Homework Ch 10 Organizing Production 1 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 loan Cost 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 depreciation Cost 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 79 000 Opportunity Cost of Production 40 500 2 400 79 000 117 100 Economic Profit total revenue minus total cost with total cost measured as the opportunity cost of production Total cost 117 100 Total revenue is 160 000 Economic Profit 160 000 117 100 42 900 2 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 alternative 3 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 57 000 5 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 output 6 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 cost Method Labor hours A 1 B C D 5 20 50 table shows alternative ways of laundering 100 shirts Capital machines 10 7 T h e 8 4 1 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 A 8 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 9 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 each firm summed over the largest firms or summed over all the firms if there are fewer than in a market square 50 50 11 No retailer has more cachet among gamers than GameStop For now only Wal Mart has a larger market share 21 3 last year GameStop s share was 21 1 last year and may well overtake Wal Mart this year But if new women games prefer shopping at Target to GameStop Wal Mart and Target might erode GameStop s market share According to the news clip …