Question

1.) Which good does not belong in the list below? a. National defense b. Pollution control c. Public park d. Tornado siren e. Street lights

2.)  Michelle quit her job to open her own business. Her for former job paid $3,500 per month. Her new business makes knitted hats for sale. The hats cost $14 each and she sells 1,000 per month. Labor costs her $7,000 per month. Yarn and other supplies cost $1,800 and utilities cost $500 per month. She rents space for $800 per month for her business.

I. What is her implicit cost?

II. What is her explicit cost?


III. Calculate her total revenue?


IV. a. Calculate her Accounting profit


b. Calculate her Economic profit



V. a. How would your answer for question IV change if her pay at her previous job was $4000?

Answer 1

Ans) 1) Public goods are those which are non excludable and non rivalrous in nature. Non excludable means that no one can be excluded from using it. And non rivalrous means that ones consumption does not reduce its availability for others.

Option b (pollution control)

[However, all the given options are an example of public good. But if you have to choose one, then its clean air or pollution control. ]

2) Explicit costs are the direct payments made = $7000 + $1800 + $500 + $800 = $10,100

Implicit costs are basically the opportunity cost = salary from old job = $3,500

Total revenue = price × quantity = $14 × 1000 = $14,000

Accounting profit = total revenue - total explicit cost

= $14,000 - $10,100 = $3,900

Economic profit = total revenue - total (explicit + implicit cost)

= $14,000 - ($10,100 + $3,500) = $14,000 - $13,600

= $400

If old salary were $4,000 then÷

Implicit cost = $4,000

And, economic profit = $14,000 - ($10,100+4,000)

= $14,000 - $14,100

= - $100 (economic loss)