a) Explain the effect of the increase of Coffee prices on the equilibrium price and

equilibrium quantity of the tea.

(5 points)

a)- Tea and coffee are substitute goods, when the price of one increases the demand of
other good increases as it is comparatively cheaper than other good,

- The relation between the substitute goods demand and price is positive,

- As in the given case the price of coffee increases the demand of tea will increase and
the equilibrium will change because the the demand curve of tea will shift rightward and
the new quantity with price sets new equilibrium point.

b) A student claims to have spotted a UFO over the desert outside of Dubai. How
will his claim affect the supply (not the quantity supplied) of binoculars in
Dubai stores? (5 points)
Chapter 3, Problem 3P
Supply will not change, but the quantity supplied would increase in response
to the higher price for binoculars. There would be a likely increase in the
demand for binoculars, thereby increasing the selling price.
c) If we have an inferior good, explain the impact of the decrease in consumer's
income on the demand of that good. (5 points)
there is inverse relationship between quantity demanded and income in case of
inferior good. When your income rises you definitely prefer McDonald's
burger (as a result demand decreases for KFC burger). but if your income falls
then you buy more KFC burger (demand for KFC burger increase).

d) How would each of the following affect the market supply curve for corn?
(10 points)
1. A new and improved crop rotation technique is discovered.
Shift in the supply curve to the right. There will an increase in the
quantity supplied. Due to the improved crop rotation system, the
quantity supplied will increase because a determinant of supply -
technological advancement is touched upon.

2. The price of fertilizer increases

 Shift in the supply curve to the right. There will an increase in the
quantity supplied. Due to fall in inputs, the quantity supplied will
increase because a determinant of supply - prices of inputs is affected.

Question Two (25 points)

Based on the following table, answer the questions below:
Output TC TFC TVC ATC AFC AVC MC
0 $400
1 $120
2 $240
3 $840
4 $320
5 $240

Summary:
Table is completed above; formulas are written in table and for more clarification are
given here also

 At Zero level of output TC is given $400. we know that at zero level TVC
is also zero, so TFC=TC=$400 at zero level of output.
 As we know TFC is fixed cost at any level of output, so TFC at all level is
$400.

 TC=TFC+TVC ,TC=ACxQ , TC= MC

 TVC=TC-TFC , TVC =AVCxQ
 ATC =TC/Q , ATC= AFC+AVC
  AFC=TFC/Q , AFC = ATC- AVC
 AVC=TVC/Q ,AVC= ATC-AFC
 MC =TCn-TCn-1.

a) Complete the table below based on the relationships among the various cost
functions. (18 points)
b) If the marginal revenue equals $200, what is the level of production that
maximize the profits of producer? Explain your answer.

Answer
Q=5 or above
The profit is maximum at MR=MC
but here the MR is very high so the firm should produce 5 units to maximize profit
but firm should increase the production above 5 units if possible up to MC=$200

(7 points)

Question Three (25 points)

The Racqueteer Company makes tennis racquets out of graphite supplied to it by
Acme Sporting Goods, which pays Racqueteer $10 for each finished racquet.
Racqueteer’s only factors of production are lathe operators and a small building with
a lathe. The number of racquets per day it produces depends on the number of
employee-hours per day, as shown in the table below.

Number of racquets per day Number of employee-hours per day

0 0

5 1

10 2

15 4

20 7

25 11

30 16

35 22

a) If the wage is $15 per hour and Racqueteer’s daily fixed cost for the lathe and
building is $60, what is the profit-maximizing quantity of racquets?
 (15 points)

The Profit maximizing quantity of Racquetes is 20 racquets per day.

The profit-maximizing quantity is where the marginal cost is either less than or equal to
the marginal revenue. In this case, Racequetters get $10 for each racquet, so marginal
revenue is $10. As we can see in the table the firm will produce up to 20 racquets
because after that the marginal cost is more than the marginal revenue like at a level of
25 (MR< MC, 10 < 12), so the firm will incur a loss by producing more racquets, so the
firm will produce up to 20 racquets which will be profit-maximizing quantity.
Fixed Cost = $60

Variable Cost = Number of employee-hours per day * wag per hour ($15)

Total Cost = Variable Cost + Fixed Cost

Marginal Cost = (Change in Total Cost / Change in number of racquets)

b) What would be the profit-maximizing number of racquets if the firm’s fixed

cost were not $60 per day but only $30? (10 points)
The Profit maximizing quantity of Racquets will be the same 20 racquets per day as
we can see in the table.
The profit-maximizing quantity is where the marginal cost is either less than or
equal to the marginal revenue. In this case, Racequetters get $10 for each
racquet, so marginal revenue is $10. As we can see in the table the firm will
produce up to 20 racquets because after that the marginal cost is more than the
marginal revenue like at a level of 25 (MR< MC, 10 < 12), so the firm will incur a
loss by producing more racquets, so the firm will produce up to 20 racquets which
will be profit-maximizing quantity.

Fixed Cost = $30

Variable Cost = Number of employee-hours per day * wag per hour ($15)
Total Cost = Variable Cost + Fixed Cost
Marginal Cost = (Change in Total Cost / Change in number of racquets)

Question Four (25 points)

Waleed owns and manages a café in downtown whose annual revenue is $5,000.
Annual expenses are as follows:

Labor $2,000
Food and water 500
Electricity 100
 Vehicle lease 150
Rent 500
Interest on loan for equipment 1,000

a) Calculate Waleed’s annual accounting profit. (9 points)

Accounting profit = Revenue - All expenses listed in table (all of which are explicit
costs) = $5,000 - $(2,000 + 500 + 100 + 150 + 500 + 1,000) = $(5,000 - 4,250)
= $750
b) Waleed could earn $1,000 per year as a recycler of aluminum cans. However,
he prefers to run the café. In fact, he would be willing to pay up to $275 per
year to run the café rather than to recycle. (8 points)
Economic profit = Accounting profit - Earning foregone - Wllingness to pay to run cafe

= $(750 - 1,000 - 275)

= - $525

Since economic profit < 0, Jawad should not stay in the cafe.

1. Is the café making an economic profit? Calculate the economic profits?

2. Should Waleed stay in the café business? Explain your answer.
c) Suppose the café’s revenues and expenses remain the same, but recyclers’
earnings rise to $1,100 per year. Is the café still making an economic profit?
Show your calculations. (8 points)
Economic profit = Accounting profit - Earning foregone

= $(750 - 1,100)

= - $350

Since economic profit is still negative, Jawad should not stay in the cafe.

Best wishes

(d) In this case, interest amount is still same at $1,000 but it is an implicit cost.

Accounting profit = $5,000 - $(2,000 + 500 + 100 + 150 + 500) = $(5,000 - 3,250)

= $1,750

Economic profit = $1,750 - $(1,000 + 1,000 + 275) = $(1,750 - 2,275) = - $525

So, accounting profit will increase but economic profit will remain unchanged.

NOTE: As per Chegg Answering Policy, 1st 4 parts of the 1st question are answered.