Economic: Economics and Profit Max Profit

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1. Sally is considering opening her own beauty salon. She anticipates the following costs per year: Additionally, Sally is withdrawing $34,000 from her savings account that pays 4% interest/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: Furniture: $20,000

Equipment: $14,000
Rent: $12,000
Coloring products: $6,000
Styling products: $4,000
a. Explicit costs (list the items).
-furniture 20,000 
-equipment 14,000 
-rent 12,000 
-coloring products 6,000 
-styling products 4,000 
b. Implicit costs (list the items).
-34,000 @ 4% per year 
-Sally’s current salary of 25,000 per year 
c. Accounting profit.
Revenue 70,000 -furniture 20,000 -equipment 14,000 -rent 12,000 -products 10,000 = Net income (accounting profit) 14,000 

d. Economic profit.
Revenue 70,000-salary of 25,000- 34,000 + 4% interest = 35360 = 9,640 economic profit
e. Given this first-year information only, should Sally open a salon? Yes, Sally should open the salon. In this situation, she will prosper and make a profit. On the other hand, if she were to estimate to be a net loss, she should not open the salon. ______________________________________________________________________________ 2. Suppose a monopolistic competitor in long-run equilibrium has a constant marginal cost of $6 and faces the demand curve given in the following table:

a. What output will the firm choose?
TR=QP Profit-maximization rule: MR→MC MR=TR(Qⁿ)-TR(Qⁿˉ¹) MR=7 MC=6 Profit=Pr=TR-TC

MC=2
VC= ∫ MC∂Q = 2Q
Q| P| TR| Profit| MR|
20| 2| 40| -80| -17|
19| 3| 57| -57| -15|
18| 4| 72| -36| --13|
17| 5| 85| -17| -11|
16| 6| 96| 0| -9|
15| 7| 105| 15| -7|
14| 8| 112| 28|...
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