CH10-solution-9e

# CH10-solution-9e - CH10 1 One year ago Jack and Jill set up...

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C H 1 0 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.

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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. b. Which method is economically efficient if the hourly wage rate and implicit rental rate of capital are (i) Wage rate \$1, rental rate \$100? Method D is economically efficient because the total cost is the least. Method D ’s costs are 50 × \$1 + 1 × \$100, or \$150.
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