Kate makes sweaters in her home. She started with just some knitting needles and
ID: 1223445 • Letter: K
Question
Kate makes sweaters in her home. She started with just some knitting needles and yarn and was able to knit 60 sweaters per year. Now some local stores have expressed interest in her designs and have offered to buy her sweaters for $10 each. This makes it worthwhile for her to invest in some capital; in particular, she could produce many more sweaters if she invested in one or more looms, as shown in the following table.
Complete the following table by calculating the marginal product (MP) of each loom and the marginal revenue product (MRP) of each loom.
If the rental price of a loom is $270 per year, Kate should use .(1 loom, 2 looms, 3 looms, 4 looms, 5 looms)
Suppose the demand for sweaters is very elastic, while the demand for cigarettes is very inelastic.
Suppose that looms are used exclusively in the production of sweaters and that tobacco is used exclusively in the production of cigarettes. Which of the following might we expect?
a.The supply of tobacco would be less elastic than the supply of looms.
b.The supply of tobacco would be more elastic than the supply of looms.
c.The demand for tobacco would be more elastic than the demand for looms.
d.The demand for tobacco would be less elastic than the demand for looms
Quantity of Input Output MP of Each Loom MRP of Each Loom (Looms) (Sweaters per year) (Sweaters) (Dollars) 0 60 1 110 2 150 3 184 4 213 5 238Explanation / Answer
Price per sweater = $10
Following is the complete table -
The rental price of a loom is $270 per year. A firm hire inputs upto that level at which MRP is higher or equal to the input price.
In given case, upto hiring of 4 looms, MRP is greater than rental price of loom.
So, Kate should use 4 looms.
If demand for a product is inelastic the demand for inputs used in its production is also inelastic.
On the other hand, if demand for a product is elastic then demand for inputs used in its production is also elastic.
Tobacco is used in production of cigarettes and demand for cigarettes is inelastic. Thus, demand for tobacco will also be inelastic.
looms are used in production of sweaters and demand for sweaters is elastic. Thus, demand for looms will also be elastic.
Thus, it can be stated that demand for tobacco would be less elastic than the demand for looms.
Hence, the correct answer is option (d).
Quantity of Inputs Output (Q) MP of each loom MRP of each loom (Looms) (Sweaters per year) (Sweaters) (Dollars) MP = Qn - Qn-1 MRP = MP * Price 0 60 - - 1 110 110-60 = 50 500 2 150 150-110 = 40 400 3 184 184-150 = 34 340 4 213 213-184 = 29 290 5 238 238 - 213 = 25 250Related Questions
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