4. Donald makes and sells carved wooden ducks in a perfectly competitive market
ID: 1126311 • Letter: 4
Question
4. Donald makes and sells carved wooden ducks in a perfectly competitive market Donald's production and input cost information follows. Donald buys wood from Lowes at $5/pound, his wood requirements are shown in the table. He hires labor at S1S hour to shape the wood into a duck, his labor requirements are shown in the table. Donald then finishes off the duck by painting it, his painting requirements are shown in the table. For any of the time Donald isn't painting ducks he can work at Walt's Art Store where he earns an hourly wage of $50/hour. Donald rents a shed from Christopher George Realty at $1100month. The lease does not allow sub-letting. Donald also uses his own fine artisan tool kit, which he could rent out for S1000/month to his artist friend Nigel, if be wasn't using the kit himself. His tools do not depreciate. His equipment only lets him make ducks in batches of 100. The table shows information for a typical month. Pounds Hours of Hours of Ducks orWood Labor Donald 100 20 60 120 200 300 420 15 300 400 500 30 10 75 12 10sExplanation / Answer
In perfect competition profit is maximised where price is radial to marginal cost or greater than and closest to marginal cost.
It happens with 300 ducks with MC= 32.35. profit maximising level of output is 300 ducks.
c) accounting profit= p*q - Total cost
= 35*300 - 8580 = 19200
Economic profit takes opportunity cost into account as well. Opportunity cost here is the 50 per wage he can earn if he does not paint. Painting hours required for 300 ducks are 120. So opportunity cost of producing 300 ducks is 300*50= 15000.
Economic profit= accounting profit- opportunity cost
= 19200 - 15000= 4200
d) now when price is 22, he produces 200 ducks. 60 hours are needed to paint 200 ducks .Opportunity cost= 200*50= 10000.
Economic profit= 22*200 - 5345 - 10000= -10945
It is incurring negative economic profit.
e) since it is incurring negative economic profit, it should sublet and earn 1100. This saves him loss and get him earn 1100.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.