ECO401 - Solution by VUsolutions VU Solutions

ECONOMICS

Question 01
A firm pays in cash $250000 in wages, $55430 in interest on borrowed money capital and $74320 for the yearly rental of its factory building. If the entrepreneur worked for somebody else as a manager, he would earn at most $44500 per year and if he lent out his money capital to somebody else in a similarly risky business, he would at most receive $16600 per year. Keeping in view the above information:
(A) Calculate:
a) The explicit cost of the firm.
b) The implicit cost of the firm.
c) The total cost of the firm.
(B) If the entrepreneur received $495680 from selling his years output, then calculate his total profit.
(C) What will be the total profit if the entrepreneur’s total revenue were $413934 instead?


........................................

ANSWER:
(A)
a. Explixit cost of the firm:

Explicit cost = $25,000+$74320
= $324,320
b. Implicit cost of the firm:

Implicit cost = $44500+$16600
= 61,100
c. Total cost:

Total cost = explicit+implicit
= $324320+$61100
= $385420
(B) TOTAL PROFIT:
Profit=Revenue-Cost
= $495680-$385420
= $ 110260

(D) TOTAL PROFIT:
Profit= $413934-$385420
=$28514
Ans
Question 02
(A) Find the value of multiplier if:
a) MPC = 0.39
b) MPS = 0.64
(B) If the value of multiplier is 2.49 then find out:
a) MPC
b) MPS
(C) What is the relationship between the value of multiplier and MPC?
(D) Find the change in equilibrium level of output when there is a $25 increase in investment spending and the MPC is 0.75.
ANSWER:
A. Value of multilpier:

a. Mpc=0.39
K=1/1-mpc
=1/1-0.39
=1/0.61
=1.6
b. Mps=0.64
K=1/mps
=1/0.64
=1.56

B.

a. K=2.49 , Mpc=?

K=1/1-mpc
2.49(1-mpc0=1
2.49-2.49mpc=1
2.49-1=2.49mpc
1.49=2.49mpc
Mpc=0.6
b. K=2.49 mps?
K=1/mps
2.49=1/mps
2.49(mps)=1
Mps=0.40
C. RELATIONSHIP BETWEEN THE VALUE OF MULTILPER AND MPC:

k is strong when mpc increase
Or k is weak when mpc is decrese
K=more than 1 and less than infinity
MPC=less than 1 more than 0
D. CHANGE IN EQUILBRIUM LEVEL OF OUTPUT:

If the invest is increase 25 the change in equilibrium level of output will increase.if mpc=0.75 will be stronger


))))))))))))))))))))))))))))))))))))))))))))))))


Another solution
.......................


Explicit costs are those which are clearl stated and recorded, such as:
- material costs - prices paid to suppliers;
- labour costs - wages paid
- depreciation costs on fixed assets;
- other expenses, such as rates, building rental etc.

Implicit costs are benefits forgone by not using the factors of production in their next most profitable way.


Q # 1 Part (A) to easy hai, iss se ho jaye ga...

explicit costs = 250,000 (wages) + 55,430(interest) + 74,320(rent)
implicit costs = 44,500 (income forgone which the entrepreneur would have received had he worked somewhere else as a manager, yeh aap ko samjhane ke liye likha hai) + 16,600 (benefit forgone)
total cost = explicit cost + implicit cost

part (B) mein confusion hai...
kuch students ne total profit ko aisay calculate kiya hai:
total profit = total revenue - explicit cost

lekin mere khayal se it should be;
total profit = total revenue - total cost (explicit cost + implicit cost) [but i'm not sure about it yet, lekin mein aisay hi karon ga]

kyon ke ek concept hota hai "Accounting profit" and "Economic profit" ka... jo handouts mein to shayad kahin nahi likha, but CA ki book se bata raha hoon...
Accounting profit = total revenue - explicit cost
economic profit = total revenue - (explicit cost + implicit cost)

ab question mein kahin nahi likha ke hum ne accounting profit find karna hai ya economic profit .. mein ne eco401 deptt ko mail bhi ki thi yehi confirm karne ke liye, unhon ne kaha ke dear student, read lecture # 17. lecture # 17 mein bas total profit ka formula diya hai (total profit = total revenue - total cost)

anyways kyon ke yeh subject economics hai, and question bhi silent hai about accounting or economic profit, so i'll calculate economic profit... [agar kisi ko nahi samjh aa raha accounting and economic profit mein difference, to kindly confuse mat hoon, just remember "total profit = total revenue - total cost"]


