Micro2Solutions

# Assume all revenues are earned at the end of the year

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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&gt;0 2nd oven: PV of MRP = 1694 / 1.1 + 1694 / 1.21= 1540 + 1400 = 2940 NPV&lt;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.

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