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Unformatted text preview: at the end of
the year. If the rate of interest is 10 percent, how many ovens will the pizza shop buy? a)
b)
c)
d)
e) none
1
2
3
Cannot be determined with given information Solution: b) 1
Net present value (NPV) = PV of MRP – Price.
PV of MRP= MRP1/ (1+r) + MRP2/ [(1+r) ^2]
1st oven: PV of MRP = 1815 / 1.1 + 1815 / 1.21= 1650 +1500= 3150 NPV>0
2nd oven: PV of MRP = 1694 / 1.1 + 1694 / 1.21= 1540 + 1400 = 2940 NPV<0 Page 24 of 33 ©Prep101 www.prep101.com/freestuff Use the following figure to answer question 39:
Wage rate
S 20
16
12
8
4 D
1 2 3 4 5 Labour Q39. Suppose the goods market is competitive and the price of a unit of output is $4.
The marginal product of the last unit of labour hired is ________. If the reservation wage
rate is $4, labourers’ economic rent is ______and opportunity cost is ______. a)
b)
c)
d)
e) 3 units of output; $12; $24
4 units of output; $12; $24
3 units of output; $24; $12
5 units of output; $36; $0
2 units of output; $0; $36 Solution: a) 3 units of output; $12; $24
In competitive equilibrium, MR=MC=P MR= $4
Profit maximizing condition requires that MRP = wage rate
MRP = MR*MP=W 4*MP = $12 MP=3 units of output
Economic rent = area above the supply of labour curve and below equilibrium wage rate
= (½)*(12  4)*3 = $12
Opportunity cost = area below the supply of labour curve = total income earned by
labourers – economic rent = 12*3 – 12 = $24 Page 25 of 33 ©Prep101 www.prep101.com/freestuff U...
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This note was uploaded on 08/26/2010 for the course ECON 208 taught by Professor Dickenson during the Fall '07 term at McGill.
 Fall '07
 Dickenson
 Microeconomics

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