1. i) GianCarlo used to work as an architect for $50,000 per year but quit in or
ID: 1112120 • Letter: 1
Question
1. i) GianCarlo used to work as an architect for $50,000 per year but quit in order to start his own photography business. To invest in his photography business, he withdrew $20,000 from his savings, which paid 2% interest, and borrowed $40,000 from his brother, whom he pays 3% interest per year. Last year GianCarlo paid $10,000 for supplies and had revenues of $70,000. GianCarlo asked William the accountant and Henry the economist to calculate his photography business's annual costs.
a. William says his costs are $10,000, and Henry says his costs are $120,000.
b. William says his costs are $61,600, and Henry says his costs are $61,600.
c. William says his costs are $10,000, and Henry says his costs are $61,600.
d. William says his costs are $11,200, and Henry says his costs are $61,600.
ii) Which of the following is correct with respect to firms in a competitive market in the long-run?
a. economic profits are positive
b. price is equal to average total costs
c. price is equal average fixed costs
d. price is below average total costs
2. i) A new movie is being released that you are excited to see. The personal value you receive from seeing the movie is $20. You purchase an advanced ticket for $10. If you lose the ticket, what is the most you should be willing to pay for a new ticket if losing the ticket does not change the value received from watching the movie?
a. $20
b. $15
c. $10
d. $5
ii) If a firm in a competitive market doubles the quantity of units sold, total revenue will exactly double.
True
False
iii) If a firm chooses to produce at its efficient scale, it should choose the output level where
a. marginal cost intersects with average total cost.
b. average variable cost is minimized.
c. average fixed cost is minimized.
d. marginal cost is minimized.
Explanation / Answer
Ans:
1. i) Option D
William says his costs are $11,200, and Henry says his costs are $61,600.
Analysis
Annual cost as per William = $10,000 + ($40,000 * 3%)
= $10,000 + $1200
= $11200
Annual cost as per Henry = $10,000 + ($40,000 * 3%) + $50,000 +($20,000 * $2%)
= $10,000 + $1200 + $50,000 + $400
= $61600
ii) Option B
price is equal to average total costs
In the long run due to increase in competition a firm in competitive market will experience a decrease in price and charges a price which is equal to average total cost.
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