Question

# 3) Cindy is trying to decide between two options. She can either start up a telephone...

3)

Cindy is trying to decide between two options. She can either start up a telephone psychic hotline using her \$300,000 in savings to purchase equipment or take a job at an advertising agency for \$60,000/year. If she takes the job she will put her \$300,000 savings into the market and earn a 10% annual rate. If she starts up the psychic hotline she expects to earn \$310,000 a year in revenue while having annual explicit costs of \$220,000. What is the economic profit per year of starting up the telephone psychic hotline?

a \$30,000

b \$180,000

c \$60,000

d \$90,000

e \$0

4)

When producing its 5th unit a firm's total variable costs increased from 300 to 340. If a firm is facing increasing marginal returns, which answer could be the total variable cost of producing 6 units?

a 320

b 400

c 360

d 380

Ans 3) If Cindy starts telephone psychic hotline then, she has to use up her savings of \$300,000.

Earnings per year = \$310,000/year

Explicit costs = \$220,000/year

Implicit costs = Opportunity cost which is lost by not taking up the job = (\$60,000 + \$30,000)/year =\$90,000/year

Thus, economic profit per year of starting up a telephone psychic hotline = \$310,000 - \$220,000 - \$90,000 = \$0

e) \$0

Ans 4) c) 360

The total variable cost will increase but the marginal increase will be lesser due to increasing marginal returns.

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