Case UA Q+A 20240410
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Economics
Date
May 5, 2024
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14
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1 Answers CASE = UNDER ARMOUR INC. (UA) Version: 4/10/24
This case has you analyze the financial statements of, and disclosures made by, Under Armour (UA), especially with regard to UA’s
revenues during the period Q3:2015-Q4:2016. At the top of the ocean, you’ll need to critically appraise the motives, decisions and actions of the key players in the case. Down in the krill, you
’ll
need to take the information in the Case and other documents on Canvas plus the incomplete data in the case Excel file on Canvas, find missing P&L data from SEC.gov and then do a number of calculations, analyses and evaluations. Balance the two perspectives well, and good luck! Q0. Who is the key FSAV-oriented decision maker in the UA case? What business decision is he faced with? How could high-quality FSAV improve his decision? (1.5 pts) DM = Scott Baxter, a recent MBA from the Ivey Business School at the University of Western Ontario. It’s May 2021 and Baxter is monitoring his personal investment portfolio, part of which is long in UA. He sees the news headline “UA to Pay $9 million to Settle SEC Charges” and is surprised to see only a slight drop in UA’s share price in response
to this announcement. The business decision that Baxter faces is: What should he do with his long position in UA? Should he sell some or all of his shares? Or none? Should he buy more? Or go short? High-
quality FSAV could improve his decision by giving him a sophisticated investor’s understanding of the “what/when/why/how/who/past
-present-
future” behind the SEC’s charges against UA + settlement. A sophisticated investor will be one who understands what happened, when it happened, why it happened, how it happened, who made it happen, and what the implications are for UA’s future. A sophisticated investor will also differentiate out economic aspects from accounting aspects; within economic aspects, fundamental from capital market; within accounting aspects, recognition from disclosure. Lastly, a sophisticated investor will also appreciate the viewpoints on the “what/when/why/how/who/past
-present-
future” that an unsophisticated investor has, since the probability that the marginal investor setting UA’s stock price is sophisticated is less than one, not only now but in the future. ___________________________________________________________________________________ Q1. Who else might do FSAV on UA over the 5 years leading up to May 2021, and why? (1 pt) Here are the most likely candidates and reasons: Equity analysts What do I forecast UA’s REV, EPS etc. will be over the next Qs/Ys?
What do I forecast UA’s stock price will be over the next Qs/Ys? Individual investors like Baxter For same reasons as Baxter in Q0. Specialized/fraud researchers Is fraud going on given how fast REV are growing? Competitors (Nike, Adidas) How is UA achieving such consistently high REV growth? How big of a competitive threat is UA to us? How do we respond? UA CEO Plank + UA CFO What do I forecast UA’s REV, EPS etc. will be over the next Qs/Ys?
Hedge funds Is UA overvalued or undervalued? SEC, Justice Dept. Is there fire in UA REV smoke concerns that have been brought to us? Class-action lawyers Has UA or key individuals at UA acted illegally? Big customers of UA Why is UA asking us to push more & more REV forward? WSJ, Bloomberg, Jim Cramer Is there a story here that our readers would be interested in? Credit rating agencies Is UA creating credit risks because of its rapid REV growth strategy? Politicians like Sen. Warren Are execs abusing 10b5-1 Should there be more Govt. regulation?
2 Q2. Using the horizontal timeline below, visually depict around and connecting to the timeline the major events in the case. You may draw freehand or use software. Your timeline does
n’
t need to be linear —
so 1 cm can separate 2 events that are one week apart or one year apart. You may use abbrevs. I recommend that you use [1] arrows, [2] boxes or circles with text in them, [3] coloring them differently based on what type of event it is. NOTE: I
’
ll grade generously because I’m not looking for you to get exactly the same timeline as I do –
just some of the key events. (2 pts) FYI: I
’
ve added 2 relevant events that are not in the case. The first is the 10/15/15 announcement that CFO Brad Dickerson was leaving, and ex-Navy Top Gun fighter pilot Chip Molloy was replacing him. Maybe Brad decided to bail from UA’s hyper
-aggressive REV approach, but per the associated press release, Top Gun Molloy was eager to take on the risks. Then after the SEC REV debacle, Molloy decided to leave for “personal reasons” and was replaced by someone who, from the associated press release, sounds like “just a regular normal guy”.
