6. Optimal choice of capital Rosa makes sweaters in her home. She started with j

Question

6. Optimal choice of capital Rosa makes sweaters in her home. She started with just some knitting needles and yarn and was able to knit 60 sweaters per year. Now some local stores have expressed interest in her designs and have 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. Complete the following table by calculating the marginal product (MP) of each loom and the marginal revenue product (MRP) of each loom Output Quantity of Input Looms) MP of Each Loom MRP of Each Loom (Dollars) (Sweaters per year)(Sweaters) 2 3 4 5 60 110 150 184 213 238 If the rental price of a loom is $315 per year, Rosa 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 would you expect? The demand for looms would be less elastic than the demand for tobacco The supply of looms would be more elastic than the supply of tobacco. The demand for looms would be more elastic than the demand for tobacco The supply of looms would be less elastic than the supply of tobacco

Explanation / Answer

Ans:

1) Table showing marginal product and marginal revenue product.

The profit maximizing level of output is where marginal revenue is equal to marginal cost.

2) three looms

In this case when marginal cost(price of loom per year) is $315 , Rose should use three looms.

3) The demand for looms is more elastic than the demand for tobacco.

This is because demand for sweaters produced using looms is very elastic which means the change in the demand is more than the change in the price.hence the demand for sweaters will have direct impact on demand for looms and making the demand for looms more elastic .However in case of cigarettes, demand is inelastic and therefore the demand for tobacco is less effected.

Quantity of input Output Marginal product Marginal revenue product@$10 each 0 60 60 $600 1 110 50 $500 2 150 40 $400 3 184 34 $340 4 213 29 $290 5 238 25 $250

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