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Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3000 per year. Total annual revenue from pottery sales is $72,000. Calculate the accounting profit and the economic profit for Gomez’s pottery firm
In the area around Iqra University, a number of food vendors gather each lunchtime to sell food
to university students who are tired of Hostel food. The university and the city have no license
fees that apply to food vendors, preferring to let the market dictate how many and which vendors
show up.
Many different cuisines are represented on the street corner, including a cart sponsored by Tipu
Burger sells a burger of either Chicken or Beef for Rs.100. The food is made in the morning at
nearby restaurant in DHA, when the kitchen is otherwise unoccupied.
His crew of three, each of whom earns Rs.200 per hour, takes 2 hours to make the 50 meals
required by Tipu. In creating these burgers, they use ingredients equal to Rs.2000. Tipu hires
another worker to load her cart with food and sell it during the lunch hours. That worker costs
Rs.100 per hour and typically sells out the entire cart of 50 meals in 2 hours. The cart is rented
for Rs.1000 per 5-day week. (The carts are not in operation on the weekends, when Tipu is too
busy at his restaurant.)
A. What market structure does this business most resemble? What characteristics lead you to
this conclusion? (3 Marks)
B. What would you expect to see happen in this business? Use the data in the problem to
support your conclusions. (2 Marks)
the surplus labour theory of values
Given the production function f (x1; x2) = X1a1 X2 a2
, calculate
the profit maximizing demand and supply functions, and the profit function.
Assume ai > 0. What restrictions must a1 and a2 satisfy?
For a car and a vacation. Which has the higher exchange value and use value
Identify at which point is penetration pricing and
at which point is skimming. Which is the best
point for a newly launched everyday use product
in competitive environment and why?
1. Study the following table carefully
income Price of X Quantity of X Price of Z Quantity of Z
40000 300 200 200 250
70000 500 90 600 100
Calculate the following:
(a) Income elasticity of demand for good X
(b) Cross elasticity of demand of good Z when the price of good X changes
(c)c Price elasticity of demand for good Z
1. (a) Assume that although Marrow firm is presently making accounting profit but experiencing negative economic profit in its current venture. The owner of the firm does not understand what this means and asks you to explain to him.
(b) Study the table below
Revenue $50000
Labour $5000
Equipment Rental $6000
Rent $7000
Insurance $3500
Advertising $2500
Wages of other jobs foregone $20,000
(i) Calculate the accounting profit
Total revenue – explicit cost
(ii) Calculate the economic profit
Total revenue – (explicit cost + implicit cost)
1. Complete the table below
Total Product Variable cost Total cost Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost Total Revenue Profit
Total Product Variable cost
0 0
1 60
2 90
3 130
4 180
5 250
6 340
7 490
8 680
Explain the relationship between Average Total Cost (ATC) and Marginal Cost (MC).
1. Massy super store, wishes to increase its total revenue. It offers 30% discount on every item it sells.
Group A Group B
Volume of sales before the 30% discount 1.79 million 1.76 million
Volume of sales after the 30% discount 1.84 million 1.86 million
(a) Using the midpoint method, calculate the price elasticities of demand for group A and group B.
(b) If Massy wants to increase its total revenue, which group should it offer the discount to?
