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# econ101_ps5 - METU Department of Economics Econ 101...

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1 METU Department of Economics Econ 101: Introduction to Economics I Sections 01-02-03 Fall 2010 PROBLEM SET 5 PART A – PROBLEMS 1. The table below represents the annual income statement of Mazlum’s Hardware Store. Mazlum worked full time at the store. He used \$25,000 of his savings to furnish and stock the store (included in costs). He was recently offered a \$20,000 annual salary to work in an advertisement agency. Annual Income Statement Revenues Costs Sales of Merchandise \$90,000 Wholesale purchases \$60,000 Service Revenues 5,000 Store Supplies 2,000 Labor Costs 10,000 Utilities 1,000 Rent 5,000 Depreciation on fixtures 2,000 Total revenues \$95,000 Total Costs \$80,000 a) Calculate the accounting profits for Mazlum’s Hardware Store. b) What are some imputed costs to be taken into account? c) If annual interest rate is 10%, what are the total costs of this business? d) Calculate the economic profits of Mazlum’s Hardware Store. 2. The following information represents TP, AP, and MP of Pedestal Inc. # of Labor TP AP MP 0 0 0 - 1 30 2 70 3 45 4 25 5 35 6 180 a) Fill in the missing entries. b) Define the concept of diminishing returns.

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2 c) Does the table indicate a situation of diminishing returns? Explain. When does dimishing returns become evident? 3. 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 8 2 20 3 35 4 45 5 52 6 57 7 60 b) Over what range of labor input are there increasing returns to labor? Diminishing returns to labor? Negative returns to 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?
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econ101_ps5 - METU Department of Economics Econ 101...

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