# Question one: Adam is the owner of a small grocery store.

Question one: Adam is the owner of a small grocery store. Adam’s annual revenue is $200,000 and his total explicit cost (Adam pays himself an annual salary of $30,000) is $180,000 per year. A supermarket chain wants to hire Adam as its general manager for $60,000 per year.

• What is the opportunity cost to Adam of owning and managing the grocery store?

• What is Adam’s accounting profit?

• What is Adam’s economic profit?

Question Two: A firm has the following total revenue and total cost functions:

• At what level of output does the firm maximize total revenue?

• Define the firm’s total profit as p = TR- TC. At what level of output does the firm maximize total profit?

• How much is the firm’s total profit at its maximum?

Question three: Characterize each of the following statements as true or false, and

explain your answer.

• If marginal revenue is less than average revenue, the demand curve will be downward sloping.

• Profits will be maximized when total revenue equals total cost.

• Marginal cost must be falling for average cost to decline as output expands.

• Marginal profit is the difference between marginal revenue and marginal cost and will always equal zero at the profit-maximizing activity level.

Part II: 20%

Question One: Mathematically show that

Where MR is marginal revenue;epis price elasticity of demand

Question Two: TV is contemplating a T-shirt advertising promotion. Monthly sales data from T-shirt shops marketing the “Eye Watch KRMY-TV” design indicate that

Q= 1,500 – 200P

where Qis T-shirt sales and Pis price.

A. How many T-shirts could KRMY-TV sell at $4.50 each?

B. What price would KRMY-TV have to charge to sell 900 T-shirts?

C. At what price would T-shirt sales equal zero?

D. How many T-shirts could be given away?

E. Calculate the point price elasticity of demand at a price of $5.

Question Three: Silkwood Enterprises specializes in gardening supplies. The demand for its new brand of fertilizer, Meadow Muffins, is given by the equation Q = 120 – 4P.

a. Silkwood is currently charging $10 for a pound of Meadow Muffins. At this price, what is the price elasticity of demand for Meadow Muffins?

b. At a price of $10, what is Silkwood’s marginal revenue?

c. What price should Silkwood charge if it wishes to maximize its total revenue?

d. At the total revenue maximizing price, what is the price elasticity of demand for Meadow Muffins?

Part III: 20%

Question One: The following production table provides estimates of the maximum amounts of output possible with different combinations of two input factors, Xand Y. (Assume that these are just illustrative points on a spectrum of continuous input combinations.)

• Do the two inputs exhibit the characteristics of constant, increasing, or decreasing marginal rates of technical substitution? How do you know?

• Assuming that output sells for $3 per unit, complete the following tables:

c)Assume that the quantity of Xis fixed at 2 units. If output sells for $3 and the cost of Yis $120 per day, how many units of Ywill be employed?

d) Assume that the company is currently producing 162 units of output per day using 1 unit of Xand 3 units of Y. The daily cost per unit of Xis $120 and that of Yis also $120. Would you recommend a change in the present input combination? Why or why not?

Question two: The total cost equation of a firm is given by the equation where TCis total cost and Qis the level of output.

a. What is the firm’s total fixed cost?

b. What is the equation for the firm’s total variable cost (TVC)?

c. What is the equation for the firm’s average total cost (ATC)?

d. What is the equation for the firm’s marginal cost (MC)?