Author Question: Two university graduates, Bill and Steve, worked for an advertising agency at an annual salary of ... (Read 104 times)

yoroshambo · **on:** Jun 29, 2018

Two university graduates, Bill and Steve, worked for an advertising agency at an annual salary of 40,000 each for 3 years after they graduated. Then, they decided to quit their jobs and start a partnership that designs and builds Web sites.

They rented an office for 12,000 a year and bought capital for 30,000. To pay for the equipment, Bill and Steve borrowed money from a bank at an annual interest rate of 6 percent. During their first year of operation, the partners' total revenue was 100,000. The market value of their capital at the end of the year was 20,000. If Bill and Steve do not design Web pages, their best alternatives are to return to their previous job. a) What is the firm's economic depreciation? b) What are the partnership's costs? c) What is the firm's economic profit in the first year of operation?

Question 2

Which of the following four firms would most likely be part of a monopolistically competitive market?

A) Lee, J Brand, Joe's Jeans, Paper Denim & Cloth, Levi's, and Wrangler are all producers of jeans.
B) Mark sells the tomatoes he grew in his backyard at the local farmers market.
C) The WaveHouse is the only place in San Diego where you can ride an indoor 10 foot wave.
D) Amara Massage is the only firm which specializes in pre- and post-natal massage.

reversalruiz · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

a) The economic depreciation of the firm's capital is the market value of its equipment at the beginning of the year, 30,000, minus its market value at the end of the year, 20,000, so the economic depreciation is 10,000.
b) The partnership's costs are: the rent, 12,000; the interest expense, 1,800; the economic depreciation, 10,000; and, the opportunity cost of the owners' resources, which is the best alternative use of their resources, working at their previous job for 40,000 each, for a total of 80,000. therefore the total cost is 103,800.
c) A firm's economic profit is its total revenue minus its total cost. Bill and Steve's total economic profit is 100,000 - 103,800 = -3,800, which means that the firm has an economic loss.

Answer to Question 2

A