Question

1) Xavier opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor’s lawn for $40.

What is Xavier’s accounting profit?

What is Xavier’s economic profit?

2) A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:

Hours                   Quantity of fish (in pounds)

0

10

18

24

28

30

What is the marginal product of increasing hours from 3 to 4?

If the fisherman has a fixed cost of $10 and a cost of $10 per hour, what is the average cost of catching 30 pounds of fish?

3)A profit-maximizing firm in a PERFECTLY COMPETITIVE MARKET is currently producing 100 units of output. It has average revenue of $10, average total cost of $8 and fixed cost of $200.

What is the firm’s profit?

What is its marginal cost?

What is its average variable cost?

1) You and Mary have made a documentary movie about the URI basketball team. You have decided to make the movie available on the Internet at a price per download, and you can act as a single-price monopolist. Each time the movie is downloaded your Internet service provider charges you a service fee of $4. You have calculated your firm’s demand condition as follows:

Price of download           Quantity of downloads demanded

$10                   0

   8                   1

   6                   3

   4                   6

   2                   10

   0                   15

[Hint: For example you will charge $2 per download if your customers buy 10 downloads]

You want to maximize your profit.

What price will you charge?

What quantity would be sold?

5. What is the value of profit in the long run equilibrium of a firm in a monopolistically competitive market?

Answer_____________________________________________

6. Below is your production function per day for your frozen yogurt store. The labor market equilibrium wage for a worker is $80 per day. Each cup of frozen yogurt sells for $2.

Quantity of workers           Quantity of yogurt (cups)

0

110

200

270

300

320

330

You are a profit maximizer:

a. How many workers should you employ?

Answer 1

1.Accounting profits include monetary costs a fir pays out and the revenue a firm receives.

Accounting profit = (Sell how much worth of lemonades - Spending on ingredients)

= $(60-10)= $ 50.

Economic Profit is the monetary costs and opportunity costs a firm pays and the revenue firm receives.

This implies , Economic profit = Accounting profit - opportunity cost

Economic profit= $( 50 -40)= $ 10.

2.

Hours	Quantity of fish	FC =$10	VC = $(10)(hours)	TC=FC+VC	MP=(change in Q)/(change in hours)	AC =TC/Q
0	0	10	-	10	-	-
1	10	10	10	20	10	2
2	18	10	20	30	8	1.67
3	24	10	30	40	6	1.67
4	28	10	40	50	4	1.78
5	30	10	50	60	2	2

(a) Marginal product of increasing from 3 to 4 hours = 4 pounds of fish.

(b) Average cost of of catching 30 pounds of fish = $2.