ps06_sol

# ps06_sol - Exercise#6 Q1 Based on the following table if...

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Exercise #6

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Q1) Based on the following table, if pizzas are sold for \$10 each, the pizza shop earns a ____ of ____ when it uses 3 workers per day. No. of Workers Pizza sold Fixed Cost Var. Cost 0 0 500 0 1 25 500 200 2 75 500 350 3 150 500 450 4 200 500 600 5 205 500 800
When 3 workers are used, 150 pizzas are sold at \$10. Fixed Cost = \$500, and Variable Cost = \$450. Recall that… Profit = Total Revenue – Total Costs Total Revenue = \$10 x 150 pizzas TR = \$1500

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Total Cost = Fixed Cost + Var. Cost TC = 500 + 450 = \$950 Profit = TR – TC = \$1500 - \$950 = \$550 Therefore, the shop is making a PROFIT of \$550. (B)
Q2) If a firm is earning zero profits… A) Its revenue are sufficient to pay explicit costs, but not implicit costs. A) The owner will not be able to pay himself or herself a salary. B) It will shut down in the LR, but will continue to operate in the SR. C) The owner is earning a return on his time and investment that is equal to the opportunity costs of that time and investment. D) The firm is not making a profit-maximising output decision. Ans: D

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In economics, total cost = explicit cost + implicit cost (including opportunity cost). Profit = Total revenue – total cost. This profit concept is true for both SR and LR. Thus, (A) is false.
(E) is also not true. In economics, all agents are assumed to be rational. i.e. firms are all making profit-max decisions at all times. (C) is not true as well. Since the firm is not making a loss, there is no reason for it to cease operating in the LR. That leaves us with options (B) and (D).

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Economic Profit is not the same as Accounting Profit. In calculating Econ Profit, we look at costs of production, and these costs include opportunity costs. The cost of hiring the owner to make entrepreneurial decisions has already entered our equation (either as fixed or variable costs depending on nature).
The opportunity cost of an entrepreneur is the amount s/he can make from elsewhere, using the same amount of time and effort. (OC = highest valued option foregone) Hence, (B) is incorrect, and (D) is the right answer. This implies that the salary one is currently earning is the highest amount that s/he can earn elsewhere.

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in the number of firms, then… A) The original firms will produce more. B) The new firms will produce more than the original firms. C) The industry supply curve will shift left. D) The new firms will produce the same amount as the original firms. E)
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ps06_sol - Exercise#6 Q1 Based on the following table if...

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