Ag Econ: HW Set 8 (Chapter 7)
1. State whether the following statements are true or false.
a. The economic maxim "There's no cash on the table" means that there are never any unexploited economic opportunities.
The Equilibrium Principle, also called the No-Cash-on-the-Table Principle, predicts, when people confront an opportunity for gain, they are almost always quick to exploit it.
b. Firms in competitive environments make no accounting profit when the market is in long-run equilibrium.
c. Firms that can introduce cost-saving innovations can make an economic profit in the short run.
2. Jaime owns and manages a cafe in Collegetown whose annual revenue is $5,000. Annual expenses are as follows:
a. Calculate Jaime's annual accounting profit.
Accounting profit: the difference between a firm's total revenue and its explicit costs.
Accounting profit = Total Revenue - Explicit costs
Total revenue: The dollar amount that consumers spend on a product is equal to the dollar amount that sellers receive. (Also called 'total expenditure')
(Also called Total Revenue)
Explicit costs: The actual payments a firm makes to its factors of production and other suppliers
Examples of explicit costs: wages, lease payments, utilities, raw materials, and other direct costs.
Total Explicit Cost: $4,250
Accounting profit: the difference between a firm's total revenue and its explicit costs.
Accounting profit = Total Revenue - Explicit costs
Accounting profit = $5,000 - $4,250
b. Suppose Jaime could earn $1,000 per year as a recycler of aluminum cans, but she prefers to run the cafe. In fact, she would be willing to pay up to $275 per year to run the cafe rather than to recycle.
Is the cafe making an economic profit? Should Jaime stay in the cafe business?
Part a: Cafe Accounting Profit = $750
Total revenue: The dollar amount that consumers spend on a product is equal to the dollar amount that sellers receive. (Also called 'total expenditure')
Explicit costs: The actual payments a firm makes to its factors of production and other suppliers
Examples of explicit costs: wages, lease payments, utilities, raw materials, and other direct costs.
Part a: Explicit costs = $4,250
Implicit costs: A type of opportunity cost. The cost of resources already owned by the firm that could have been put to some other use.
Example of implicit costs: Implicit cost is the "if things were different" cost. The foregone income that a business owner-manager could have earned working for someone else.
Implicit cost = The amount that could be made by recycling subtracted ($1,000) by the amount Jaime is willing to pay to keep the cafe going out ($275).
Implicit cost = Recycling - Financial Sacrifice
Implicit cost = $1000 - $275
Economic profit: the difference between a firm's total revenue and the sum of its explicit and implicit costs. (Also called excess profit)
Economic profit = Total revenue - Explicit costs - Implicit costs
Economic profit = $5000 - $4,250 - $725
Even if it is only $25 there is still a profit being made from the business. Thus, Jaime should keep their business open.
c. Suppose the cafe's revenues and expenses remain the same, but recyclers' earnings rise to $1,100 per year. Is the cafe making an economic profit? Should Jaime stay in the cafe business?
Everything from the previous problem remains the same except the implicit costs because of the increase of $1000 to $1,100.
Implicit cost = The amount that could be made by recycling subtracted ($1,100) by the amount Jaime is willing to pay to keep the cafe going out ($275).
Implicit cost = $1100 - $275
Economic profit = $5000 - $4,250 - $825
The cafe is no longer making a profit. It is now making an economic loss of $75 per year. Jaime should not stay in business.
d. Suppose Jaime had not had gotten a $10,000 loan at an annual interest rate of 10 percent to buy equipment, but instead had invested $10,000 of her own money in equipment. Calculate Jaime's annual accounting profit.
The only thing changing from the problem in part a is the Explicit costs. Where the $1,000 cost for the loan is removed.
Total Explicit Cost: $3,250
Accounting profit = Total Revenue - Explicit costs
Accounting profit = $5000 - $3250
e. As in part b, suppose Jaime could earn $1,000 per year as a recycler and she has to pay $1,000 per year in interest on her loan, but, unlike part b, suppose Jaime likes recycling just as well as running the cafe. How much additional revenue would the cafe have to collect each year to earn a normal profit?
Normal Profit: The opportunity cost of the resources supplied to a business by its owner, equal to accounting profit minus economic profit.
