Problem Set 1 Key - Econ. 221 Practice problem Set 1...

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Econ. 221 Practice problem Set 1 (Chapter 1), Key 1. Text, Chapter 1, Question 5, Problems and Applications Two students are discussing Solved Problem 1-1. Joe: “I think the key additional information you need to know in deciding whether to produce 300,000 more iPods is the amount of profit you are currently making while producing 3,000,000. Then you can compare the profit earned from selling 3,300,000 iPods with the profit earned from selling 3,000,000. This information is more important than the additional revenue and additional cost of the last 300,000 iPods produced.” Jill: “Actually, Joe, knowing how much profits change when you sell 300,000 more iPods is exactly the same as knowing the additional revenue and the additional cost.” Briefly evaluate their arguments. This means, first consider Joes’ argument. Use fundamental economic terminology and equations. In your answer, be sure to provide the economic term for additional revenue, additional cost and additional profit. Then consider Jill’s argument and determine if she is right. Answer: This is Joe’s argument. He says one needs to compare Profit(Q=3million) with Profit(Q=3.3million). In other words one needs to determine the change in profit ( profit) or marginal profit from the additional 0.3 million units. But Profit = Total Revenue – Total Cost and therefore, Profit = Total Revenue – Total Cost or Marginal Profit = Marginal Revenue – Marginal Cost which is precisely Jill’s point, since Total Revenue = Marginal Revenue and
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Problem Set 1 Key - Econ. 221 Practice problem Set 1...

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