1.3. Many corporations allow CEOs to use the firm’s corporate jet for personal travel (see the Mini-Case “Company Jets” in Chapter 7 for more details). The Internal Revenue Service (IRS) requires that the firm report personal use of its corporate jet as taxable executive income, and the Securities and Exchange Commission (SEC) requires that publicly traded cor-porations report the value of this benefit to share-holders. An important issue is the determination of the value of this benefit. The IRS values a CEO’s personal flight at or below the price of a first-class ticket. The SEC values the flight at the “incremental” cost of the flight: the additional costs to the corpora-tion of the flight. The third alternative is the market value of chartering an aircraft. Of the three methods, the first-class ticket is least expensive and the char-tered flight is most expensive.
a.What factors (such as fuel) determine the mar-ginal explicit cost to a corporation of an execu-tive’s personal flight? Does any one of the three valuation methods correctly determine the marginal explicit cost?
b.What is the marginal opportunity cost to the corporation of an executive’s personal flight?
3.3. Three firms have identical revenue and profit functions with the same general shape as those in Figure 7.3. Firm 1 is a private sector firm operated by an owner-manager who wishes to maximize profit. Firm 2 is managed by an income-maximizing manager whose pay is proportional to the firm’s revenue. Firm 3 is a government-owned firm that has been instructed to maximize the amount of employment, L ,subject to the constraint that revenue must not be negative. To increase q , L must increase. Which of these firms produces the most, which the least, and which is in the middle? Show the output level of each firm in a diagram.
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