The sheet will solve for the indifference point. Express cost scenarios in equation form with a common variable and solve for indifference point The sheet permits what-if scenarios. Enter a new quantity to calculate the cost of each option at that quantity of usage. The sheet will highlight the higher cost option in red in this case Option A is higher at the usage of units or megabytes. You are taking your children to the zoo. What common variable will allow you to calculate an indifference point? How would you find the indifference point between two cost options with a common variable? Set the two equations equal to one another and solve for the breakeven level of the common variable.
The common variable is cost per ounce Activity Step 3: Express cost scenarios in equation form with a common variable and solve — Ratio This simple example will help to identify the point of indifference in purchase price between two alternatives: The common variable is cost per ounce. What is the expression for cost per ounce for the two-liter bottle? Express cost scenarios in equation form with a common variable and solve — Ratio Students will have this version of the slide with the blanks.
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This will give them a chance to think about the cost expression before seeing it. Express cost scenarios in equation form with a common variable and solve — Ratio The cost of the two-liter bottle is the unknown. Therefore, the cost expression is: Express cost scenarios in equation form with a common variable and solve — Ratio Set the two cost expressions equal to one another and solve.
The instructor is encouraged to solve by hand on the board or overhead. VGs step through the solution. Express cost scenarios in equation form with a common variable and solve — Ratio Perform the simple math operations first. Express cost scenarios in equation form with a common variable and solve — Ratio Multiply both sides of the equation by Express cost scenarios in equation form with a common variable and solve — Ratio Perform the simple math calculation.
Indifference curve - Wikipedia
Two-Liter Cost of 6-pack is known so Cost per oz. Express cost scenarios in equation form with a common variable and solve — Ratio The blue line represents the cost per ounce for the six-pack. The red line represents the cost per ounce of the two-liter. As the price of the two-liter bottle increases, the cost per ounce also increases. What other factors might be considered? Express cost scenarios in equation form with a common variable and solve — Ratio Open the 9. You will enter data into the first table on the sheet. As with all the other spreadsheets, you will enter data into the white cells.
Enter the cost of the items which are known into the spaces under option A. Enter what is known about the two-liter bottle under option B. In this case that would be the number of ounces The spreadsheet returns the solution 2. It is also possible, if quantity is unknown, to enter the cost and solve for the quantity that yields an equal cost per unit ounce, in this case. The sheet will automatically solve for whichever item is unknown and left blank. It is important to remember whether you are solving for an unknown cost in which case the solution should be denominated in dollars or an unknown quantity, in which case the solution should be denominated in in units.
When solving for an indifference point, what two questions should you ask yourself first? What is the common variable? And What are the known quantities? Assumes probabilities and dollar value of outcomes are known or can be estimated Activity Step 4: Express cost scenarios in equation form with a common variable — Uncertainty Review of Expected Value from Lesson 7. One has a known expected value Example: Express cost scenarios in equation form with a common variable — Uncertainty If probability is unknown, it is possible to solve for breakeven probability. It is important to look for what IS known and what relationships exist.
Essentially we will be comparing two alternatives. The other has two possible outcomes with an unknown probability. Express cost scenarios in equation form with a common variable — Uncertainty Solving for breakeven probability demonstration problem. This is a guaranteed cost.
Calculate Point Of Indifference Between Two Different Cost Scenarios
We can choose to not subscribe to the backup service. If we do not subscribe, there are two possible outcomes: We do not know the probability of the hard drive failing. What is the outcome or dollar value? Express cost scenarios in equation form with a common variable — Uncertainty The students will have this blank version of the slide. What are the outcomes and dollar values?
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Express cost scenarios in equation form with a common variable — Uncertainty Students will have the blank version of this slide. Express cost scenarios in equation form with a common variable — Uncertainty The cost expression for not subscribing to the backup service has several parts. First, define the outcomes and their dollar values: Express cost scenarios in equation form with a common variable — Uncertainty Perform simple math calculations. Express cost scenarios in equation form with a common variable — Uncertainty The x axis represents the unknown probability of hard drive failure.
As probability increases, the expected value of not subscribing to the backup service increases. Meaning its cost increases.
The blue line represents the Expected value of the subscription. The red line represents the expected value of no subscription. Since the probabilities of the two options are unknown, the line represents the varying expected value as probability of hard drive failure increases.
The point where the two are equal, or the two lines intersect, represented by the red star, is the point of indifference.
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Note, however, that this is just an expected value or cost. Other factors to consider would be the value of peace of mind.
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Also, the chance that, even after paying for hard drive recovery, that some data might be lost. What about the cost of recreating the data? What is the breakeven probability? Which value is represented by a horizontal line on the graph of breakeven probability? What is the equation for expected value? The expected value where both the probabilities and cash flows are known is represented by a horizontal line. Games with continuous payoffs. The Cournot game In all the games discussed so far, firms had a discrete set of choices high — medium — low, enter — not.
My presentations Profile Feedback Log out. If the company operated at that level of volume, the alternative used would not matter because income would be the same either way. There may be two methods or two alternatives of doing a thing, say two methods of production. It is also possible at a particular level of activity; one production method is superior to another, and vice versa. There is a need to know at which level of production, it will be desirable to shift from one production method to another production method. This level or point is known as cost indifference point and at this point total cost of two production methods is same.
Alternatively, we may calculate the indifference point by setting up an equation where each side represents total cost under one of the alternatives. Because selling price is the same under both of these alternatives, profits will be the same when total costs are the same. At unit volumes below the indifference point, the alternative with the lower fixed cost gives higher profits; at volumes above the indifference point, the alternative with the higher fixed cost is more profitable.
Assume the following details about two methods of production, A and B for the new product: The indifference point will be 18, units, calculated as follows, Q indicates unit Volume. At volumes below 18, units, production A gives lower total costs and higher profits ; above 18, units, production B gives higher profits. The company gains Rs 3 per unit in reduced variable costs by increasing fixed costs Rs 55,