑑 = $483

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(b)
(2.4 × 106 ) + (9,109,000) + (9,109,000 × 1.25)
𝑈𝑑+𝑛 =
46,000

𝑈𝑑+𝑛 = $497.723

𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑈𝑛𝑖𝑡 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = 𝑈𝑑+𝑛 − 𝑈𝑑

𝑈𝑑+𝑛 − 𝑈𝑑 = 497.723 − 483 = $14.723

Thus, adding a second shift increases the unit manufacturing cost by $14.723.

Q-4 A privately owned summer camp for youngsters has the following data for a
12-weeksession: (09)

Charge per camper $120 per week

Fixed costs $48,000 per session
Variable cost per camper $80 per week
Capacity 200 campers

(a) Develop the mathematical relationships for total cost and total revenue.
(b) What is the total number of campers that will allow the camp to just break even?
(c) What is the profit or loss for the 12-week session if the camp operates at 80% capacity?

(a)
Let the number of campers be ‘n’. Then we can say:

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐶𝑡𝑜𝑡𝑎𝑙 = 48,000 + (80𝑛) × 12

𝐶𝑡𝑜𝑡𝑎𝑙 = 48,000 + 960𝑛 , 𝑛 ≤ 200

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑅𝑡𝑜𝑡𝑎𝑙 = 120𝑛 × 12

𝑅𝑡𝑜𝑡𝑎𝑙 = 1440𝑛 , 𝑛 ≤ 200

(b)

For the camp to just break even, the Revenue must equal the Cost:
48,000 + 960𝑛 = 1440𝑛
480𝑛 = 48,000
𝑛 = 100
Thus, to break even, the total number of campers should be 100.

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(c)
At 80% Capacity:
80
𝑛= × 200
100
𝑛 = 160
For n = 160, we can calculate the total revenue and the total cost:
𝐶𝑡𝑜𝑡𝑎𝑙 = 48,000 + 960𝑛
𝐶𝑡𝑜𝑡𝑎𝑙 = 48,000 + 960(160)
𝐶𝑡𝑜𝑡𝑎𝑙 = $201,600

𝑅𝑡𝑜𝑡𝑎𝑙 = 1440𝑛
𝑅𝑡𝑜𝑡𝑎𝑙 = 1440(160)
𝑅𝑡𝑜𝑡𝑎𝑙 = $230,400

As the total revenue exceeds the total cost, a profit will be made:
𝑃𝑟𝑜𝑓𝑖𝑡 = 230,400 − 201,600
𝑃𝑟𝑜𝑓𝑖𝑡 = $28,800

Q-5 A small company manufactures a certain product. Variable costs are $20 per unit and
fixed costs are $10,875. The price-demand relationship for this product is P = -0.25D + 250,
where P is the unit sales price of the product and D is the annual demand. Use the data (and
helpful hints) that follow to work out answers to parts (a)-(e).
(10)
Given: Total cost = Fixed cost + Variable cost, Revenue=Demand x Price,
Profit = Revenue - Total cost
Set up your graph with dollars on the y axis, (between 0 and $70,000) and, on the x axis,
demand D: (units produced or sold), between 0 and 1000 units.
(11)
(a) Develop the equations for total cost and total revenue.
(b) Find the breakeven quantity (in terms of profit and loss) for the product.
(c) What profit would the company obtain by maximizing its total revenue?
(d) What is the company's maximum possible profit?
(e) Neatly graph the solutions from parts (a), (b), (c), and (d).

Answer Q-5 on the next page:

Ans.5

(a)
Let the number of units manufactured be ‘n’. Then we can say:

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐶𝑡𝑜𝑡𝑎𝑙 = 10, 875 + (20𝑛)

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 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑅𝑡𝑜𝑡𝑎𝑙 = 𝑃 × 𝐷
𝑅𝑡𝑜𝑡𝑎𝑙 = (−0.25𝐷 + 250) × 𝐷
𝑅𝑡𝑜𝑡𝑎𝑙 = −0.25𝐷2 + 250𝐷

(b)
For n = D, we can equate the equations for revenue and cost:
−0.25𝑛2 + 250𝑛 = 10, 875 + (20𝑛)
0.25𝑛2 − 230𝑛 + 10,875 = 0
Solving the polynomial, we get:
𝑛 = 50, 𝑛 = 870
Thus, the breakeven point is at D = n = 50 or D = n = 870.

