Ugi 105 hw8 Productivity and Cost Curves answers

UGI 105 HW8 Productivity and Cost Curves
ANSWERS

1. Sally is considering opening a beauty salon. She anticipates the following annual costs:

Sally's Annual Costs Furniture:	$20,000	Additionally, Sally is withdrawing $34,000 from her savings account that pays 4% interest per year to purchase the furniture and equipment; she will quit her current job that pays $25,000 per year. She expects total revenues from the new business in the first year to be $70,000. Calculate the following:
Equipment:	$14,000
Rent:	$12,000
Coloring products:	$6,000
Styling products:	$4,000

a. Explicit costs (list the items).

b. Implicit costs (list the items).
c. Accounting profit.
d. Economic profit.
e. Given this first-year information only, should Sally open a salon?

ANSWERS:
a. Explicit costs are $56,000: furniture, equipment, rent, coloring and styling products

b. Implicit costs are $26,360: lost income ($25,000) and lost interest (0.04 × $34,000 = $1,360)
c. Accounting profit is $14,000
d. Economic profit is –$12,360
e. Economic profit is negative, so Sally should not open the salon.
2. State whether the following decision is a short-run or long-run decision:

a. ADM is deciding whether to install machinery that uses Human Machine Interface technology or 8-layer PCB prototype technology in its manufacturing plant.

b. Wal-Mart hires additional seasonal workers during November and December.

c. Bassett furniture manufacturers close all manufacturing plants in North Carolina, USA and outsource their furniture production to manufacturing plants in China.

d. General Motors purchases new equipment to replace depreciating equipment.

ANS:
a. Long run; b. Short run; c. Long run; d. Short run

3. If marginal productivity is below average productivity, what will happen to average variable cost as output rises? Why?

ANS:
Average variable cost will rise. That is because if marginal productivity is below average productivity, marginal cost is above average variable costs. And when marginal cost exceeds average variable costs, average variable costs are rising.

4. Use the table below to answer the following questions: