Economics Assignment

Question 01
A firm pays in cash $250000 in wages, $55430 in interest on borrowed money capital and $74320 for the yearly rental of its factory building. If the entrepreneur worked for somebody else as a manager, he would earn at most $44500 per year and if he lent out his money capital to somebody else in a similarly risky business, he would at most receive $16600 per year. Keeping in view the above information:
(A) Calculate:
a) The explicit cost of the firm.
b) The implicit cost of the firm.
c) The total cost of the firm.
(B) If the entrepreneur received $495680 from selling his years output, then calculate his total profit.
(C) What will be the total profit if the entrepreneur’s total revenue were $413934 instead?
(Marks: A = 2+2+2, B = 2, C = 2)
Question 02
(A) Find the value of multiplier if:
a) MPC = 0.39
b) MPS = 0.64
(B) If the value of multiplier is 2.49 then find out:
a) MPC
b) MPS
(C) What is the relationship between the value of multiplier and MPC?
(D) Find the change in equilibrium level of output when there is a $25 increase in investment spending and the MPC is 0.75.
(Marks: A = 3, B = 3, C = 1, D = 3)

Solution

Question 01

Answer: (A)

a) Explicit Cost

Wages + Interest on borrowed Capital + Factory Rent

$ 250,000 + $ 55,430 + $ 74,320 = $ 379,750

b) Implicit Cost

Cost of working for somebody else as manager + Cost of lending money to somebody else

 $ 44,500 + $ 16,600 = $ 61,100

c) Total Cost

 Explicit Cost + Implicit Cost = Total Cost

$ 379,750 + $ 61,100 = $ 440,850

(B) Total Profit

Revenue – Explicit Cost = Total Profit

$ 495,680 - $ 379,750 = $ 115,930

(C) Total Profit (if the entrepreneur’s total revenue were $413,934)

 Revenue – Explicit Cost = Total Profit

$ 413,934 - $ 379,750 = $ 115,930

Question 02

Answer: (A)

a) Value of Multiplier

MPC= 0.39

Multiplier = ?

1 / (1-MPC) =   1/ 1-0.39 = 1/0.61 = 1.6393

b) Value of Multiplier

MPS = 0.64

1 / (MPS) =   1/ 0.64 = 1.5625

(B)

a)

Multiplier = 2.49

MPC =?

MPC    = 1 - 1/ K

            = 1 – 1/ 2.49

            = 1 – 0.4016

            = 0.5984                     

b)

Multiplier = 2.49

MPS = ?

MPS =   1/multiplier = 1/ 2.49 = 0.4016

(C)

The value of multiplier is directly related to value of MPC. When MPC decreases value of multiplier will also decrease. When MPC increases value of multiplier will also increase.

(D)

Delta Y = $ 25

MPC = 0.75

Multiplier = 1/1 - 0.75 = 4

Delta y = K (Delta L)  

= 4 ($ 25)

= $ 100