1. Optimal choice of capital Sharon makes sweaters in her home. Starting with ju
ID: 1108317 • Letter: 1
Question
1. Optimal choice of capital Sharon makes sweaters in her home. Starting with just some knitting needles and yarn, she was able to knit 70 sweaters per year. Now some local stores have expressed interest in her designs and offered to buy her sweaters for $10 each. This makes it worthwhile for her to invest in some capital; in particular, she could produce many more sweaters if she invested in one or more looms, as shown in the following table. Assume that Sharon's sweater business is a perfectly competitive firm. Complete the following table by calculating the marginal physical product (MPP) of each loom and the marginal revenue product (MRP) of each loom Output Sweaters per year) 70 130 181 226 265 301 Quantity of Input (Looms) MPP of Each Loom MRP of Each Loom (Sweaters) (Dollars) If the rental price of a loom is $375 per year, Sharon should use Suppose the demand for sweaters is very elastic, while the demand for cigarettes is very inelastic. Suppose that looms are used exclusively in the production of sweaters and that tobacco is used exclusively in the production of cigarettes, Which of the following might we expect? O The supply of tobacco would be more elastic than the supply of looms. O The demand for tobacco would be more elastic than the demand for looms. O The supply of tobacco would be less elastic than the supply of looms. O The demand for tobacco would be less elastic than the demand for looms.Explanation / Answer
MPP (nth unit) = Q (n units) - Q ((n-1) units)
MRP of loom = Price x MPP
If the rental price of a loom is $375 per year, Sharon should use 4 looms. (MRP of loom > Rental price for the last loom employed)
Correct option:
The demand for tobacco would be less elastic than the demand for looms. (Option 4 is correct)
K Q MPP MRP ($) 0 70 1 130 60 600 2 181 51 510 3 226 45 450 4 265 39 390 5 301 36 360Related Questions
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