“Over next decade (06
-15), UA continued →
to see strong financial performance, primarily driven by nearly 20% quarterly REV growth”
(p.2)
High competition, pessimism →
+ Sports Authority liquidates (p.2) Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
Plank 1
st
10b5-1 →
stock sales ($458 mil) First ever Q loss Oct 2019 Plank to step down from CEO on 1/1/20 Plank boasts of 20%+ Q-over-Q REV growth past 5 years
Plank 2
nd
10b5-1 →
stock sales ($138 mil) 1
st
CAL filed 1
st
CAL dismissed 1
st
CAL reopened WSJ: UA is being probed by DoJ & SEC for pulling REV forward 2020 11/4 2019 UA reveals it has a Wells Notice from SEC 7/27 2020 5/3 2021 SEC press release: UA charged with failing to disclose $408 mil of RPF + case settled for $9 mil. + no restatements UA stock hits all-time high ≈ $50 and mkt cap ≈ $50 bn UA stock falls 58% 2017 COVID + lower REV guidance + restructuring
SEC’s “Relevant Period” per Wells Notice →
6 Quarters during which SEC alleged UA [1] pulled forward $408 million of REV to help meet-or-
beat analysts’ REV estimates, but [2] materially misled investors by failing to disclose to them the impacts of the RPFs on future REV. UA IPO; 1
st
day pop = 92% 11/18 2005 Sept 1996 Plank founds UA CFO Brad Dickerson announces he’s leaving. New CFO is Chip Molloy, an ex-Navy Top Gun fighter pilot 2011 10/15 2015 CFO Chip Molloy announces he’s leaving “for personal reasons”.
David Bergman . Previously SVP + with UA since 2004. 1/31 2017
3 Q3. Right from its founding, Plank emphasized that UA achieve a high REV growth rate above all else, even more than maximizing its Net Income. Why, do you think? What might be the economic costs vs. benefits, risks vs. returns to a REV-growth-maximizing strategy? What non-economic human factors might have come into play in deciding this approach? (2 pts) The raw/simple economic answer to “Why?” = Plank thought that the strategy would maximize his wealth. The High-REV-growth-rate-above-all-else strategy would likely encompass benefits & costs such as: Economic benefits of / returns to adopting a high REV growth business strategy include: •
Increasing the probability of dominating an already existing market. •
Increasing the probability of dominating a brand-
new market via “winner
-takes-
all” strategy.
•
Domination →
market power →
increases firm’s ability to set prices and earn profits above those in perfect competition. Thus, sacrificing near-term profits for high REV growth can lead to higher profits in the long-term as compared to taking a lower REV growth approach. Economic costs of / risks to adopting a high REV growth business strategy can include: •
High REV growth strategies need more capital to implement because REV typically only comes after spending big $ out on PP&E, inventory, personnel. This creates cash flow / default risks. •
Given the above, high REV growth strategies →
higher cost of equity and debt capital to the firm. •
Increasing the probability of shareholders being completely wiped out and earning nothing. •
All in all, high REV growth →
potential for high NI but such high NI comes with high RISK. Potential human factors at play might include aspects beyond just economic wealth: •
Plank is an entrepreneur whose idea has been remarkable successful
—
whether by skill, luck or both
, we don’t know. Regardless, such success is likely to make Plank overconfident in his own abilities, including being able to keep UA’s high REV growth going a long time into the future.
•
Plank gets to hobnob and be on first-name terms with lots of famous athletes. Who no doubt face incentives to tell him what a wonderful and successful person he is (so he’ll pay them lots of $$).
