EC111Class4Answers - UNIVERSITY OF ESSEX DEPARTMENT OF...

This preview shows pages 1–2. Sign up to view the full content.

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.

{[ snackBarMessage ]}

Page1 / 3

EC111Class4Answers - UNIVERSITY OF ESSEX DEPARTMENT OF...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online