Q # 2:

yeh bahut hi easy question hai...

part (A)
multiplier ki value find karni hai...
multiplier hota hai... "the ratio of change in the national income to a change in investment" [handouts mein bhi likha hai, but different words mein likha ho ga, don't get confused]

[multiplier ka concept mein CA book se copy kar raha hoon, jo parhna chahay parh sakta hai, but agar na samjh ayi , to kindly don't get confused, just remember we can find the value of multiplier (K) by these formulas:

1. K = delta y/ delta I
2. K = 1/MPS
3. K = 1/1-MPC

and if someone wants to read the detail, he/she can the text below (in blue color), but again agar yeh below concept na samjh aya to don't get confused, coz mere khayal se yeh shayad handouts mein hai bhi nahi...]

K = delta y(change in income)/ delta I(change in investment)

-K ----> multiplier
-delta -> symbol hota hai... means change

the above method is a straightforward way of defining the concept of the multiplier. Another way to put it would be as follows: [copying from CA book]

MPS = ΔS/ delta Y

1/MPS = delta Y/delta S (above equation ko hi change kiya hai) -------- (i)

K = delta Y/ delta I --------------- (ii)

Since delta S = delta I [ Y = C + S, Y = C + I therefore S = I or delta S = delta I]

therefore. delta Y/ delta S = delta Y / delta I

K = 1/MPS --------> iss se bhi multiplier ki value find kar sakte hain...

And MPC + MPS = 1
MPS = 1 - MPC

so,

K = 1/1-MPC -------> iss se bhi multiplier ki value find kar sakte hain...

yeh to tha book se, jo mein ne yahan likha... yeh assignment mein sab kuch likhne ki zarorat nahi, coz only 2, 2 marks ke questions hain :-P

part (A), (a)
K = 1/MPS just put the values and u'll get the answer, and same will be done for part (B)

part (C) there is a direct relationship b/w MPC and the value of multiplier... if the MPC is higher, the size of multiplier would be high and vice versa...

Part (D) [iss mein thori confusion hai mujhe, but mein ne jaisay kiya hai, woh bata daita hoon]
pehle multiplier (K) ki value find karo,

then multiplier ka jo ist formula likha tha, K = delta Y/delta I iss mein values put kar do,

-delta Y = find karna hai
-delta I = given (25$)
-K = value pehle find karo.
.................................................



another solution
----------------


Question no 1



A

a) Explicit Cost


Wages + Interest on borrowed Capital + Factory Rent

$250,000 + $55,430 + $74,320 = $379,750



b) Implicit Cost

Cost of forgone payment he would have received working as a manger = $44,500
Cost of forgone payment he would have received working as a manger = $16,600
Answer : $61,100

c) Total Cost = Explicit Cost + Implicit Cost = $379,750 + $61,100 = $440,850



Part B His total Profit = $495,680 - Explicit Cost (379,750) = $115,930


Part C If sales would have $413,934 then $413,934 - 379,750 = $34184


Question no 2

Part A
a)

The size of the multiplier effect is 1/(1-MPC).
so multiplier = 1/1-0.39 = 1/0.61 = 1.639



b) The multiplier is the reciprocal of the MPS

= 1/0.64 = 1.5625



Part B If the value of multiplier is 2.49 then


MPS = 1/2.49 = 0.4016

MPC = 1-0.4016 = 0.59839



Part C

The value of multiplier is directly related to the magnitude of MPC.


Part D


= 1/1-0.75 =4

= delta y = K( delta L)
=4 (25$)
=100$
..........

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