110_11s_SelectedQ_Ch10

110_11s_SelectedQ_Ch10 - Econ 110 Selected Questions From...

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Econ 110 Selected Questions From Chapter 10 - ORGANIZING PRODUCTION 1. One year ago, Jack and Jill set up a vinegar-bottling firm (called JJVB). Use the following information to calculate JJVB’s opportunity cost of production during its first year of operation: Jack and Jill put $50,000 of their own money into the firm. They bought equipment for $30,000. They hired one employee to help them for an annual wage of $20,000. Jack gave up his previous job, at which he earned $30,000, and spent all his time working for JJVB. Jill kept her old job, which paid $30 an hour, but gave up 10 hours of leisure each week (for 50 weeks) to work for JJVB. JJVB bought $10,000 of goods and services from other firms. The market value of the equipment at the end of the year was $28,000. Jack and Jill have a $100,000 home loan on which they pay an interest rate of 6 percent a year. The wages paid, $20,000, and the goods and services bought from other firms, $10,000, are opportunity costs to JJVB. Other opportunity cost include the interest forgone on the $50,000 put into the firm, which could have been used to pay part of the mortgage, so the interest forgone is $3,000; the $30,000 income forgone by Jack not working at his previous job; $15,000, which is the value of 500 hours of Jill’s leisure (10 hours a week for 50 weeks); and the economic depreciation of $2,000 ($30,000 minus $28,000). JJVB’s total opportunity cost is the sum of all these opportunity costs and is $80,000. 2. Joe runs a shoeshine stand at the airport. With no skills and no job experience, Joe has no alternative employment. Other shoeshine stand operators that Joe knows earn $10,000 a year. Joe pays the airport $2,000 a year for the space he uses, and his total revenue from shining shoes is $15,000 a year. He spent $1,000 on a chair, polish, and brushes and paid for these items using his credit card. The interest on his credit card balance is 20 percent a year. At the end of the year, Joe was offered $500 for his business and all its equipment. Calculate Joe’s opportunity cost of production and his economic profit. Joe’s opportunity costs are the $2,000 paid to the airport for the space; the $200 for the interest paid on the $1,000 credit card balance; the $10,000 of normal profit; and, the $500 for the depreciation of his equipment (which equals the $1,000 paid for the chair, polish, and brushes minus the $500 he was offered for this equipment). Joe’s total opportunity cost is the sum of these costs, which is $12,700. Joe’s economic profit is his total revenue, $15,000, minus his total opportunity cost, $12,700, for an economic profit of $2,300. 3. Alternative ways of laundering 100 shirts are a. Which methods are technologically efficient? All the methods are technologically efficient.
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This note was uploaded on 05/20/2011 for the course ECON 110 taught by Professor Po during the Spring '11 term at HKU.

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110_11s_SelectedQ_Ch10 - Econ 110 Selected Questions From...

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