[Economics HW]?

Question

Hi.

I have not idea how to get to this problem.

Please help me out!

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Deirdre makes sweaters in her home. She started with just some knitting needles and yarn and was able to knit 50 sweaters per year. Now some local stores have expressed interest in her designs and have offered to buy her sweaters for $25 each. This makes it worthwhile for her to invest in some capital; in particular, she could produce many more sweaters if she invested in one or more looms, as shown in the table below.

Equipment

(Number of looms) Output

(Sweaters per year)

0 50

1 100

2 140

3 170

4 190

5 200

2.3. If the rental price of a loom is $600 per year, how many looms should Deirdre use?

A. Three

B. One

C. Four

D. Two

How do you connect the "MRP=MFC" stuff relate to this??

Answer 1

A. Three

TR - total revenue = Output x Price ($25 each)

TC - total cost (without wage, opportunity costs etc. - only rental price). = Output x rental price ($600 each)

MP - marginal product (per extra equipment)

MRP - marginal revenue product (per extra equipment)

MR - marginal revenue (per output)

MCP - marginal cost product (per extra equipment)

MC - marginal cost (per output)

Equipm.Output.. TR......TC.....Profit

0..............50.... 1250.......0....1250

1.............100.... 2500...600....1900

2.............140.... 3500..1200....2300

3.............170.... 4250..1800....2450  <--Maximal profit ($2'450)

4.............190.... 4750..2400....2350

5.............200.... 5000..3000....2000

Equipm.Output. MP..MCP. MC..MRP..MR

0............50....... 50....0...... 0...1250....25

1...........100...... 50..600.... 12..1250....25

2...........140...... 40..600.... 15..1000....25

3...........170...... 30..600.... 20....750....25

4...........190...... 20..600.... 30....500....25

5...........200...... 10..600.... 60....250....25

At equipment quantity =3  we have closest  MC≤MR (20≤25) or MCP≤MRP (600≤750)

Answer 2

The correct Answer is A. Three

[ because with three looms the profit is maximum: MRP is closest to MFC --- see table below]

No. of   -----------$ -------------------$ --------------- $

looms Output  Cost  MFC  Revenue  MRP...PROFIT

0 ......... 50 .....  0 ........  0 ......1250   .  1250..1250

1 .........100 ......600.....600....2500......1250 1900

2 .........140 ......1200...600.....3500.....1000.2300

3......... 170 .......1800...600....4250.......750.2450

4 .........190 .......2400...600.....4750......500.2350

5 ..........200....... 3000...600....5000......250.2000

Profit = Revenue - Cost