PLEASE ANSWER ALL PARTS OF ALL QUESTIONS THOUROUGHLY (WILL GIVE GOOD RATING-THAN
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Question
PLEASE ANSWER ALL PARTS OF ALL QUESTIONS THOUROUGHLY (WILL GIVE GOOD RATING-THANKS)
A. Consider an entrepreneur who has decided to follow through on a business venture. He has quit his job where he was employed as a Medical Assistant earning $2,500 a month, and has decided to run this new business venture alone as the sole proprietor. He approaches a bank with his business idea and obtains a loan for the startup and purchases the equipment and machinery that he would need for the business including the purchase of a web address and design for his business, he also takes out a 2 year lease on a building and adjoining property, with paid utilities at an excellent location and contracts with suppliers to provide him with raw materials on a six month basis at discounted bulk purchase rates. His total fixed costs on a monthly basis for this venture, which includes his forgone earnings from his previous job, are $7,500.
He now needs to hire workers to operate the machines, handle orders etc. and he needs at least 5 workers to begin production. Having taking ECON 2020 while in college, he computes the total product function for his business, on a monthly basis, given the quantity of other resources he has, in the short run as follows:
Quantity of Labor (Number of workers)
Total Product (Output)
5
200
10
450
15
800
20
1100
25
1300
30
1400
1. First, assume no other information on the profitability of this venture, what is the implied “profit” expected by the entrepreneur each month? Explain
2. Obtain the marginal physical product of this business, graph the function and provide an intuitive explanation for the shape of the function.
3. Now suppose each worker hired is paid $10/hr in wages and works 150 hours each month. Obtain the monthly total variable, total fixed and total cost functions for this business if it produces at the various output levels in the table above (i.e. fill out the table below, and show all necessary work below)
Output (Q)
Total Fixed Cost
Total Variable Cost
Total Cost
200
450
800
1100
1300
1400
4. The entrepreneur knows that his business is producing in an environment of perfect competition and as a result the market determined price after his entry into the business is $37.50 for each unit of the product that he sells. Determine the firm’s monthly profit maximizing (or loss minimizing) output level , using the profit maximizing rule
5. From (4), is this firm making any excess (economic) profits in the short run? Explain. Compute the firm’s monthly profits (or losses) at the profit maximizing output level
6. What should we expect to happen in the long run in this industry as a result of the correct answers given in part (5)? Explain.
Quantity of Labor (Number of workers)
Total Product (Output)
5
200
10
450
15
800
20
1100
25
1300
30
1400
Explanation / Answer
Answer 1) implied profit expected by the entrpreneur is $2500 which is his salary that he has foregone.
Answer 2)
Quantity of Labor (Number of workers)
Total Product (Output)
5
200
10
450
15
800
20
1100
25
1300
30
1400
MARGINAL PRODUCT= change in TP/Change in Labor
The shape of Marginal product curve is INVERSE U SHAPED.
Marginal product of labor rises in the beginning and then ultimately falls as more of it is used for production.
Answer 3)
Output (Q)
Total Fixed Cost
Total Variable Cost
Total Cost
200
7500
10*150*5=7500
15000
450
7500
10*150*10=15000
22500
800
7500
10*150*15=22500
30000
1100
7500
10*150*20=30000
37500
1300
7500
10*150*25=37500
45000
1400
7500
10*150*30=45000
52500
Answer 4)Profit maximising level=1300
Answer 5) profits/ losses shown above
Answer6)In the long run firm will earn normal profits where MR=MC
Quantity of Labor (Number of workers)
Total Product (Output)
Marginal Product (output)5
200
20010
450
25015
800
35020
1100
30025
1300
20030
1400
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