Opportunity Cost For Recycling: $1000
Cafe Accounting Profit: $750
Normal Profit = Opportunity Cost - Accounting Profit
Normal Profit = $1000 - $750
Jaime would need to make $250 a year more to equal the opportunity cost for recycling ($1000).
3. The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal ability at a salary of $100,000 a year. The companies that employ normal designers each collect $500,000 in revenue a year, which is just enough to ensure that each earns exactly a normal profit. The 200th company, however, employs Janus, an unusually talented designer. Because of Janus's talent, this company collects $1,000,000 in revenue a year.
a. How much will Janus earn?
Number of Companies with normal designers: 199
Normal designers salary: $100,000
Cost of Labor: $19,900,000
Revenue from each company = 199 × 500,000
Total Revenue: $99,500,000
Company makes normal profit at $99,500,000
Number of Companies with normal designers: 199
Normal designers salary: $100,000
Cost of Labor: $19,900,000
Additional Revenue Janus Creates: $1,000,000
Revenue from each company + Janus = (199 × $500,000) + $1,000,000
Total Revenue: $100,500,000
Janus's Salary = (Revenue Janus Creates - Normal Employee Revenue) + Normal Employee Salary
Janus's Salary = (1,000,000 - 500,000) + $100,000
How much of her annual salary will be economic rent?
Economic rent: That part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor.
Economic rent is how much the salary of Janus exceeds the reservation price of the business's set salary for other employees.
Normal designers salary: $100,000
Economic rent = Janus's salary - Normal Salary
Economic rent = $600,000 - $100,00
Proportion of Economic Rent = Economic Rent/Janus's Salary
Proportion of Economic Rent = $500,000/$600,000
Proportion of Economic Rent:
83% (percent form, 0.83 × 100)
b. Will the advertising company for which Janus works be able to earn an economic profit?
Economic profit: the difference between a firm's total revenue and the sum of its explicit and implicit costs. (Also called excess profit)
Economic profit = Total revenue - Explicit costs - Implicit costs
Total Revenue with Janus: $100,500,000
Total Revenue: $99,500,000
Company makes normal profit at $99,500,000
4. Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram.
Calculate the following at the equilibrium price of $10.50:
a. The weekly consumer surplus.
Area highlighted is the portion of consumer surplus.
Consumer surplus: the difference between a buyer's reservation price for a product and the price actually paid.
Weekly Consumer Surplus = (1/2) × (the price where quantity demanded is 0 - the current price of DVDs) × Equilibrium quantity
Weekly Consumer Surplus = (1/2) × (price where quantity demanded 0 - current equilibrium price) × Equilibrium quantity
Weekly Consumer Surplus = (1/2) × ($12 - $10.50) × 6
Weekly Consumer Surplus: $4.50
b. The weekly producer surplus
Producer Surplus = 1/2 × (Equilibrium Price - Price at the quantity supplied is zero) × Equilibrium quantity
Producer Surplus = 1/2 × (10.50 - 6) × 6
c. The maximum weekly amount that producers and consumers in Lincoln would be willing to pay to be able to buy and sell used DVDs in any given week (total economic surplus).
Total economic surplus = Consumer surplus + Producer surplus
Total economic surplus = $4.50 + 13.50
Total economic surplus: $18
5. Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram.
Use the following values for the graph
Suppose a coalition of students from Lincoln High School succeeds in persuading the local government to impose a price ceiling of $7.50 on used DVDs, on the grounds that local suppliers are taking advantage of teenagers by charging exorbitant prices.
a. Calculate the weekly shortage of used DVDs that will result from this policy.
Shortage: When the demand is greater than the supply
Shortage = Quantity Demanded > Quantity Supplied
Shortage = Quantity Demanded - Quantity Supplied
b. Calculate the new consumer surplus, the new producer surplus, and the total economic surplus lost every week as a result of the price ceiling.
The market in equilibrium
New Equilibrium Price with Price Ceiling: $7.50
Current Equilibrium Quantity: 2
Consumer Surplus: lines in blue above D
Producer Surplus: lines in red below D
How To Find Producer Surplus
Producer Surplus = 1/2 × (Equilibrium Price - Price at the quantity supplied is zero) × Equilibrium quantity
Producer Surplus = 1/2 × (7.50-6.00) × 2
I am currently too frustrated with the Consumer Surplus to finish this dumb hecking problem
Total economic surplus = Consumer surplus + Producer surplus
