1)During a year of operation, a firm collects $5,000,000 in revenue and spends $3,500,000 on labor expense, raw materials, rent, and utilities. The firm's owner has provided $1,000,000 of her own money instead of investing the money and earning a 12 percent annual rate of return.

a. The explicit costs of the firm are $______________. The implicit costs are $______________. Total economic cost is $______________.

b. The firm earns accounting profit of $______________.

c. The firm's economic profit is $______________.

d. If the owner could earn 15 percent annually on the money she has invested in the firm, the economic profit of the firm would be ______________ (when revenue is $5,000,000).

2)Over the next three years, a firm is expected to earn economic profit of $700,000 in the first year, $800,000 in the second year, and $500,000 in the third year. After the end of the third year, the firm goes out of business.

a. If the risk-adjusted discount rate is 16 percent for each of the next three years, the value of the firm is $_______________. The firm can be sold today for a price of $_______________.

b. If the risk-adjusted discount rate is 10 percent for each of the next three years, the value of the firm is $_______________. The firm can be sold today for a price of $_____________

3)What happens to the supply of random-access memory (RAM) chips, a component in the manufacture of personal computers, when each of the following changes occurs? _____________

a. Two huge new manufacturing plants begin operation in South Korea. _____________

b. Scientists discover a new production technology that will lower the cost of making RAM chips. _____________

c. The price of silicon, a key ingredient in RAM chip production, rises sharply. _____________

d. The price of RAM chips increases. _____________

e. The market for personal computers turns sour and RAM chip makers now expect RAM chip prices to fall by 25 percent next quarter.

4). Consider the following demand and supply functions for tomatoes:

Qd = 6,000 4,000P Qs = 1,000 +10,000P

a. Plot the demand and supply functions on the axes below.

b. At a price of $1.00 per tomato, _______________ tomatoes is the maximum amount that can be sold. A price of $__________ per tomato is the maximum price that consumers will pay for 2,000 tomatoes, which is the demand price for 2,000 tomatoes.

c. The maximum amount of tomatoes that producers will offer for sale if the price of tomatoes is $0.30 is ______________. The minimum price necessary to induce producers to offer voluntarily 2,000 tomatoes for sale is $________, which is called the supply price for 2,000 tomatoes.

d. In equilibrium, the price of tomatoes is $_____________ and _____________ tomatoes will be sold.

e. In equilibrium, the quantity of tomatoes produced is __________ tomatoes.

f. In equilibrium, the quantity of tomatoes consumed is __________ tomatoes.

6). Evaluate the following statements:

a. "The optimal level of an activity is that level for which marginal benefit exceeds marginal cost by the greatest possible amount."

b. "The ratio of marginal benefit to marginal cost of an activity measures the additional benefit attributable to increasing the activity by one unit."

c. "At the optimal level of activity, further increases in the activity necessarily decrease total benefit."

d. "This is a lousy vacation resort, and it's been raining the whole time. I'd leave but I've already paid for the hotel for the week, so I guess I will stay."

e. "I hate golf, but I paid so much for the clubs that I can't give it up."

f. "The cost of my yearly business license is doubling next year, so I must plan to increase output next year in order to cover the additional cost of doing business."

g. "Now is the perfect time to buy more television ads because the TV networks are offering us lower prices on any extra ads we purchase."

1. a. Fill in the missing numbers below. Total Total Marginal Marginal Net A Benefit Cost Benefit Cost Benefit O 0 XX XX O 10 8 2 5 9 25 4 4 6 15 5 34 22 b. Define "optimal level of activity." In part a, what is the optimal level of activity? Why? C. In part a, marginal benefit does not equal marginal cost for any quantity. Does this mean there is no optimal level of activity? Why or why not? d. At the optimal level of activity, could you increase the level of activity and get an increase in total benefit? If so. why should the manager not increase the activity further