Question
) Sally lives in Melbourne and runs a business that sells guitars. In an average year, she receives $3.9 million from sales of guitars. Of
) Sally lives in Melbourne and runs a business that sells guitars. In an average year, she receives $3.9 million from sales of guitars. Of this sales revenue, she must pay the manufacturer a wholesale cost of $2,500,000. She also pays wages and utility bills totalling $1,350,000. If she does not operate this guitar business, she can work in an accounting firm and receive an annual salary of $90,000. She owns her showroom. If she chooses to rent it out, she will receive $60,000 in rent per year. Assume that the value of this showroom does not depreciate during the year. No other costs are incurred in running this guitar business.
What is Sally's accounting (and tax) profit? What is her economic profit?
2) Draw a production function that exhibits diminishing marginal product of labour. Draw the associated total-cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two curves you have drawn.
3) Indicate whether the following statement is TRUE or FALSE and explain your answer: Firm's averagetotal-cost curve differs in the short run and in the long run because in the long run opportunity costs are included whereas in the short run they are excluded.
4) MULTIPLE CHOICE (identify the one best answer below and explain your reasoning for each option): The government cancels a $500 per year licence fee which was previously imposed on all places selling kebabs. Which cost curves out of the ones listed shift as a result? a. total cost and marginal cost b. average total cost and fixed cost c. average fixed cost and average variable cost d. all of the above e. none of the a
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