1. Consider that you are a full time college student. In addition, you own and run a small computer repair shop. Your payment for building and equipment rentals and wages to an assistant amounts to $20,000 per year. The only input you supply is your own labor, and you consider repairing computers just as attractive as your only other employment opportunity, tutoring high school students at a salary of $11,000 per year. Your revenue from your computer repair service amounts to $30,000 per year. (3 pts each)

a. What is your Accounting profit? What is your Economic Profit? Show your work.

b. Should you remain in the computer repair business? Why?

c. Suppose your grandparents, who owns the building you have been renting, decide to give you that building as a gift. You had been paying your grandparents rent for the building equal $6000 per year which is equal to the market rate. Should should you remain in the computer repair business? Why?

2. Mr. Young is the owner and manager of a small manufacturing company that specializes in the production of watches. He decided to diversify his product line and after studying trends in demand, he is considering launching a line of smartwatches. He realizes that the facilities in the factory are not suited for manufacturing smartwatches, so the new product would require a new factory. Estimates indicate that he could construct a factory with a capacity of 1,200 smartwatches per year at a cost of $300,000 the first year and additional $100,000 the second year. The new factory would have limited capacity during the second year (only 200 units) but would be fully operational at the start of the third year. He expects demand for the product to grow and sales to rise steadily from 200 units the second year to 1,200 units in the sixth year. His accountant conducted the cash flow analysis of the project and according to the analysis he expects to lose $23,000 the second year of operation, breakeven (0 net cash flow) the third year, earn $50,000, and $75,000 the fourth and fifth years, respectively. Afterwards, he expects to earn $100,000 a year until year 10. At the end of 10 years the factory will be obsolete, and he expects to sell his old equipment for $50,000. (All these cashflows are in real terms).

Suppose Mr. Young's opportunity cost of funds is equal 5%. Should he build this factory? Why?

3. A bakery shop increases the variety of cakes it makes by adding a speciality case called "Rainbow Cake" to it product line. According to the manger of the bakery the total production costs and total benefit (revenue) of the cake can be estimated using the following cost and revenue functions:

C(Q) = 10,000 + 40Q + 0.0025Q²

B(Q) = 70Q

(Note: MC(Q) = 40 + 005Q, and MR(Q) = 70.

Where Q is the number of 6'' Rainbow cakes the bakery produces monthly.

a. What is the level of output (number if cakes produced) that maximize net benefit (profit)?

b. What are the total revenue, total cost, and net benefit from selling the profit maximizing quantity?

c.At the net benefit maximizing level of output, an extra cake can be sold for $70, thereby increasing total revenue by $70. Why does the manager of thefirm not sell one more unit?

4. You work as a market analyst in an investment bank. Part of your job description is to write a weekly report on the markets for four products, namely: automobiles, computers, gasoline, and new homes. Your assistant collects and provides you information on events that have been happening recently that she believes might affect the market of each of the products of your interest.

(a) Automobiles. Increase in imports of Chinese made automobiles.

(b)Computers. Parts for making computers fall in price because of improvements in technology.

(c) gasoline. Oil production declines due to a crisis in the Middle East; people take more vacations and drive more.

(c) New homes.The average incomes fall as the economy moves into recession; the productivity of home construction workers and builders increases.

Using the supply and demand model describe both verbally and graphically how each of the events affects the market (the equilibrium price and equilibrium quantity) of the associated product. Assume that the markets are competitive. Consider each case separately.

5. Consider that the general demand function for a product X is estimated to be

Q_d = 500 - 5P + 0.5M + 10P_Y - 2P_Z

Where Q_d is quantity demanded of good X, P is price of good X, M is consumer income (in thousands), P_Yis price of good Y, and P_Z is price of good Z.

a. Based on the estimated demand function, what is the relationship between good X and good Y; between good X and good Z? Explain.

b. Based on the estimated demand function, is good X a normal good or an inferior good? Explain.

c. Derive the demand curve equation if consumer incomes are $30,000, the price of good Y is $10 and the price of good Z is $20.

The general supply function for the product X estimated to be

Q_s = -200 + 20P - 5P_I + 0.5P_R

Where Q_s is quantity supplied of good X, P is price of good X, P_I is the price of inputs to good X, and P_R is price of related (in production) good R.

d. Based on the supply function above, what is the relationship between good X and good R? Explain.

e. Derive the equation for the supply curve if the input prices are $10, and the price of R is $20.

g. What is the minimum price at which the producer will supply any of the good X at all?

h. Based on your results above, determine the equilibrium price and quantity of good X.

i. What is the market outcome if price is $40? What do you expect to happen in the market? Why?