1. The sole proprietor of the FM2 Financial Services, Bondo, receives all accounting profits earned by her firm and a K28,000-a-year salary she pays herself. It is noteworthy that she also has a standing salary offer of K35,000 a year if she agrees to work for Bank of Zambia. If she had invested her capital outside her own company, she estimates that would have made a return of K22,000 a year. Further, information has reached you that last year, Bondo's accounting profit was K50,000. Calculate her economic profit?

[10 Marks]

2. In his spare time, Mulenga makes handling tools using metal rings he buys from a hardware store, a Janet Hardware store, and a pair of pliers. He sells the final product at local crafts fairs and at bikers' annual convention in Chisamba. Being interviewed once by a local newspaper, he said literally the following: "The materials cost me ZMW30, and the rest is just my labor, which is free. One item sells for about ZMW 150, which gives me net profit of ZMW120 for three nights of work."

a) Is he talking about economic profit or accounting profit? Explain the difference between the two.

1 Mark

b) Discuss Mulenga's statement from economic perspective (taking the opportunity cost into account).

2 Marks

c) If Mulenga talks his girlfriend into joining him in his business and buys another set of tools, would you consider it to be short run or the long run decision? Explain the difference between the two.

2 Marks

[5 Marks]

3. Your firm has discovered a cheap and efficient technology of turning used plastic bottles and bags into various useful products. You limit your attention to the following two production opportunities: you can produce plastic utensils or helmets for Boilermakers' fans. In the first case your estimated annual revenue is K25,000, while the production will cost you K8,000. However, in your second option, you expect to sell 2000 helmets every year at K10 each, and the average total cost of every helmet will be K2.

a) Which production opportunity will you choose and why?

2 Marks

b) If you do so, what will be your economic profit and if your answer is lower than accounting profit explain in technical terms why is it so?

3 Marks

[5 Marks]

4. Hellen and Shana run their own business to supplement their income. Every Friday they take two gas grills and grill burgers in front of the Unilus Leopards Campus hall. Working from noon till 6pm, they are able to serve 250 hungry students. They are both equally good in what they are doing, so their wages are equal. One day Shana was not feeling well, so Hellen had to go there alone. Of course, she has chosen to use only one grill. Within the same period of time she was able to serve 120 customers.

a. What has happened to the average cost of each burger? Show your work.

3 Marks

b. What can be said about the returns to scale for their business? Explain.

2 Marks