Essay by   •  January 16, 2011  •  640 Words (3 Pages)  •  2,231 Views

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Chapter One

Technical Problem 2

a) Implicit Costs: Opportunity cost = \$500,000 x 14% = \$70,000

Explicit Costs: What is paid for products/services = \$80,000

Total Economic Costs: Implicit Costs + Explicit Costs = \$70,000 + \$80,000 = \$150,000

b) Economic Profit: Total Revenues Ð²Ð‚" Total Economic Cost = \$175,000 - \$150,000 = \$25,000

c) Accounting Profit: Total Revenues Ð²Ð‚" Explicit Costs = \$175,000 - \$80,000 = \$95,000

d) New Implicit Costs = \$500,000 x 20% = \$100,000

Economic Profit: \$175,000 Ð²Ð‚" (\$100,000 + \$80,000) = \$ (5,000)

Chapter Two

Technical Problem 1

Qd = 600 Ð²Ð‚" 4PA Ð²Ð‚" 0.03M Ð²Ð‚" 12PB + 15F + 6Pe + 1.5N

a) The intercept parameter: The amount of the good consumers would demand if the price was zero = 600 units

b) The slope parameter for the price of good A: - 4.

This is the correct algebraic sign because for every \$1 increase in price, quantity demanded will decrease by 4 units. Price and quantity demanded are inversely related; therefore, this is the correct algebraic sign.

c) The slope parameter for income: - 0.03.

This would mean that good A is an inferior good because for every \$1 increase in income, the consumer demanded 0.03 units less of the good. The equation displays a negative correlation between income and quantity demanded.

d) The slope parameter for the price of good B: - 12.

This slope parameter explains that goods A and B are substitutes because if there is an increase in price of good B, consumers will demand less of it, and perhaps go back to consuming good A.

e) Correct algebraic signs for F, Pe, and N? No.

F is the taste patterns of the consumers. This is not the right algebraic sign because if demand is decreasing, then consumers should have tastes that are moving away from that good (a negative algebraic sign). Pe is the price the consumer is expecting to pay next month. This is not the right sign because if the consumer has a decreasing demand for good A, then the future price should be less than what it is today, and should therefore have a negative algebraic sign. N is the number of buyers. This is also not the correct algebraic sign because demand is decreasing; therefore, there should also be a decrease in the number of consumers for that particular market (a negative algebraic sign).

f) Quantity demanded of good A when PA = \$5, M = \$25,000, PB = \$40, F = 6.5, Pe = \$5.25, and N = 2,000.

Qd = 600 Ð²Ð‚" 4(\$5) Ð²Ð‚" 0.03(\$25,000) Ð²Ð‚" 12(\$40) + 15(6.5) + 6(\$5.25) + 1.5(2,000)

= 600 Ð²Ð‚" 20 Ð²Ð‚" 750 Ð²Ð‚" 480 + 97.5 + 31.5 + 3,000

Qd = 2,479 units

Applied

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