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B) To have zero accounting profit they would need a total revenue that is
equal to the total explicit costs. In this case, explicit costs are equal to ($500,
+ $20,000 + $10,000 + $20,000 + ($1,000 x 12)) which equals $62,500.
To have zero economic profit they would need a total revenue that is equal
to the total economic costs which was calculated in part A to be $157,900.
These revenues are different because economic profit includes the firm’s
explicit and implicit opportunity costs, whereas accounting profit only
includes the firm’s explicit opportunity costs.
C) The costs of machinery (i), salary (iii), and rent (iv) are fixed costs and
the cost of ingredients is variable (ii) in the short run, because only the cost
of ingredients will depend on demand the rest of the costs will be the same
regardless of production. In the short run, the iii and iv are sunk costs
because they have already been committed and con not be recovered in full
or in part.
2.
E) Assumption: In the long run there will be no economic profit and firms
will have joined the market decreasing the overall price of the good so
MC=ATC
(q/1)(10 + 2q)= ((10 + 10q + q2)/q)(q/1)
10q + 2q2= 10 + 10q + q2
q2= 10
q= 10
P= 10 + 2q
= 10 + 2 10
B)
Supply of pretzels in the city will shift to the left since there are fewer suppliers,
thus increasing the price. The individual stands now operating will see a profit in
the short run because the new price is above the point where MC and ATC cross.
C) The selling of license fees will increase ATC because the license fee is an
increase in fixed cost. However, the quantity of pretzels sold will not change unless
the lowest point of ATC rises above the price in which case an individual firm may
shut down temporarily. The price of pretzels in the city should not change as a result
of the fee.
D) The city should institute a license fee that is equal to the distance between the
new and old price because this would raise the lowest point of ATC to the new
price, which is the highest the nadir of ATC can be without causing firms to stop
producing.
6. A) Let’s assume that the fixed costs of a burger producer before tax are $1.00 and
that the producer can produce burgers with costs outlined below. Doing so we can
institute the lump sum tax of $300 and see what effects would occur
# of Fixed Fixed Total Average Total Average Total
Burgers Costs Costs Cost Total Cost Cost Cost
After Tax After Tax After Tax
($) ($) ($) ($) ($/Burger) ($/Burger)
0.00 1.00 301.00 1.00 301.00
1.00 1.00 301.00 3.00 303.00 3.00 303.00
2.00 1.00 301.00 5.00 305.00 2.50 152.50
3.00 1.00 301.00 6.00 306.00 2.00 152.00
(Note the graphs will not represent the numbers from the table, since the numbers
are just there to help clarify the concepts)
Looking at the data we can see that ATC increases, but AVC and MC stay the same.
This is because an increase in fixed costs increases the total costs but has no effect
on variable cost and since variable cost is unchanged, MC is also unchanged by the
tax.
B) Using the same assumptions form part A) let us impose a tax of $1 per burger
and see what happens.
# of Fixed Fixed Total Average Total Average Total
Burgers Costs Costs Cost Total Cost Cost Cost
After Tax After Tax After Tax
($) ($) ($) ($) ($/Burger) ($/Burger)
0.00 1.00 1.00 1.00 1.00
1.00 1.00 1.00 3.00 4.00 3.00 4.00
2.00 1.00 1.00 5.00 6.00 2.50 3.00
3.00 1.00 1.00 6.00 7.00 2.00 2.33
(Note the graphs will not represent the numbers from the table, since the numbers
are just there to help clarify the concepts)
With a tax of $1 per burger, ATC increases, AVC increases but MC does not change.
A tax of $1 per burger changes AVC because the tax is based on how many burgers
are sold thus changing the variable cost. Since total cost is just fixed cost + variable
cost, total cost is also increased by an increase in variable cost. MC is not changed
because the difference between the cost of each additional burger is not changed
because each burger costs $1 more than before.