•
Plank is very passionate. Fine, but high passion can lead to exaggeration and blindness. For example, on p.3 of UA’s Q3:2015 earnings call, Plank says “What I knew back then [10 years ago at UA’s IPO] and still believe today is that anything is possible because of the ever
-evolving power of sports.” O
n p.4, “We are not just clothing athletes, we are telling stories. We are tapping into the emotion that is tied to the power of sport and we are giving them an authentic way to display their passion.” Yes, but passion can and often does lead to exaggeration and blindness! •
Plank’s holdings of UA’s Class B common stock mean that he controls UA. He does not have to hear voices that disagree with him or rein in his overconfidence, not even at the Board level. ___________________________________________________________________________________ Q4. Using Excel, create a graph of the time-
series of UA’s annual REV 2000
-21, and a separate graph of UA’s quarterly REV Q1:2005
-Q4:2021. In each graph, overlay the “best fit” trendline. What aspects of REV are similar vs. dissimilar across the two graphs? (2 pts) Creating these kinds of graphs is a useful step towards seeing what’s at the top of the ocean for REV. Graphs provide a visual alternative to numbers and can reveal patterns such as seasonality. To create the two graphs, you’ll first need to have realized that there are some years and quarters in the raw UA data Excel file on Canvas that were missing data on UA’s annual and quarterly P&Ls. While there are online databases such as Capital IQ that you can access here at KFBS (see this link
),
4 in my experience, the safest place to find missing P&L data, and where Baxter would most likely go given that he’s no longer enrolled at Ivey B. School, is www.sec.gov
. There, follow these steps: > FILINGS / Company Filing Search / “Under Armour” / [+] 10
-K (annual reports) and 10-Q (quarterly reports) / View all 10-Ks and 10-s / pull_down_appropriate_10-K_or10-Q in Form description column / scroll thru until you find the correct annual or quarterly P&L / fill missing data into Excel One wrinkle is that separate Q4 data is not reported in a firm’s 10
-K. But you can calculate say Q4 REV from the full year’s REV less the sum of quarterly Q1+Q2+Q3 REV.
Once you have all the annual and quarterly REV data nailed down, it’s straightforward in Excel to create the graphs. It’s also straightforward to fit a trendline by right-clicking on (here the orange) line / Add trendline
. You can then choose from a variety of Trendline Options = Exponential / Linear / Logarithmic / Polynomial / Power / Moving Average.
For both REV series, my eyeball-test suggests that a 3
rd
-Order Polynomial provides “the best fit” trendline, as it captures the key feature that REV is increasing but at a decreasing rate
. Importantly, a linear fit is NOT the or a “best fit” because even by eyeball, neither UA’s annual nor quarterly REV is linear in time. Instead, it is non-linear. A linear fit will be mis specified in several ways, including but not limited to the differences between actual and fitted REV being autocorrelated. Also importantly, it is not just the Statistics angle that speaks to and declares that a 3
rd
-order polynomial is the best fit for UA’s REVs. Economics predicts a 3
rd
-order polynomial because the 1
st
derivative of a 3
rd
-order polynomial is a 2
nd
-order polynomial, and a 2
nd
-order polynomial nearly captures the economic reality that for UA, “REV is increasing
but at a decreasing rate”
. What’s SIMILAR
What’s DISSIMILAR
•
Rapid growth end of 2016. Then growth markedly slows down. •
Seasonality in Quarterly REV: Q4 > Q3 > Q1 > Q2 (due to many sports really taking off in the Fall) •
You see COVID nailing both quarterly and annual REV in 2020. •
More hints of REV growth having entirely flattened out / stopped as of about Q3:2016 in quarterly REV than in annual REV? •
Best Excel trendline is 3
rd
-order polynomial. $(1,000,000)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020`
2021
UA reported annual REV ($000s)
Annual REV
Poly. (Annual REV)
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
Q1:2005
Q3:2005
Q1:2006
Q3:2006
Q1:2007
Q3:2007
Q1:2008
Q3:2008
Q1:2009
Q3:2009
Q1:2010
Q3:2010
Q1:2011
Q3:2011
Q1:2012
Q3:2012
Q1:2013
Q3:2013
Q1:2014
Q3:2014
Q1:2015
Q3:2015
Q1:2016
Q3:2016
Q1:2017
Q3:2017
Q1:2018
Q3:2018
Q1:2019
Q3:2019
Q1:2020
Q3:2020
Q1:2021
Q3:2021
UA reported quarterly REV ($000s)
Quarterly Net Revenues
Poly. (Quarterly Net Revenues)
5 Q5a. The case + the SEC’s AAER use these three ambiguous phrases to describe UA’s REV growth: “quarter
-over-
quarter REV growth” (case p.2), “quarterly REV growth” (case p.2), “year
-over-
year REV growth” (SEC p.1).
