econ101_ps5_sol - 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 (With Answers) 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. $95,000-$80,000=$15,000 b) What are some imputed costs to be taken into account? Mazlum should include costs of annual interest rate on $25,000 investment (assuming he could recover it); and $20,000 opportunity cost for his own salary. c) If annual interest rate is 10%, what are the total costs of this business? Total costs would be accounting costs of $80,000 plus interest of $2,500 and $20,000 salary. d) Calculate the economic profits of Mazlum’s Hardware Store. A loss of $7,500 is indicated for the past year ($15,000 – $2,500 –$20,000 = $-7,500)
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2 2. The following information represents TP, AP, and MP of Pedestal Inc. # of Labor TP AP MP 0 0 0 - 1 30 30 30 2 100 50 70 3 135 45 35 4 160 40 25 5 175 35 15 6 180 30 5 a) Fill in the missing entries. b) Define the concept of diminishing returns. If increasing amounts of a variable factor are applied to a given quantity of a fixed factor, eventually a situation will be reached in which each additional unit of the variable factor adds less to TP than the previous one did; that is the MP of the variable input will decline. This fact that beyond some point output grows at a diminishing rate with increases in the variable input is known as diminishing returns. c) Does the table indicate a situation of diminishing returns? Explain. When does dimishing returns become evident? Yes, figures indicate a situation of diminishing returns. The diminishing returns become evident after employment of the third unit of labor. Until two units of labor marginal product increases, the addition of one unit of extra labor decreases marginal product from 70 to 35. 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)
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econ101_ps5_sol - METU Department of Economics Econ 101:...

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