# PS6 - METU Department of Economics Econ 101 Introduction to...

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1/5 METU Department of Economics Econ 101: Introduction to Economics I Sections 01-02-03 Fall 2011 PROBLEM SET 6 (With Answers) (CHAPTER 7 & Appendix to CHAPTER 7) PART A- PROBLEMS 1. The number of repairs produced by a computer repair shop depends on the number of workers as follows. Assume that all inputs (office space, telephone, utilities) other than labor are fixed in the short-run. a) Add two additional columns to the table, and enter the marginal product (MP L ) and average product (AP L ) for each number of workers. Draw the MP L and AP L curves. # of Workers # of repairs (per week) MP L AP L 0 0 1 10 2 22 3 30 4 36 5 40 6 42 7 39 b) Over what range of output are there increasing marginal product of labor? Diminishing returns or diminishing marginal product of labor? Negative marginal product of labor? c) Over what range of labor input is marginal product greater than average product? What is happening to average product as employment increases over this range? d) Over what range of labor input is marginal product smaller than average product? What is happening to average product as employment increases over this range? 2. The following information represents TP, AP, and MP of GUNES INC. a) Fill in the missing entries. # of Labor TP AP MP 0 0 0 - 1 40 2 70 3 50 4 10 5 35 6 168

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2/5 b) Define the concept of diminishing returns. c) Does the table indicate a situation of diminishing returns? When does the diminishing return become evident? 3. One year ago, Jack and Jill set up a vinegar bottling firm. Use the following information to answer the questions: (Interest rate for the bank deposits is %10). i. Jack and Jill put \$50.000 of their own money into the firm. ii. They bought equipment for \$30.000. iii. They hired one employee to help them for an annual wage of \$20.000. iv. Jack gave up his previous job, at which he earned \$30.000, and spent all his time working for their company. v. Jill kept her old job, which paid \$30 an hour, but gave up 10 hours of leisure week (for 50 weeks) to work for their company. vi. Their firm bought \$10.000 of goods and services from other firms. vii. At the end of the year this firm earned \$140.000 and normal rate of return is %15 for this industry. a) Identify the explicit costs incurred by this firm at the end of the year. Calculate total explicit costs. b) Identify the implicit costs incurred by this firm at the end of the year. Calculate total implicit costs. c) Calculate the accounting profit. d) Calculate the economic profit.
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