Question 1

2. Definition of economic costs Andrew lives in Philadelphia and runs a business that sells pianos. In an average year, he receives $724,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $424,000; he also pays wages and utility bills totaling $266,000. He owns his showroom; if he chooses to rent it out, he will receive $4,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Andrew does not operate this piano business, he can work as a paralegal, receive an annual salary of $21,000 with no additional monetary costs, and rent out his showroom at the $4,000 per year rate. No other costs are incurred in running this piano business. Identify each of Andrew's costs in the following table as either an implicit cost or an explicit cost of selling pianos. Implicit Cost Explicit Cost The salary Andrew could earn if he worked as a paralegal The wholesale cost for the pianos that Andrew pays the manufacturer The rental income Andrew could receive if he chose to rent out his showroom The wages and utility bills that Andrew pays Complete the following table by determining Andrew's accounting and economic prot of his piano business. Profit (Dollars) Accounting Profit Economic Profit 3. Costs in the short run versus in the long run Ike's Bikes is a major manufacturer of bicycles. Currently, the company produces bikes using only one factory. However, it is considering expanding production to two or even three factories. The following table shows the company's short-run average total cost (SRATC) each month for various levels of production if it uses one, two, or three factories. (Note: Q equals the total quantity of bikes produced by all factories.) Average Total Cost (Dollars per bike) Number of Factories Q = 100 Q = 200 Q = 300 Q = 400 Q = 500 Q = 600 1 440 280 240 320 480 800 2 620 380 240 240 380 620 3 800 480 320 240 280 440 Suppose Ike's Bikes is currently producing 600 bikes per month in its only factory. Its shortrun average total cost is per bike. Suppose Ike's Bikes is expecting to produce 600 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using V . On the following graph, plot the three SRATC curves for Ike's Bikes from the previous table. Specically, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC 1 ); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories ( SRATC; ); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATCg). Final/y, plot the longrun average total cost (LRA TC) curve for Ike's Bikes using the blue points (circle symbol). AVERAGE TOTAL COST (Dollars per bike) 400 QUANTITY (Bikes) In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production. Range Economies of Scale Constant Returns to Scale Diseconomies of Scale Fewer than 300 bikes per month Back to Assignment Attempts Keep the Highest / 2 4. Firm's Costs Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs: Quantity Variable Cost Average Fixed Cost Average Variable Cost Average Total Cost ( Houses Painted per Month) (Dollars) (Dollars) (Dollars) (Dollars) 10 N 20 3 40 4 80 160 320 640 The efficient scale is houses