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a b c d a b c d 30 140 170 300 Homework 8 Answer Key Notes Correct answers highlighted in green explanation provided when deemed necessary Q1 Analyzing the behavior of the firm enhances our understanding of what decisions lie behind the market supply curve how consumers allocate their income to purchase scarce resources how financial institutions set interest rates whether resources are allocated fairly Q2 John has decided to start his own lawn mowing business To purchase the mowers and the trailer to transport the mowers John withdrew 1 000 from his savings account which was earning 3 interest and borrowed an additional 2 000 from the bank at an interest rate of 7 What is John s annual opportunity cost of the financial capital that has been invested in the business Explanation If John had not touched his savings he would have earned 30 in interest This amount is the opportunity cost of using his savings If John had not borrowed the 2000 from the bank he would have avoided paying 7 2000 140 in interest This amount is the opportunity cost of getting a loan Therefore the total opportunity cost of financing his business is 170 Q3 Pete owns a shoe shine business Which of the following costs would be implicit costs i shoe polish ii rent on the shoe stand iii wages Pete could earn delivering newspapers interest that Pete s money was earning before he spent his savings to set up iv the shoe shine business i and ii only iv only iii and iv only i ii iii and iv 55 000 5 000 5 000 20 000 a b c d a b c d Explanation Shoe polish and rent are explicit costs as they require an outlay of cash Foregone wages and foregone interest do not require an outlay of cash and therefore are implicit costs Q4 Jacqui decides to open her own business and earns 50 000 in accounting profit the first year When deciding to open her own business she turned down three separate job offers with annual salaries of 30 000 40 000 and 45 000 What is Jacqui s economic profit from running her own business Explanation The opportunity cost of something in this case opening a business is everything that the decision maker gives up on to get that something Here Jacqui is only giving up one job as she could not hold the three jobs simultaneously That job is the best job available which would pay her 45 000 Unlike accounting profit economic profit takes into consideration implicit opportunity costs as well as explicit costs and therefore economic profit is equal to accounting profit minus implicit costs Here economic profit is equal to 50 000 45 000 5 000 Q5 Ellie has been working for an engineering firm and earning an annual salary of 80 000 She decides to open her own engineering business Her annual expenses will include 15 000 for office rent 3 000 for equipment rental 1 000 for supplies 1 200 for utilities and a 35 000 salary for a secretary bookkeeper Ellie will cover her start up expenses by cashing in a 20 000 certificate of deposit on which she was earning annual interest of 500 Ellie s annual implicit costs will be equal to 80500 her annual accounting costs will be equal to 55200 and her annual economic costs will be equal to 135700 Explanation implicit costs are those not requiring a cash outlay In this case they include foregone wages 80 000 and foregone interest 500 for a total of 80 500 Accounting or explicit costs are those requiring a cash outlay and here they include the annual expenses for rent equipment supplies utilities and staff salary totaling 55 200 Economic costs are equal to implicit costs plus explicit costs Q6 Which of these assumptions is often realistic for a firm in the short run The firm can vary both the size of its factory and the number of workers it employs The firm can vary the size of its factory but not the number of workers it employs The firm can vary the number of workers it employs but not the size of its c factory The firm can vary neither the size of its factory nor the number of workers it employs Q7 A production function is a relationship between inputs and quantity of output revenue costs profit Q8 Fill the table below Number of Workers Total Output Marginal Product 0 1 2 3 4 5 0 30 70 120 160 190 30 40 50 40 30 Explanation this question required you to perform some reverse engineering If the marginal output of the first worker is 30 units than total production with 1 worker is 30 units If the marginal output of the second worker is40 units then she must have added 40 units to the production with 1 worker and therefore total production is 30 40 70 And so on and so forth a b d a b c d Q9 On a 100 acre farm a farmer is able to produce 3 000 bushels of wheat when he hires 2 workers He is able to produce 4 400 bushels of wheat when he hires 3 workers Which of the following possibilities is consistent with the property of diminishing marginal product The farmer is able to produce 5 600 bushels of wheat when he hires 4 a workers The farmer is able to produce 5 800 bushels of wheat when he hires 4 workers The farmer is able to produce 6 000 bushels of wheat when he hires 4 workers Any of the above could be correct Explanation for the property of diminishing marginal product to be verified the marginal product of the 4th worker must be lower than the marginal product of the 3rd worker The 3rd worker s marginal product is 4 400 3 000 1 400 The marginal product of the 4th worker is 5 600 4 400 1 200 if option A is true which is consistent with the property Note that with options B and C the marginal product of the 4th worker would be 5 800 4 400 1 400 constant marginal product and 6 000 4 400 1 600 increasing marginal product Q10 A total cost curve shows the relationship between the quantity of an input used and the total cost of production quantity of output produced and the total cost of production total cost of production and profit total cost of production and total revenue Q11 In the short run a firm incurs fixed costs only if it incurs variable costs only if it produces no output only if it produces a positive quantity of output whether it produces output or not Q12 Which of the following is the best example of a variable cost monthly wage payments for hired labor annual property tax payments for a building monthly rent payments for a warehouse annual insurance payments for a warehouse Explanation property taxes rent and warehouse insurance must be paid regardless of whether the firm produces or not and so are fixed costs b c d a …

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