By Sheraz Bhatty

Class Activity

Problem #1:
Gomes runs a small pottery firm. He hires one helper at $12,000 per year, pays annual
rent of $5000 for his shop, and spends $20,000 per year on materials. He has $40,000
of his own funds invested in equipment (pottery wheels, kilns and so forth) that could
earn him $4000 per year if alternatively invested. He has been offered $15,000 per year
to work as a potter for a competitor. He estimated his entrepreneurial talents are worth
$3000 per year. Total annual revenue from pottery sales is $82,000.calculate the
accounting profit and the economic profit for Gomez's pottery firm.
Problem #2:
A women working in a large duplicating (photocopy) establishment for $15,000 per
year decides to open a small duplicating business of her own. She runs the operation by
herself without hired help and invests no money of her own. She rents the premises for
$10,000 per year and the machines for $30,000 per year. She spends $15,000 per year
on supplies (paper, ink, envelopes), electricity, telephone, and so on. During the year
her gross earnings are $65,000.
a) How much are the explicit cost of the business?
b) How much are the implicit costs?
c) Should this woman remain in business after the year if she is indifferent
between working for herself or for others in a similar capacity?

Problem #3:

Jaynet spends $20,000 per year on painting supplies and storage space. She recently
received two job offers from a famous marketing firm------- one offer was for $100,000
per year, and the other was for $90,000. However, she turned both jobs down to
continue a painting career. If Jaynet sells 20 paintings per year at a price of $10,000
each:
a) What are her accounting profits?
b) What are her economic profits?

Problem 4 :
Consider the following cost and demand information about a monopoly (in dollar).
Fill out the table.

Quantity of Price Total Marginal Total Costs Marginal Profit or

Output Revenue Revenue Cost Loss
1 14 --- --- 16 --- ---
2 12 --- --- 20 --- ---
3 10 --- --- 26 --- ---
4 8.5 --- --- 33 --- ---
5 7 --- --- 41 --- ---
6 5.5 --- --- 50 --- ---

• Determine how much the firm will produce if it is maximizing profits. What
price will the firm charge? What are its profits?
 By Sheraz Bhatty

Problem 5 :
Consider the following cost and demand information about a monopoly (in dollar).
Fill out the table.

Price Quantity Total Marginal Total Cost Marginal Profit or

Demanded Revenue Revenue Cost Loss
$20 0 $--- $--- $4 $--- $---
16 1 --- --- 10 --- ---
12 2 --- --- 14 --- ---
10 3 --- --- 20 --- ---
7 4 --- --- 28 --- ---
4 5 --- --- 40 --- ---
0 6 --- --- 54 --- ---

• Determine how much the firm will produce if it is maximizing profits. What
price will the firm charge? What are its profits?