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Solution_Set_2.S-2008

# Solution_Set_2.S-2008 - 3 Children have a limited...

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Principles of Economics W1105y-2 Spring 2008 Solution Set #2 1a. Accounting profit = TR - (total explicit costs) = 5000 - 3800 = 1200 1b. Economic profit = TR - (total implicit and explicit costs) = 5000 - (3800 + 1000) = 5000 - 4800 = 200. Yes, because economic profit is positive. 1c. Economic profit becomes -50. 5000 - (3800 + 1000 + 250) = 5000 - 5050 = -50. No, because economic profit is negative. 2. The cost of producing the machine is \$50,000 (two years of a \$25,000 salary). It will earn .10(500,000) in increased profits for 1 year (\$50,000), so economic profit is zero and either choice yields the same result.
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Unformatted text preview: 3. Children have a limited understanding of time and hence an extremely large -- perhaps infinite -- discount rate. 4a. P = \$.26, Q = 8 4b. Consumer surplus = 1/2 (8) (.64) = 1/2 (5.12) = 2.56 4c. Producer surplus = 1/2 (8) (.16) = 1/2 (1.28) = .64 4d. Total economic surplus = C.S. + P. S. = 2.56 + .64 = 3.2 4e. The loss in economic surplus is the shaded area on the graph, which equals area A + area B = [1/2 (3) (.24)] + [1/2 (3) (.06)] = 1/2 (.72) + 1/2 (.18) = .36 + .09 = .45. Price . 5 S u p p l y A .26 B .20 D e m a n d...
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