Q1. Suppose you decide to leave your current job that pays $50,000 per year to open up an auto repair shop in your home town. To open the shop, you decide to withdraw $100,000 from your retirement fund that was earning 5% per year. If at the end of the first year, you earn $80,000 of accounting profit from your new establishment, what is your economic profit?
Q2. Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10% on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are spread over the 52 weeks. Included in the fixed costs is the 10% return to the investors (the interest paid to the investors are paid out in equal weekly installments) and $1000 per week in other fixed costs. Variable costs include $1000 in weekly wages and $600 per week for materials, electricity, etc. The restaurant charges $5 on average per meal.
(a) Calculate total fixed costs per week for the restaurant.
(b) Calculate total variable costs per week for the restaurant.
(c) Calculate total costs per week for the restaurant.
(d) Calculate total revenue per week for the restaurant.
(e) Calculate the economic profit per week for the restaurant.
Q3. The Wall Street Journal published an article on May, 22, 2009, titled "Recession Turns Malls into Ghost Towns," in which it was documented that some of the mall establishments were considering not "sticking around" once their lease expired. So why wouldn't the owners of these stores simply shut down now and not wait until the lease expires?
Q4. Refer to the graphs below to answer each of the questions that follow. Assume the market for Spanish cured ham (jamón serrano) is in equilibrium where D = S . Further, for simplicity, assume that the AC cost for the typical firm represents the appropriate short-run curve consistent with the optimal scale of output at its minimum point.
Assume further that we begin in long-run equilibrium (i.e., the equilibrium market price in the market, identifiable in the left-hand graph, equals minimum long-run average cost, identifiable in the right-hand graph); that all firms have similar cost curves; and that this is a constant-cost industry, which means that as firms enter or exit the market, input prices remain the same.
(a) Referring to the market diagram above, show and explain what happens to the equilibrium market price and quantity sold in the European market for Spanish cured ham (jamón serrano) if European tastes change in favor of Italian proscuitto and away from Spanish cured ham. (Of course, we're assuming that Spanish cured ham is produced only in Spain, but consumed throughout Europe.)
(b) Refer to the typical firm diagram above to show and explain what the new profit maximizing level of output would be at this new market-equilibrium price.
(c) Referring to the typical firm diagram above, identify whether the firm at the new profit-maximizing level of output is earning a profit or a loss.
(d) Refer again to the market diagram (on the left) above. Given your answer to (c), show and explain what will happen in the market, i.e., what curve will shift and why?
(e) Review your answers in (a) through (d) to summarize how a competitive market return to its long-run equilibrium.