Autumn Term 20011/12
DEPARTMENT OF ECONOMICS
Tim Hatton
EC111 Class Exercise 4: Outline Answers
1.
(a) Price is P = 12 so from the demand function, 12 = 300 – 18q; q = 16.
(b) Consumer surplus is the area ABC or ½ × (300 – 12) × 16 =
2304 pence, or ₤23.04.
(c) John will be willing to pay any fixed fee that is less then the value of consumer
surplus. So he will pay a fee of ₤5 but not a fee of ₤25.
2.
We need to know the value of the ladder at the end of the year. Say it is ₤60. We also
need to know the interest rate in order to calculate the foregone interest on the ₤100
investment. If the interest rate is 10 percent then the opportunity cost of the funds
invested is ₤10. Thus depreciation + foregone interest is ₤40 + ₤10 = ₤50. Finally we
need to know the opportunity cost of the window cleaner’s own labour, say ₤6,000. True
economic profit is total revenue minus all (opportunity) costs. Using these figures, that
would be
₤8,000 – ₤1,000– ₤50 – ₤6,000
= ₤950.
B
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '12
 TimHatton
 Economics, Microeconomics, Opportunity Cost, Consumer Surplus, Marginal product, isocost curve, EC111 Class Exercise

Click to edit the document details