Provide 3 different algebraic definitions of % REV growth D1, D2 and D3 that taken together as a set cover/span what could plausibly be meant by these ambiguous phrases, denoting REV
t-k
= $ revenue in quarter t-k. (1.5 pts)
D1. (REV
t
–
REV
t-4
) / REV
t-4
D2. (REV
t
–
REV
t-1
) / REV
t-1 D3. (
∑
REV
𝑡−𝑘
3
𝑘=0
–
∑
REV
𝑡−𝑘
7
𝑘=4
) /
∑
REV
𝑡−𝑘
7
𝑘=4
) [based on trailing 4 quarters of REV; 1
st
best] or (AREV
t
–
AREV
t-1
) / AREV
t-1
[2
nd
best], where AREV
t
{AREV
t-1
} = REV over the most recent fiscal year {the fiscal year immediately before the most recent fiscal year}. I
’
ll also accept D4 = a continuously compounded measure of quarterly or annual REV growth. ___________________________________________________________________________________ Q5b. About UA’s REV growth, p.2 of the case states that “Over the next decade, UA continued to see strong financial performance, driven by nearly 20% quarterly REV growth.” By doing your own calculations, determine if the case writer’s statement is True or
False. (1 pt) False. Assuming that at its Nov. 2005 IPO, “
the next decade
”
means the 40 quarters Q1:2006 →
Q4:2015, then my calculations show that none of D1, D2 nor D3 yields an average close to 20%. D1. (REV
t
–
REV
t-4
) / REV
t-4
= 31% D2. (REV
t
–
REV
t-1
) / REV
t-1
= 10% D3. (
∑
REV
𝑡−𝑘
3
𝑘=0
–
∑
REV
𝑡−𝑘
7
𝑘=4
) /
∑
REV
𝑡−𝑘
7
𝑘=4
) = 30% Q5c. On p.2 of the case, the case writer states “In October 2015, CEO Plank had boasted about the performance of UA on an earnings call with Wall Street investors and analysts. Plank focused on UA’s 20% quarter
-over-quarter REV growth for the past five ye
ars …” By doing your own calculations, determine if the case writer’s statement is True or False. (1 pt)
False. Assuming that as of Oct. 22, 2015 (the date of Q3:2015 earnings call per the call transcript) the "past 5 years" means the 20 quarters Q4:2010 →
Q3:2015, then my calculations indicate that none of D1, D2 nor D3 yields an average close to 20%. D1. (REV
t
–
REV
t-4
) / REV
t-4
= 30% D2. (REV
t
–
REV
t-1
) / REV
t-1
= 10% D3. (
∑
REV
𝑡−𝑘
3
𝑘=0
–
∑
REV
𝑡−𝑘
7
𝑘=4
) /
∑
REV
𝑡−𝑘
7
𝑘=4
) = 30% -30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Q1:2006
Q2: 2006
Q3:2006
Q4:2006
Q1:2007
Q2: 2007
Q3:2007
Q4:2007
Q1:2008
Q2: 2008
Q3:2008
Q4:2008
Q1:2009
Q2: 2009
Q3:2009
Q4:2009
Q1:2010
Q2: 2010
Q3:2010
Q4:2010
Q1:2011
Q2: 2011
Q3:2011
Q4:2011
Q1:2012
Q2: 2012
Q3:2012
Q4:2012
Q1:2013
Q2: 2013
Q3:2013
Q4:2013
Q1:2014
Q2: 2014
Q3:2014
Q4:2014
Q1:2015
Q2: 2015
Q3:2015
Q4: 2015
Q5b: UA Reported REV growth (40Qs Q1:2006 - Q4:2015)
D1
D2
D3
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TC MC
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E38888888
TVC
TFC
$50 $0
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33.71
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Kirk was a bright individual who was being groomed for the Controller’s position in a medium-sized manufacturing firm. After his first year as Assistant Controller, the officers of the firm were starting to include him in major company functions. For instance, today he was attending the monthly financial statement summary given at a prestigious consulting firm. During the meeting, Kirk was intrigued at how all the financial data he had been accumulating was transformed by the consultant into revealing charts and graphs.
