Hi PLES HELP ME WITH THIS PROBLEM WITH EXPLANATION THANKS. (I) a. State the econ

Question

Hi PLES HELP ME WITH THIS PROBLEM WITH EXPLANATION THANKS.

(I)

a. State the economic criterion for choosing between two projects.

b. State the economic criterion for making the profit-maximizing choice using marginal analysis.

c. State the economic criterion for making the utility-maximizing choice using marginal analysis.

(II). Malcolm runs a bakery that employs 10 workers who each work 50 weeks a year and earn $400 a week.

In addition, Malcolm has rent of $50,000 per year, and costs for supplies and raw materials totaling

$125,000 a year. Malcolm occasionally is approached by another baker in town who is willing to pay

Malcolm $75,000 a year to come work for her. Malcolm could sell his business for $100,000. The current

interest rate on deposits at Malcolm's bank is 5%. Malcolm's revenue from the bakery is $440,000 a year.

a. What are Malcolm's explicit costs?

b. What are Malcolm's implicit costs?

c. What is Malcolm's opportunity cost?

d. What is the implicit cost of Malcolm's time and energy?

e. What is the implicit cost of capital?

f. What are Malcolm's accounting profits?

g. What are Malcolm's economic profits?

h. Should Malcolm continue to operate the bakery given the above cost and revenue figures? Explain your

answer.

i. Given the information, what is the minimum amount of revenue Malcolm's bakery must earn for Malcolm to stay in business?

Explanation / Answer

Answer

a. Cost Benefit analysis is the analytical tool to determine the pros and cons of a project. The benefits from both the projects are evaluated and its net Present Value is computed. In the next step, the costs associated with the projects are evaluated and NPV computed. By subtracting them , we get the returns. The project with the higher value should be chosen.

b. In order to make profit maximizing choice for a firm, there are two criteria, one is the traditional approach of maximizing the difference between Total Revenue and Total Cost by drawing tangents to these curves. The other more convenient approach is equating Marginal Revenue with the Marginal Cost. The firms will produce the level of output at which Marginal Revenue is equal to the Marginal Cost and corresponding to this output level charge prices on the demand curve.

At any level of the output with Marginal Revenue more than the marginal cost, the firms will have an incentive to produce to sell more and earn more marginal revenue and at any level of the output where Marginal cost exceeds the Marginal revenue, the firms will sell less. Thus, equilibrium occurs where MR = MC.

c. Given the budget constraint and the indifference curve of a consumer, the utility maximizing point occurs at the combination of the two goods the slope of the indifference curve or the ratio of the marginal utility of the two goods is equal to the price ratio of the two goods.

If the slope of the indifference curve or Marginal utility of x to marginal utility of y exceeds the price ratio, then the consumer will substitute X for Y and opposite will be the case when marginal utility ratio is less than the price ratio. Thus, the substitution will keep on occurring until both the ratios are equal.

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