2. A) If the price o entertainment is 12 and the price of necessities is 4, and
ID: 1119227 • Letter: 2
Question
2.
A) If the price o entertainment is 12 and the price of necessities is 4, and the MRS of necessities for entertainment expressed by Pam is 1/2, is Pam a utility maximizer? How do you know? If Pam is not maximizing, what should she do to improve her situation? Assume necessities are plotted on x axis. B) You are deciding on the most efficient mix of labor and capital to use to fulfil an order of 1000 cars. You have the cost and productivity data. What condition needs to be met to produce 1000 cars at the lowest cost? Explain.
C) You own a small coffee shop called Exotic Latte' that only sell lattes. The business operates 7 days a week. Your average weekly sales are 200 lattes. Your costs are as follows:
Rent= $450/week (rent Fixed Cost for year)
Labor= $350/week (1 worker produce 200 lattes a week)
Ingredients-$0.50/latte.
Other variable expenses = 0.50/latte.
What is the average variable cost, average fixed cost, and average total cost?
If the price of a latte is $4, which cannot be rasied, Should the business shut down next week or should it shut down when the rent lease expires. Explain.
2. a. If the price o entertainment is 12 and the price of necessities is 4, and the MRS of necessities for entertainment expressed by Pam is 1/2, is Pam a utility maximizer? How do you know? If Pam is not maximizing, what should she do to improve her situation? Assume necessities are plotted on x axis. (3) b. You are deciding on the most efficient mix of labor and capital to use to fulfil an order of 1000 cars. You have the cost and productivity data. What condition needs to be met to produce 1000 cars at the lowest cost? Explain. c. You own a small coffee shop called Exotic Latte' that only sell lattes. The business operates 7 days a week. Your average weekly sales are 200 lattes. Your costs are as follows Building and Equipment Rent= $450/week Labor= $350/week Ingredients-$0.50/latte. Other variable expenses s0.50/latte. Year Lease (Fixed Cost) 1 worker is needed to produce 200 lattes a weelkExplanation / Answer
a. Assuming that necessities are on x-axis. The marginal rate of substitution is the rate of exchange between goods according to preference of consumer. At equilibrium the marginal rate of substitution between two goods should be equal to ratio of respective prices. It is given that price of entertainment (Pe) is 12, price of necessity (Pn) is 4, and the marginal rate of necessity for entertainment (MRSne) is 1/2. Therefore according to equilibrium condition MRSne= Pn/ Pe. The given information 1/2>4/12 ==> 1/2>1/3 indicates that marginal rate of substitution is greater than the price ratio, so to reach the equilibrium Pam need to consume more of necessities and less of entertainment. By consuming more of necessities and less of entertainment, the marginal utility of necessity will decrease and marginal utility of entertainment will increase (MRSne= MUn/ MUe), which result into equalization.
b. The condition required to produce 1000 cars at the lowest cost is corresponding to equality of marginal rate of transformation between labor and capital to the ratio of wage rate and rate of return on capital (MRTLK=MPL/MPK)=(w/r). This is because at this condition the iso-cost line (w/r) is tangent to isoquant line (MPL/MPK).
c. The total cost is equal to total fixed cost and total variable cost. C=F+V=(450+350)+(.50*L+.50*L)=800+L
Hence the average varaible cost =(.50+.50)*L/L=1
The average fixed cost =800/L
The average total cost =(800+L)/L
If the price of latte is $4 then the total sale per week is 200*$4=$800
Hence the business should continue at least when total sales=total cost==>800=800+L. It is able to cover the fixed cost for the week. If one continue to sell then it will incur additional fixed cost for next week and as well the variable cost. Hence it is better to shut down next week and not when rent lease expires.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.