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PS4_AK

# PS4_AK - Econ 110 Spring 2010 L1 L2 HW4 Solution A...

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HW4 Solution A. Chapter10, problem 12, [(10.1)] 12. Lee is a computer programmer who earned \$35,000 in 2007. But on January 1, 2008 Lee opened a body board manufacturing business. At the end of the first year of operation, he submitted the following information to his accountant: He stopped renting out his cottage for \$3,500 a year and used it as his factory. The market value of the cottage increased from \$70,000 to \$71,000. He spent \$50,000 on materials, phone, utilities, etc. He leased machines for \$10,000 a year. He paid \$15,000 in wages. He used \$10,000 from his savings account, which earns 5 percent a year interest. He borrowed \$40,000 at 10 percent a year from the bank. He sold \$160,000 worth of body boards. Normal profit is \$25,000 a year. a. Calculate Lee’s opportunity cost of production and economic profit. Lee has costs of \$50,000 paid for materials, phone, utilities, etc; \$15,000 for wages; \$10,000 paid for the machine lease; \$4,000 paid for interest expense on the loan; \$3,500 of forgone rent for the cottage plus - \$1,000 for the “depreciation” of the cottage (the cottage actually appreciated); \$500 in forgone interest from the savings account; and, \$25,000 for normal profit. These give a total opportunity cost of \$107,000. Lee’s economic profit is the total revenue, \$160,000, minus the total opportunity cost, \$107,000, for an economic profit of \$53,000. b. Lee’s accountant recorded the depreciation on his cottage during 2007 as \$7,000. According to the accountant, what profit did Lee’s make? Lee’s accountant will include Lee has costs of \$50,000 paid for materials, phone, utilities, etc; \$15,000 for wages; \$10,000 paid for the machine lease; \$4,000 paid for interest expense on the loan; and, 7,000 of depreciation expense for a total opportunity cost of \$86,000. The total profit according to the accountant will equal total revenue, \$160,000, minus total cost, \$86,000, for a profit of \$74,000. B. Chapter11, problem 2, [(11.2)] 1

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2. The table sets out Sue’s Surfboards’ total product schedule. a. Draw the total product curve. To draw the total product curve measure labor on the x -axis and output on the y -axis. The total product curve is upward sloping and is illustrated in Figure 11.1. b. Calculate the average product of labor and draw the average product curve. The average product of labor is equal to total product divided by the quantity of labor employed. For example, when 3 workers are employed, they produce 120 surfboards a week, so average product is 40 surfboards per worker. As Figure 11.2 (on the next page) shows, the average product curve is upward sloping when up to 3 workers are hired and then is downward sloping when more than 4 workers are hired. c.
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PS4_AK - Econ 110 Spring 2010 L1 L2 HW4 Solution A...

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