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ECO101_PS5 - MIDDLE EAST TECHNICAL UNIVERSITY NORTHERN...

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MIDDLE EAST TECHNICAL UNIVERSITY – NORTHERN CYPRUS CAMPUS ECO 101 (01, 02, 03) Spring 2014 PROBLEM SET 5 (Chapter 7) Part A. Problems 1. Consider a firm that uses capital and labor as inputs and sells 5.000 units of output per year at the going maket price of $10. Also assume that total labor costs to the firm are $45.000 annually. Assume further that the total capital stock of the firm is currently worth $100.000, that the return available to investors with comparable risks is 10 percent annually, and that there is no depreciation. Which ones are explicit costs? Is there any implicit cost? Is this a profitable firm? Explain briefly your answer. 2. Two former METU students worked in an investment bank at a salary of $60.000 each for 2 years after they graduated. Together they saved $50.000. After 2 years, they decided to quit their jobs and start a business designing Web sites. They used the $50.000 to buy computer equipment, desks, and chairs. For the next 2 years, they took in $40.000 in revenue each year, paid themselves $10.000 annually each, and rented an office for $18.000 per year. Prior to the investment, their $50.000 was in bonds earning interest at a rate of 10 percent. Are they now earning economic profits? Explain your answer. 3. The following information represents TP (total product), AP (average product), and MP (marginal product) of PEDESTAL INC.
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