Attempts Average: /11 5. The market for capital Aa Aa Amy makes sweaters in her
ID: 1207767 • Letter: A
Question
Attempts Average: /11 5. The market for capital Aa Aa Amy makes sweaters in her home. She started with just some knitting needles and yarn and was able to knit 45 sweaters per year. Now some local stores have expressed interest in her designs and have offered to buy her sweaters for $25 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 Quantity of Input (Looms) Quantity of Output,Q (Sweaters) VMP of Each Loom MR MP of Each Loom (Sweaters per year) 45 125 190 240 275 290 $1,250 per year 80 sweaters per year 90 sweaters per year $2,000 per year Calculate and enter the marginal product, as well as the value of the marginal product, of each loom in the previous table Suppose Amy can use looms by renting them at a rate of $1,000 per loom per year, Amy should useExplanation / Answer
Price of each sweater = $25
Following is the complete table -
Quantity of Inputs
(looms)
Quantity of
Output (Q)
MP
(Qn - Qn-1)
VMP
(Q * Price)
Rent per loom = $1,000
The optimum quantity of looms used should be such at which VMP equals the rent or VMP is greater than rent and further increase in quantity results in rent becoming greater than VMP.
The above table shows that up to use of 3 looms, VMP is greater than rent. However, adding 4th loom results in VMP becoming less than rent.
So, Amy should use three looms.
Quantity of Inputs
(looms)
Quantity of
Output (Q)
MP
(Qn - Qn-1)
VMP
(Q * Price)
0 45 - - 1 125 125-45 = 80 80*25 = 2,000 2 190 190-125 = 65 65*25 = 1,625 3 240 240-190 = 50 50*25 = 1,250 4 275 275-240 = 35 35*25 = 875 5 290 290-275 = 15 15*25 = 375Related Questions
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