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

ECO401 Assignment solution

1   The process by which resources are transformed into useful forms is 

A.    capitalisation.

B.     consumption.

C.     allocation.

D.    production.

  2   The concept of choice would become irrelevant if 

A.    capital were eliminated.

B.     scarcity were eliminated.

C.     we were dealing with a very simple, one-person economy.

D.    poverty were eliminated.

  3   Which of the following is not a resource as the term is used by economists? 

A.    money.

B.     land.

C.     buildings.

D.    labour.

  4   Capital, as economists use the term, 

A.    is the money the firm spends to hire resources.

B.     is money the firm raises from selling stock.

C.     refers to the process by which resources are transformed into useful forms.

D.    refers to things that have already been produced that are in turn used to produce other goods and services.

  5   Opportunity cost, most broadly define, is 

A.    the additional cost of producing an additional unit of output.

B.     what we forgo, or give up, when we make a choice or a decision.

C.     a cost that cannot be avoided, regardless of what is done in the future.

D.    the additional cost of buying an additional unit of a product.

  6   A graph showing all the combinations of goods and services that can be produced if all of society's resources are used efficiently is a 

A.    demand curve.

B.     supply curve

C.     production possibility frontier.

D.    circular-flow diagram.

 

  7   Periods of “less than full employment” of resources correspond to 

A.    points on the ppf.

B.     points outside the ppf.

C.     either points inside or outside the ppf.

D.    points inside the ppf.

  8   What lies is at the heart of the allocation of goods and services in a free-market economy?

A.    Concerns of equity or equal distribution among individuals.

B.     The order or command of the ruling government or dictator.

C.     The wishes of consumers in the market.

D.    The price mechanism.

  9   The phrase 'ceteris paribus' is best expressed as 

A.    'all else equal.'

B.     'everything affects everything else.'

C.     'scarcity is a fact of life.'

D.    'there is no such thing as a free lunch.'

10   Laboratory (or controlled) experiments cannot be performed in economics because: 

A.    of resource scarcity.

B.     economics is a natural science.

C.     of the difficulty of distinguishing between normative and positive statements.

D.    economics is a social science.

11  Positive statements are:

A.    value judgments

B.     verifiable or testable

C.     statements in the affirmative

D.    good statements

12  The former Soviet Union was an example of:

A.    a planned economy

B.     free-market/capitalism

C.     dictatorship

D.    a mixed economy

13. Rational choice or rational decision-making involves

A.  comparing the net benefit of a choice with the total net benefit foregone of all the alternatives combined

B.  weighing up total costs and total benefits associated with a decision

C.  weighing up marginal costs and marginal benefits associated with a decision

D.  all of the above.

14 The PPF can be used to illustrate:

A. the principle of opportunity costs and increasing opportunity costs

B. the distinction between micro and macroeconomics

C. efficient, infeasible and inefficient production combinations

D. all of the above