Question Set 77-Solution

Solution

(i) Dave decides to quit his job at Sloppy Copies, sacrificing yearly earnings of $8,500 in order to open Java Lava, an espresso bar.
His costs are:
Top Quality Coffee Beans

$10,000

Depreciation of espresso machines and grinders

$2,000

Sugar, Milk, cream, biscuits, cups

$8,000

Rent, Utilities, and insurance

$25,000

Salaries

$9,000

Interest on loans

$6,000

His annual revenues will be: $80,000
a. What will be his accounting profits/losses?
b. What will be his economic profits/losses?

(ii) Suppose that a firm has a monopoly on a good with the following demand schedule:

Price

Quantity

$10

0

$9

1

$8

2

$7

3

$6

4

$5

5

$4

6

$3

7

$2

8

$1

9

$0

10

a. Draw the demand and the Marginal revenue curves (you must find the total revenue first).
b. What price and quantity will the monopolist produce at if the marginal cost is a constant $4?

(iii) Felicia Alverez, a bakery manager, faces the total product curve, which gives the relationship between the number of bakers she hires each day and the number of loaves of bread she produces, assuming all other factors of production are given.

Number of Bakers per day

Loaves of bread per day

0

0

1

400

2

700

3

900

4

1025

5

1100

6

1150

Assume the bakers in the area receive a wage of $100 per day and that the price of bread is $1 per loaf.
a. Graph the bakery’s marginal revenue product curve.
b. Graph the bakery’s marginal factor (labor) cost curve on the same graph.
c. How many bakers will Ms. Alvarez employ per day?
d. Suppose the price of bread rises to $1.20 per loaf. How will this affect the marginal revenue product curve for bakers? Graph the new curve.

(iv)At an hourly wage of $10 per hour, Marcia Fanning is willing to work 36 hours per week. Between $30 and $40 per hour, she is willing to work 40 hours per week. At $50 per hour, she is willing to work 35 hours per week.

a. Assuming her labor supply curve is linear between the data points mentioned, draw Ms. Fanning’s labor supply curve.

b. Given her labor supply curve, how much could she earn per week at the wage of $10 per hour? $30 per hour? $40 per hour? $50 per hour?

c. Does the substitution effect, income effect or neither dominate wages between $10 and $30 per hour? Between $30 and $40 per hour? Between $40 and $50 per hour?

(v) Suppose a firm faces the following total product schedule for labor:

Number of Workers

Output per day

0

0

1

92

2

176

3

252

4

320

5

380

6

432

7

476

8

512

9

540

10

560

Compute the schedules for the firm’s marginal product and marginal revenue product curves, assuming the price of the good the firm produces is $2 and that the firm operates in a perfectly competitive product market.

(vi) Suppose that Germany and the United States are both fully employed and can produce the following amounts of wine and beer per week. Use this information to answer the following questions.

Wine
(gallons)

Beer
(gallons)

Germany

600

1200

United States

400

1600

a. Germany has a comparative advantage in the production of _______________, whereas the United States has a comparative advantage in the production of __________.

b. What is the cost of wine in terms of beer in Germany? What is the cost of wine in terms of beer in the United States?

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