solution to ECO401

ECONOMICS




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?



ANSWER:

(A)

a. Explixit cost of the firm:



Explicit cost = $25,000+$74320

= $324,320

b. Implicit cost of the firm:



Implicit cost = $44500+$16600

= 61,100

c. Total cost:



Total cost = explicit+implicit

= $324320+$61100

= $385420

(B) TOTAL PROFIT:

Profit=Revenue-Cost

= $495680-$385420

= $ 110260



(D) TOTAL PROFIT:

Profit= $413934-$385420

=$28514

Ans

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.

ANSWER:

A. Value of multilpier:



a. Mpc=0.39

K=1/1-mpc

=1/1-0.39

=1/0.61

=1.6

b. Mps=0.64

K=1/mps

=1/0.64

=1.56



B.



a. K=2.49 , Mpc=?



K=1/1-mpc

2.49(1-mpc0=1

2.49-2.49mpc=1

2.49-1=2.49mpc

1.49=2.49mpc

Mpc=0.6

b. K=2.49 mps?

K=1/mps

2.49=1/mps

2.49(mps)=1

Mps=0.40

C. RELATIONSHIP BETWEEN THE VALUE OF MULTILPER AND MPC:



k is strong when mpc increase

Or k is weak when mpc is decrese

K=more than 1 and less than infinity

MPC=less than 1 more than 0

D. CHANGE IN EQUILBRIUM LEVEL OF OUTPUT:



If the invest is increase 25 the change in equilibrium level of output will increase.if mpc=0.75 will be stronger