Consider the following events: Scientists reveal that eating oats can result in glowing skin and healthy hair, and at the same time, wages (i.e., the price of labour) for the oat production rise.

 

(a) Illustrate and explain what effect these changes have on the equilibrium price and quantity of oats. 




(b) Critically evaluate what will happen to the oat farmers' total revenue. (3 marks)




Q2, 

Amy owns a photo developing shop. She also does contract photography. If she takes on a contract, she cannot develop photos in that time and her customers go to her competitors. Suppose Amy rejects a contract to photograph a wedding. This would have been a five-hour job and Amy charges $500 per hour. She spent those five hours developing photos. Her chemicals and paper cost $1250. She earned $3500 in sales. 




(i) What is Amy's accounting profit from development photos? (1.5 marks) What is Amy's economic profit from development photos? (1.5 marks) 




(ii) Based on your answers in (i) and (ii), is it a wise decision for her to reject the contract to photograph a wedding? Explain your answer. (1 mark) 




Q3, Ahmad's business is a profit-maximising, perfectly competitive firm. He mows lawns for $20 each. His total cost each day is $220, of which $40 is a fixed cost. He mows 10 lawns a day. 




(i) What is Ahmad's profit/loss per day if he shuts down? (1.5 marks) 




(ii) What is Ahmad's profit/loss per day if he does not shut down? (1.5 marks) 




(iii) What can you say about Ahmad's short-run decision regarding shutdown? Explain your answer. (1.5 marks) 




(iv) What is his long-run decision regarding exit? (1.5 marks) 

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