(c)
𝑅𝑡𝑜𝑡𝑎𝑙 = −0.25𝐷2 + 250𝐷
We can find maximum revenue by finding the maxima of the above equation i.e taking the
derivative and equating it to zero:
𝑑(𝑅𝑡𝑜𝑡𝑎𝑙 )
= −0.5𝐷 + 250
𝑑𝐷
0.5𝐷 = 250
𝐷 = 500
Thus, maximum revenue is gathered at D = 500:
𝑅𝑚𝑎𝑥 = −0.25(500)2 + 250(500)
𝑅𝑚𝑎𝑥 = $62,500
We can also find the total cost, as D = n:
𝐶𝑡𝑜𝑡𝑎𝑙 = 10, 875 + 20𝑛
𝐶𝑡𝑜𝑡𝑎𝑙 = 10, 875 + 20(500)
𝐶𝑡𝑜𝑡𝑎𝑙 = $20,875
The profit earned is hence:
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃 = 𝑅𝑡𝑜𝑡𝑎𝑙 − 𝐶𝑡𝑜𝑡𝑎𝑙
𝑃 = 62,500 − 20,875
𝑃 = $41,625

(d)
Writing the equation for the profit:
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃 = 𝑅𝑡𝑜𝑡𝑎𝑙 − 𝐶𝑡𝑜𝑡𝑎𝑙
𝑃 = (−0.25𝐷2 + 250𝐷) − (10, 875 + (20𝑛))
𝑃 = −0.25𝐷2 + 250𝐷 − 10, 875 − (20𝑛)
𝑃 = −0.25𝑛2 + 250𝑛 − 10, 875 − 20𝑛
𝑃 = −0.25𝑛2 + 230𝑛 − 10, 875

Now we can differentiate with respect to n:

𝑑𝑃
= −0.5𝑛 + 230
𝑑𝑛

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To find maxima, put derivative equal to zero:
−0.5𝑛 + 230 = 0
0.5𝑛 − 230 = 0

Solving the equation, we get:

0.5𝑛 = 230
𝑛 = 460
At this value of D, the profit is
𝑃 = −0.25(460)2 + 230(460) − 10, 875
𝑃 = $42,025

Thus, the maximum profit attainable is $42,025.

(e)

Q-6 Suppose that we are studying the market for cornflakes. Suppose further that during the
summer of 1999 the following events both occur: (1) The weather in the farm belt is
extraordinarily hot, with very little rain; and (2) A new research study is published and widely
disseminated which proves that eating cornflakes makes people healthier and adds years to
their lives.
(10)

(a) Show how the two events described above will change this market.

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(b) Can you say what will happen to the equilibrium price in this market? Please explain
your answer.
(c) Can you say what will happen to the equilibrium quantity in this market? Please
explain your answer.

Ans.6:

S1
Price S2
D1
D2

Quantity

a) Analyzing the first event, the extreme change in weather conditions will affect the yield
or production of cornflakes i.e it will decrease. As the supplied quantity decreases, the
price will rise. Analyzing the second event, the quantity demanded will increase, and in
turn the price increases.
b) Analyzing the two events, both of them lead to the price of cornflakes increasing. This
means that the market equilibrium price will rise significantly. This is because due to the
first event, production has decreased, which leads to a price hike. The second event
leads to an increase in the demand for cornflakes, which in turn will also lead to a price
hike. Thus, the overall effect is an increase in the equilibrium price.
c) The equilibrium quantity can either go up or down, depending on the shifts in the curves
of either Supply or Demand.