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HOMEWORK 7 (20 points)THIS ASSIGNMENT IS DUE ON WEDNESDAY, NOVEMBER 18Write your answers in the spaces provided. If you need extra space, use the backs of thepages. NAME___________________________________________Total Points = 20.1. Adam Smith owns and operates a small business that provides economic consulting services. During the year he spends $55,000 on travel to clients and $5,000 on other expenses. Mr. Smith’s total revenue for the year is $100,000. Instead of working as a consultant for the year, he could teach moral philosophy at a small local college and make a salary of $50,000.a. Calculate Mr. Smith’s accounting profits. SHOW WORK.(3 points)b. Calculate Mr. Smith’s economic profits. SHOW WORK. (3 points)c. Should Mr. Smith continue working as a consultant, or should he teach moral philosophy instead? Use the information above to explain, but do so in a way thata person who is not an economist can understand. (3 points)2. The graph below shows the situation of a perfectly (purely) competitive firm:$ ATC $20 D = P $15 $12 6 10 Output (q)Assuming the firm in the diagram is producing 10 units of output:a. What price (P) is the firm charging? ___________ (fill in blank) (1 point)b. What is the average total cost (ATC)? __________ (fill in blank) (1 point)c. Are the firm’s total economic profits greater than, less than, or equal to zero? Explain how you can tell using the numerical information in the diagram. (2 points)$ ATC $20 D = P $15 $12 6 10 Output (q)d. Based on your answers above, will new firms enter this perfectly competitive industry in the long-run or will they exit? Explain briefly. (3 points)e. When the firm above arrives at long-run equilibrium, what will the price of the product be and how much output will be produced? Modify the diagram above to show long-run equilibrium. (4 points)This graph is a reproduction of the graph on the previous


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SHEPERD ECON 123 - Homework #7

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