Economics of Enterprise Answers

Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a
current market value of $4 million. Bowen owes his local bank $3 million. Last year,
Bowen sold $5 million worth of cotton. His variable operating costs were $4.5 million;
accounting depreciation was $40,000, although the actual decline in value of Bowen’s
machinery was $60,000 last year. Bowen paid himself a salary of $50,000, which is not
considered part of his variable operating costs. Interest on his bank loan was $400,000.
If Bowen worked for another farmer or a local manufacturer, his annual income would be
about $30,000. Bowen can invest any funds that would be derived, if the farm sold, to
earn 10 percent annually. (Ignore taxes.)
a. Compute and interpret Bowen’s accounting profits.
b. Compute and interpret Bowen’s economic profits.

Assume that a firm in a perfectly competitive industry has the following total cost schedule:

Output Units Total Cost ($)
10 $110
15 150
20 180
25 225
30 300
35 385
40 480

a. Calculate a marginal cost and an average cost schedule for the firm

b. If the prevailing market price is $17 per unit, how many units will be produced and sold? What are profits per unit? What are total profits?

c. Is the industry in long run equilibrium at this price

Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a
current market value of $4 million. Bowen owes his local bank $3 million. Last year,
Bowen sold $5 million worth of cotton. His variable operating costs were $4.5 million;
accounting depreciation was $40,000, although the actual decline in value of Bowen’s
machinery was $60,000 last year. Bowen paid himself a salary of $50,000, which is not
considered part of his variable operating costs. Interest on his bank loan was $400,000.
If Bowen worked for another farmer or a local manufacturer, his annual income would be
about $30,000. Bowen can invest any funds that would be derived, if the farm sold, to
earn 10 percent annually. (Ignore taxes.)
a. Compute and interpret Bowen’s accounting profits.
b. Compute and interpret Bowen’s economic profits.

Explain income affect and substitution affect.

What is the difference between multiplier and accelerator?

As an economy's capital stock increases, what happens to the economy?

What do you understand by the term ‘externalities’? Explain the various methods to deal with
externalities.

With the help of Is-Lm technique, explain the process of integrations of money market and goods
market by way of Keynesian approach. What are the policy implications of Keynesian approach?

What is the distinction between money flow and real flows? Explain how various economic
transactions are used to study circular flow of income.

How wages are determined in the perfectly competitive market? Why do so many kinds of wage
Rates prevail in the market?