Kirk was generally optimistic about the session and the company’s future until the consultant started talking about the new manufacturing plant the company was adding to the current location and the costs per unit of the chemically plated products it produced. At that time, Bob (the President) and John (the chemical engineer) started talking about waste treatment and disposal problems. John mentioned that the current waste facilities were not adequate to handle the…
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9- Following table presents the quarterly market share of Tasty Food Company;
Quarter
Firm's Actual Market Share
1
20
22
3
23
4
24
5
18
23
7
19
8
17
22
10
23
11
18
12
23
13
?
a) Forecast the company's market share for the 13th quarter by exponential smoothing with w=0.3.
b) Calculate the Root-Mean Square Error (RMSE) for the exponential forecast using w=0.3.
c) If the RMSE for the exponential forecast using w=0.5 is 2.91 then compare which forecasts is better
and why?
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1. Define a Special Purpose Acquisition Company (SPAC).2. Describe the 2012 legal problems of New York hedge-fund Tiger Asia Management LLC.
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Refer to the information provided in Figure 13.6 below to answer the
question(s) that follow.
Dollars
LA
286 43
20
18
16
14
13
11
9
0
MC
AVC
MR
200
300 350
Number of Baldwin High School yearbooks
D
5) Refer to Figure 13.6. The.
yearbook is $16.
6) Refer to Figure 13.6. The Memory Company's
ATC
Figure 13.6
1) Refer to Figure 13.6. The profit-maximizing level of output for the Memory
Company is
high school yearbooks.
2) Refer to Figure 13.6. The profit-maximizing price for the Memory Company's high
school yearbook is
3) Refer to Figure 13.6. The maximum profit level for the Memory Company is
level of output is 200 high
4) Refer to Figure 13.6. The Memory Company's
school yearbooks.
for the Memory Company's high school
is $800.
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Economics
The next two questions are about interacting with people during COVID. When we encounter another person these days, we would like to know how likely it is that they have COVID-19 before we get too close. While many people with COVID-19 don't know they have it, they do know how careful they tend to be (whether they avoid crowds, etc.). So this is a case of asymmetric information - they know how careful they are, and you don't. Further, assume that people who are less-careful are annoyed by people not wanting to meet them, and would like to be perceived as being more-careful. What would our model of asymmetric information tell us might happen if we have no idea how careful the person we're about to meet is being? An inefficiently high number of meetings would occur Everyone would start being extra-careful about COVID Increasingly, people would refuse to meet with anyone, whether they're actually careful or not We'd assume that everyone we meet is being careful about COVID
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Consider again Steve:
Steve collects old synthesizers. One he bought a few years back for $3000 he's decided to sell.
Over the time he owned it, Steve did $250 in repairs and renovations.
In preparing to sell the synthesizer, he's told by a source he considers 100% reliable that he could
sell it for $3250 as it currently is. If, however, he is willing to pay $400 for some additional
cosmetic repairs, he's told he could definitely get $3800 instead.
Steve
repair the synth before selling because marginal cost is
than marginal
benefit.
