Homework: Ch 10: Organizing Production1. Devlin is a computer programmer who earned $40,000 in 2011. But on January 1, 2012 he opened a custom woodworking business. At the end of 2012, Devlin submitted the info below to his accountant. Use the question facts to calculate Devlin's opportunity cost of production and economic profit. 1. Devlin stopped renting out his cottage for $4,000 a year and used it as his woodworking shop.2. The market value of the cottage increases from $60,000 to $63,000.3. He spent $20,000 on materials, phone, utilities, etc.4. He leased machines for $11,000 a year.5. He paid $7,500 in wages.6. He used $15,000 from his savings account, which earns 4 percent a year interest.7. He borrowed $20,000 at 10 percent a year from the bank.8. He sold $160,000 worth of furniture.9. Normal profit is $35,000 a year. Opportunity Cost of Production: the sum of the cost of using resources bought in the market, resources owned by the firm, and the resources supplied by Devlin Cost of resources bought in the market: materials, phone, utilities, leased machines, wages, and interest on the loanCost of resources bought in the market = $20,000+$11,000+$7,500+$2,000 (20,000/10) = $40,500 Cost of resources owned by the firm includes forgone interest and economic depreciationCost of resources owned by the firm = $600 (10-4?) – ($63,000-$60,000) = $-2,400 Cost of resources supplied by Devlin includes wages forgone, rent forgone, and normal profit Cost of resources supplied by Devlin = $40,000 + $4,000 + $35,000 = $79,000Opportunity Cost of Production = $40,500 + $-2,400 + $79,000 = $117,100Economic Profit: total revenue minus total cost, with total cost measured as the opportunity cost of production Total cost = $117,100 Total revenue is $160,000Economic Profit = $160,000 - $117,100 = $42,9002. Stocks too volatile? Bonds too boring? Then try an alternative investment – one you can wear on your wrist… The typical return on a watch over five to ten years is roughly 10%. One could do better in an index fund, but… what other investment is so wearable?- The cost of buying a watch is _____. The opportunity cost of owning a watch is ____. The best thing you give up to buy the watch; the interest forgone on an alternative asset plus the depreciation of the watch - Owning a watch ____ create an opportunity for economic profit _____. Can; if the gain in the value of the watch is greater than the normal profit you would have earned by investing the money in the next best alternative3. Lucinda starts a business consulting company. She makes all the business decisions and bears the risk of running the business. - List expects to receive ______. Normal Profit 4. Gloria is an executive who earned $50,000 in 2011. But she enjoys photography, so at the beginning of 2012, she quit her job and became a photographer. The info below gives details of Gloria's first year in the photography business. The sum of the cost of resources owned by Gloria's firm and the resources supplied by Gloria is _____. 1. Gloria leased photographic equipment for $25,000 and paid $10,000 for supplies.2. She borrowed $20,000 at 10 percent a year.3. She withdrew $5,000 from her savings account that paid 4 percent a year.4. Economic depreciation was $1,000.5. Gloria's revenue was $70,000.6. Normal profit is $7,000.  Cost of resources owned by the firm includes economic depreciation and forgone interest = $1,000+$200 (20,000/10% then 2000/10?) = $1,200 Cost of resources supplied by Gloria includes normal profit and forgone wages = $7,000 + $57,000 = $57,0005. A firm that uses the latest technology ______ technologically efficient because ______.Technology Efficiency: the relationship between the factors of production used and the output produced, occurs when the firm produces a given output by using the least amount of inputs, only efficient if the firm can produce a given output by using the least about of inputs or if it uses more of one type of input and less of another type of input when compared to a second method Is not necessarily; the firm might not use the least amount of inputs to produce a given output6. If a firm can cut its cost by producing less, then it _____ economically efficient _______.Economic Efficiency: the firm produces a given output at the least cost, a firm is economically efficient if the output it is producing is produced at the least cost Is not necessarily; unless it is producing its output at the least cost7. The table shows alternative ways of laundering 100 shirts. - Which methods are technologically efficient? All methods- If the wage rate is $1 and the implicit rental rate of capital is $100, _____ is economically efficient.If the wage rate is $5 and the implicit rental rate of capital is $50, _____ is economically efficient.*Method A = (1x$1) +(10x$100) = $1,001*Method B = (5x1$) +(8x$100) = $805*Method C = (20x$1) +(4x$100) = $420*Method D = (50x$1) +(1x$100) = $150-----------------------------------------------------*Method A = (1x$5) +(10x$50) = $505*Method B = (5x$5) +(8x$50) = $425*Method C = (20x$5) +(4x$50) = $300*Method D = (50x$5) +(1x$50) = $300  Method D; methods C and D - If the wage rate is $50 and the implicit rental rate of capital is $5, method __ is economically efficient  A8. _____ system is a method of organizing production that uses managerial hierarchy._____ system is a method of organizing production that uses a market-like mechanism inside the firm. Command; incentive Method Labor (hours) Capital (machines)A 1 10B 5 8C 20 4D 50 19. ______ arises when there are many firms each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry.______ is a market structure in which a large number of firms compete by making similar but slightly different products. ______ is a market structure in which a small number of firms compete.______ arises when there is one firm which produces a good or service that has no close substitutes, and the firm is protected by a barrier preventing the entry of new firms.  Perfect Competition, Monopolisitc Competition, Oligopoly, Monopoly 10. The four-firm concentration ratio is the percentage of the value of _____ accounted for by the four largest firms in an industry.  Sales The Herfindahl-Hirschman Index is the _____ of the percentage market share of eachfirm summed over the largest ____ firms (or summed over all the firms if there are