1. Jane quit her job at IBM where she earned $50,000 a year. She cashed in $50,0
ID: 1254450 • Letter: 1
Question
1. Jane quit her job at IBM where she earned $50,000 a year. She cashed in $50,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, depreciation, etc.(a) Complete the following questions: (1) What are Jane’s total revenues? (2) What are Jane’s explicit costs? (3) What is her accounting profit?
(b) List two important implicit costs that Jane has not included.
(c) What is Jane’s pure economic profit (loss)?
2. The table below shows the total production of a firm as the quantity of labor employed increases. The quantities of all other resources employed are constant. Compute the marginal and average products and enter them in the table.
Marginal Average
Units Total product product
of Labor product of labor of labor
0 0 ––– –––
1 40 ______ ______
2 100 ______ ______
3 165 ______ ______
4 200 ______ ______
5 225 ______ ______
6 240 ______ ______
7 245 ______ ______
8 240 ______ ______
(a) At what levels are there increasing returns to labor and at what levels are there decreasing returns to labor?
(b) Describe the relationship between the total product and marginal product.
(c) Describe the relationship between marginal and average product.
3. You are given the following short-run information for an individual firm. Labor (L) is the only variable input. The price of labor is $200/week. Fixed costs are $100/week. Complete the rest of the table. Describe the relationship between the MP and MC. At which output level does the law of diminishing returns set in?
Total
Labor product
L Q MP TVC TFC TC MC
0 0 _____ $_____ $_____ $_____
1 20 _____ _____ _____ _____ $_____
2 55 _____ _____ _____ _____ _____
3 100 _____ _____ _____ _____ _____
4 150 _____ _____ _____ _____ _____
5 200 _____ _____ _____ _____ _____
6 230 _____ _____ _____ _____ _____
7 250 _____ _____ _____ _____ _____
8 263 _____ _____ _____ _____ _____
9 270 _____ _____ _____ _____ _____
10 275 _____ _____ _____ _____ _____
11 278 _____ _____ _____ _____ _____
12 280 _____ _____ _____ _____ _____
Explanation / Answer
Jane quit her job at IBM where she earned $50,000 a year. She cashed in $50,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, depreciation, etc. (a) Complete the following questions: (1) What are Janeís total revenues? Total revenue= Price x Quantity Price charge= $400 Quantity= 1000 Total revenue= Price x Quantity = 400 x 1000 = $400000 Total revenue= $400000 (2) What are Janeís explicit costs? Explicit costs are the direct payments made, or the direct costs that are incurred. Total Explicit costs incurred by Jane are TC= Fixed cost + Variable cost Fixed cost= cost incurred on purchase of bus= $50,000 Variable Cost= 1000 x 280= $280,000 Total Cost= $50,000 + $280,000 = $330,000 (3) What is her accounting profit? Accounting Profit= Total revenue - Total explicit costs = $400000-$330,000 = $ 70000 Accounting Profit= $ 70000 (b) List two important implicit costs that Jane has not included. Implicit costs: 1) opportunity lost to earn an annual income of $50000 working for IBM. 2) Opportunity lost in loosing income as interest on $5000, interest income= 10% of $50000 interest income= $5000 Total Implicit costs= $50,000 +$5000 Total Implicit costs= $55000 (c) What is Janeís pure economic profit (loss)? Economic profit considers all the costs, i.e both implicit and explicit costs. Total economic costs= implicit cost + explicit cost Total economic costs = $55000 +$330,000 Total economic costs = $385000 Economic profits= Total revenue - Total economic costs =$400,000 - $385,000 Economic profits= $15000
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