ans 8
Problem Set 8
1.Your Aunt Imelda is thinking about opening a pub. She estimates that it would cost € 500 000 per year to rent the premises, buy a license to serve alcohol and to buy in enough Murphy's Irish Stout from the brewery. In addition, she would have to leave her € 50 000 per year job as an accountant.
a) Define opportunity cost.
When making a decision between options A and B, the opportunity cost of choosing A is what you could have won if you would have chosen option B. That is, what you give up to obtain what you want.
b) What is your aunt's opportunity cost of running the pub for a year? If your aunt thought she could sell € 510 000 worth of Murphy's in a year, should she open the pub? Explain.
My aunt’s opportunity cost is €50 000 per year in her last job, because that is the amount she’s not longer earning. She should not open the pub because:
1. By opening the pub she’s already giving up €50.000 per year
2. By selling the pub in a year she only wins €10.000
3. Thus, she loses €40.000 in a year.
4. It’s not a good idea for her to open the pub.
2. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:
a) What is the marginal product of each hour spent fishing?
Hours
Kg of fish
Marginal product
0
0
10
1
10
8
2
18
6
3
24
4
4
28
2
5
30
c) Use these data to graph the fisherman's production function. Explain its shape.
MPL equals the slope of the production function. The function gets flatter as time increases.
c) The fisherman has a fixed cost of € 10 (his fishing rod). The opportunity cost of his time is € 5 per hour. Graph the fisherman's total cost curve. Explain its shape.
Hours
Quantity of fish in kg
Fixed costs
OC of his time
Total costs
0
0
10
0
10
1
10
10
5
15
2
18
10
10
20
3
24
10
15
25
4
28
10
20
30
5
30
10
25
35
It has an upward slope because catching additional fish takes additional time. The curve is convex because there are diminishing
1.Your Aunt Imelda is thinking about opening a pub. She estimates that it would cost € 500 000 per year to rent the premises, buy a license to serve alcohol and to buy in enough Murphy's Irish Stout from the brewery. In addition, she would have to leave her € 50 000 per year job as an accountant.
a) Define opportunity cost.
When making a decision between options A and B, the opportunity cost of choosing A is what you could have won if you would have chosen option B. That is, what you give up to obtain what you want.
b) What is your aunt's opportunity cost of running the pub for a year? If your aunt thought she could sell € 510 000 worth of Murphy's in a year, should she open the pub? Explain.
My aunt’s opportunity cost is €50 000 per year in her last job, because that is the amount she’s not longer earning. She should not open the pub because:
1. By opening the pub she’s already giving up €50.000 per year
2. By selling the pub in a year she only wins €10.000
3. Thus, she loses €40.000 in a year.
4. It’s not a good idea for her to open the pub.
2. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:
a) What is the marginal product of each hour spent fishing?
Hours
Kg of fish
Marginal product
0
0
10
1
10
8
2
18
6
3
24
4
4
28
2
5
30
c) Use these data to graph the fisherman's production function. Explain its shape.
MPL equals the slope of the production function. The function gets flatter as time increases.
c) The fisherman has a fixed cost of € 10 (his fishing rod). The opportunity cost of his time is € 5 per hour. Graph the fisherman's total cost curve. Explain its shape.
Hours
Quantity of fish in kg
Fixed costs
OC of his time
Total costs
0
0
10
0
10
1
10
10
5
15
2
18
10
10
20
3
24
10
15
25
4
28
10
20
30
5
30
10
25
35
It has an upward slope because catching additional fish takes additional time. The curve is convex because there are diminishing