Problem 1 For each one of the costs below, explain whether the resource cost is explicit or implicit, and give the annual opportunity cost for each one.
a. A telephone/voicemail system for the entire firm is leased for $15,000 per year.
The cost of leasing the telephone/voicemail system is an explicit cost.
Annual opportunity cost = Explicit Cost + Implicit Cost
AOC = $15,000.00 + $0.00
AOC = $15,000.00
b. The owner starts the business with savings of $150,000. Currently the owner could earn 3.25% annual interest on money invested.
Savings of $150,000.00 is an explicit cost. The annual interest amount earned is implicit.
AOC = $150,000.00 + ($150,000.00*3.25%)
AOC = $150,000.00 + $4,875.00
AOC = $154,875.00
c. Clerical employees are paid $3,375 a month and the firm hires four each year.
The $3,375.00 employees are paid is an explicit cost.
AOC = ($3,375.00 * 4) + $0.00
AOC = $13,500.00
d. Before starting this business, the owner was offered a salary of $90,000 per year to manage a rival firm.
Implicit cost
AOC = $0.00 + $90,000.00
AOC = $90,000.00
e. The firm receives an offer to lease its offices for $22,000 a month.
Problem 2 In your own words, fully explain how economic models simplify reality and help us to better understand important aspects of it.
Problem 3 Explain what the conditions are that an exchange must satisfy in order to make two individuals participate in it.
Problem 4 Fab Tools Inc. can produce 150 widgets and 100 axes in a month. Another company AllMyTools Inc. can produce 80 widgets and 50 axes per month. Sketch the production sets and calculate the marginal costs.
Problem 5 Suppose the seller's opportunity cost of producing shirts is $12 and the buyer's valuation is $22. If the seller gains $2 more than the buyer from this transaction, what is the price at which the good is exchanged between the two parties?
Problem 6 Define demand. Define supply. In your own words, explain the difference between demand and quantity demanded and supply and quantity supplied.
Problem 7 The generalized demand function for good X is
Qd = 1,500 - 4P + 5A + 10M +3PY
a. Are goods X and good Y substitutes or complements? How do you know?
b. Is good X a normal good or an inferior good? How do you know?
c. What is the demand function when A (advertising) = $20,000, M = $15,000, PY = $500?
Problem 8 Consider the following demand and supply functions:
Demand: Qd = 3,000 - 10P
Supply: Qs = -1000 + 10P
a. Solve for the equilibrium price (Po) and the equilibrium quantity (Qo).
b. Find the inverse demand function and the inverse supply function.
c. Sketch this market.
Problem 9 Consider the following demand and supply functions for good X:
Demand: Qd = 800 - 55P
Supply: Qs = 45P - 200
a. Find the inverse demand function and the inverse supply function.
b. Find the equilibrium price and quantity in this market.
c. Sketch the market for good X.
Problem 10 Consider the following demand and supply functions for good X:
Demand: Qd = 800 - 55P
Supply: Qs = 45P - 200
a. Find the equilibrium price and quantity in this market.
b. Suppose there are complaints that the equilibrium price in this market is unfair and Congress sets a price control of $10. Is this a prices floor or a price ceiling?
c. Explain what the effect of this price control would be on the market.
d. Who most likely would be complaining about the equilibrium price, consumers or firms? Was the equilibrium price considered too low or too high?
e. What did Congress hope to achieve by setting this price control?
f. Who in the market would benefit from this price control? Who would be worse off?