Home Work Chapter 7 (Principles of Microeconomics)

Suppose Alex owns a business making quilts that generates $7,000 a month in revenue. Each month, Alex spends $1,500 on fabric and other sewing materials, and he pays his two employees a combined total of $4,000 per month (they each earn $2,000). Alex makes his quilts in a workshop he has set up in his basement. If Alex did not own the quilt business, he would work as a yoga instructor earning $2,300 per month, and he would use the basement as a TV room, an option he would value at $40 per month. a. What is Alex's accounting profit? b. What is Alex's economic profit? c. If the market for quilts is perfectly competitive, and other quilt producers face the same costs as Alex, then what would you expect to happen to both the number of firms making quilts and the equilibrium price of quilts in the long run. Briefly explain.

a. $1500 b. $-840 c. You would expect firms to exit the industry. This would lead the equilibrium quantity of quilts to fall and the equilibrium price to rise

Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram: Use the following values for the graph above: A--12.00 B--11.50 C--10.50 D--7.50 E--6.00 F--2 G--6 H--18 I--48 Calculate the following at the equilibrium price of $10.50. a. The weekly consumer surplus at the market equilibrium price. b. The weekly producer surplus at the market equilibrium price. c. The maximum weekly amount that producers and consumers in Lincoln would be willing to pay to be able to buy and sell used DVDs in any given week (total economic surplus).

a. $4.50 b. $13.50 c. $18

Jaime owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: Labor --- $2,000 Food and drink --- 500 Electricity --- 100 Vehicle lease --- 150 Rent --- 500 Interest on loan for equipment --- 1,000 a. Calculate Jaime's annual accounting profit. b. Suppose Jaime could earn $1,000 per year as a recycler of aluminum cans, but she prefers to run the café. In fact, she would be willing to pay up to $275 per year to run the café rather than to recycle. Is the café making an economic profit? Should Jaime stay in the cafe business? c. Suppose the café's revenues and expenses remain the same, but recyclers' earnings rise to $1,100 per year. Is the café making an economic profit? Should Jaime stay in the café business? d. Suppose Jaime had not had gotten a $10,000 loan at an annual interest rate of 10 percent to buy equipment, but instead had invested $10,000 of her own money in equipment. Calculate Jaime's annual accounting profit. e. As in part b, suppose Jaime could earn $1,000 per year as a recycler and she has to pay $1,000 per year in interest on her loan, but, unlike part b, suppose Jaime likes recycling just as well as running the café. How much additional revenue would the café have to collect each year to earn a normal profit?

a. $750 b. (yes), the café is making an economic (profit) of ($25) per year. Yes, she should stay in the cafe business. c. (no), the café is making an economic (loss) of ($-75 per year. No, she should not stay in the café business. d. 1750 e.250

Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram. Use the following values for the graph above: A--16.00 B--15.00 C--14.00 D--11.00 E--8.00 F--4 G--8 H--20 I--64 Suppose a coalition of students from Lincoln High School succeeds in persuading the local government to impose a price ceiling of $11.00 on used DVDs, on the grounds that local suppliers are taking advantage of teenagers by charging exorbitant prices. a. Calculate the weekly shortage of used DVDs that will result from this policy. b. Calculate the new consumer surplus, the new producer surplus, and the total economic surplus lost every week as a result of the price ceiling.

a. 16 b. The new consumer surplus is $18 per week. The new producer surplus is $6 per week. The total economic surplus lost is $8 per week.

The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal ability at a salary of $90,000 a year. The firms that employ designers of normal ability each collect $500,000 in revenue a year, which is just enough to ensure that each earns exactly a normal profit. However, the 200th company employs Janus, an unusually talented designer. Because of Janus's talent, this company collects $800,000 in revenue a year. a. How much will Janus earn? What proportion of her annual salary will be economic rent? b. Will the advertising company for which Janus works be able to earn an economic profit?

a. 390,000 78 b. Yes, because the company earns far more than other companies.

Unskilled workers in a poor cotton-growing region must choose between working in a factory for $6,000 a year and being a tenant cotton farmer. One farmer can work a 120-acre farm, which rents for $10,000 a year. Such farms yield $20,000 worth of cotton each year. The total nonlabor cost of producing and marketing the cotton is $4,000 a year. A local politician whose motto is "Working people come first" has promised that if she is elected, her administration will fund a fertilizer, irrigation, and marketing scheme that will triple cotton yields on tenant farms at no charge to tenant farmers. a. If the market price of cotton would be unaffected by this policy and no new jobs would be created in the cotton-growing industry, how would the project affect the profits of tenant farmers in the short run? In the long run? b. Who would reap the benefit of the scheme in the long run? How much would they gain each year?

a. 40000, 0 b. (Landowners) would gain ($40000) per plot each year due to (higher rent for land)

State whether the following statements are true or false. a. The economic maxim "There's no cash on the table" means that there are never any unexploited economic opportunities. b. Firms in competitive environments make no accounting profit when the market is in long-run equilibrium. c. Firms that can introduce cost-saving innovations can make an economic profit in the short run.

a. False b. False c. True

If a firm is earning zero economic profit, then its accounting profit will

be positive.

Suppose farmers in a given market can either grow soybeans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. As a result of the increase in the price of corn, farmers who were already growing corn will earn an

economic profit in the short run.

Explicit costs

measure the payments made to the firm's factors of production.

The role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the ______ function of price.

rationing

Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid $1,000 in monthly rent for office space, $200 in monthly rent for equipment, $3,000 to your workers in wages for the month, and $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was −$200, then it must be true that

your implicit costs are $1,000 per month.