O should not; greater
O should; less
O should not; less
O should; greater
MacBook Air
吕口
F3
F4
F5
F6
F7
F8
2$
&
4
8
9.
R
Y
6
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EOC 18.06 (and 18.07)
Jim and Cheryl are competitors in a small town and each is trying to decide if it is worthwhile to
advertise. If both of them advertise, each will earn a profit of $10, 000. If neither of them
advertises, each will earn a profit of $20,000. If one advertises and the other doesn't, then the one
who advertises will earn a profit of $30,000 and the other will earn $14,000. What is the Nash
equilibrium in this game?
Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.
a
Neither of them should advertise.
b
Both of them should advertise.
There is no unique Nash equilibrium for this game.
d
Jim should advertise and Cheryl should not advertise.
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Company Blackmores
Analyse and discuss the key legal and regulatory, financial, operational and taxation issues relevant to
the company's international operations in the identified country. (China)
Please in detail, thank you so much I hope you have a great day
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Sainsbury's-ASDA merger blocked by the regulator (Competition and Markets Authority) (CMA)
1) What type of market or industry are both supermarkets? Justify your answer clearly.
2) Do you think the reasons for a merger between ASDA and Sainsbury mentioned in the news are justifiable?
Why did the supermarkets want to merge?
The deal would have created the UK's biggest supermarket chain, accounting for £1 in every £3 spent on groceries.
Sainsbury's and Asda had said the planned tie-up would have cut their costs, allowing them to lower prices for consumers across the UK.
Analysts also believed it was designed to help the two supermarkets counter the rise of discounters Aldi and Lidl in the increasingly competitive grocery market.
3) The CMA provides economic justifications to the merger block by regulators
in the UK. Do you think the justifications are reasonable?
Why was the CMA concerned?
But the CMA, which had previously raised concerns about the deal, said the merger would lessen…
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Lyft launched its IPO on April 1st 2019 with a share price of $72. Before the IPO, Lyft’s board of directors was likely trying to decide how to compensate CEO Logan Green to provide an incentive for him to increase the firm’s performance and share price after it went public. Let’s say the board was considering two possibilities such that they were deciding between providing one million dollars worth of shares of the firm stock at $72 per share or one million dollars worth of call options with a strike price of $72 and a maturity and vesting date one year after the IPO. To keep things simple, let’s say CEO Logan Green can choose between providing two levels of effort: regular effort or high effort. He has been exerting regular effort all along. He could switch to high effort which would be much more costly for him as he would have to work even longer hours, but the extra effort would likely result in better performance for the firm. The goal of the board’s incentive compensation is to…
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Gaborone Fried Chicken (GFC), is a Botswana based fast food restaurant chain headquartered in Gaborone and specializes in fried chicken. It is the Southern African region's second-largest restaurant chain as measured by sales. It has locations in Zimbabwe, South Africa, Lesotho, Swaziland and Namibia. GFC was founded by Ms. Foody who then roped in local and regional shareholders into the business.
Analyse country risks that GFC may encounter in the five countries other than Botswana
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and increase
XYZ company has introduced a loyalty program so that it can reduce
sales.
Select one:
a A. Bargaining power of buyers
B. Bargaining power of suppliers
O C. Production Cost
2 D. Threat of new entrants
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Utilize the following table to answer the following question:
O Q-5
O Q-3
Q
0
1
7
8
9
10
Q=4
O Q-1
2
3
4
5
6
TC
30
55
75
85
100
120
145
185.
240
310
395
MC
N/A
25
20
10
15
20
25
40
55
70
85
TVC
N/A
25
45
55
70
90
115
155
210
280
365
TFC
30
30
30
30
30
30
30
30
30
30
30
AVC
N/A
25
22.5
18.33333
17.5
18.
19.16667
22.14286
26.25
31.11111
36.5
ATC
N/A
55
Question:
Suppose that the prevailing price in the market drops to $16. What output level maximizes profit
for the firm?
37.5
28.33333
25
24
24.16667
26.42857
30
34.44444
39.5
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