Suppose the equilibrium quantity in the market for widgets

| November 24, 2016

1. Suppose the equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. As a result, the government is able to raise $740 per month in tax revenue. We can conclude that the equilibrium of widgets has fallen by how much?

2. John is considering starting a t-shirt company. To do so would require the purchase of a machine to imprint the t-shirts. Cost = $50,000 with no resale value. A corporate “friend” has promised John a one-year contract for 20,000 shorts, if his price is “right”. The marginal cost of producing a t-shirt is $1.50.
a. What is the lowest price John can offer for this contract?
b. At the end of the one-year contract, what will his “friend” offer John as the price for an extension of the deal?

3. Now, assume that John (from the question above) left a job at which he made $65,000 per year. To pay for the machine, John borrowed $40,000 from the bank at an interest rate of 7%. The balance of the purchase price ($10,000) came from John’s personal savings account, where it has been earning 3%. If he charged $5.00 per shirt for the first year’s contract, what was his accounting profit? What was his economic profit?

4. Marginal Analysis

Number of workers Total cost
0 50
1 110
2 160
3 200
4 240
5 250
6 260
7 280
8 310
9 350
10 400

If hiring the 7th worker increases total product by 5 units and the price of each unit is $2, should he/she be hired? Why or why not?

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