BUSINESS ECONOMICS

ASSIGNMENT-II
Student Name: Asna Khan
Student Id: 202309001
QUESTION 1. Akiko is a college student who works during the summers to pay for tuition. Last
summer she worked at a fast-food restaurant and earned $3,500. This summer she is working as a
painter and will earn $4,000. To do the painting job, Akiko had to spend $200 on supplies.
a. What is Akiko’s accounting profit?
b. If working at the fast-food restaurant was Akiko’s next-best alternative, how much
economic profit will Akiko earn from painting?
c. Suppose that Akiko can get an internship at an investment banking firm. The internship
provides a stipend of $3,000 and tangible work experience that will help him get a job after
graduation. Should Akiko take the painting job or the internship?

ANSWER 1:

a) Accounting profit is calculated by deducting explicit costs from revenue earned. Akiko will
earn $4,000 by working as a painter and her explicit cost will be $200 which she will have to
spent on supplies. So, her accounting profit from the work of painter will be-
Accounting Profit = Revenue - Explicit Costs.
Accounting Profit = $4,000 - $200
Accounting Profit = $3,800

b) Economic profit is calculated by deducting total costs (explicit + implicit cost) from revenue
earned. Implicit cost is the opportunity cost which is the value of the next best alternative
forgone in order to work as a painter i.e., to work at fast-food restaurant. Akiko wouldhave
earned $3,500 at the fast-food restaurant. So, this is her implicit cost.
Akiko’s economic profit will be-
Economic Profit = Revenue – (Explicit Costs + Implicit Costs)
Economic Profit = $4,000 – ($200 + $3,500)
Economic Profit = $4,000 - $3,700
Economic Profit = $300

c) Akiko would earn $4,000 in the painting work and will earn $3,000 along with work
experience in the banking firm. The decision of choosing one of these options will depend on
his interests and objectives. The painting job would be a better option if his main objective is
to earn money because he would be paid more for it. However, the internship would be a
preferable option if he wants to get the essential work experience that would help him find
employment after graduation because it would be related to his subject of study. The $3,000
payment can also help him pay some of his tuition, making the internship financially realistic.
Akiko must ultimately weigh his options and choose the one that best suits his objectives.

QUESTION 2. Use the information provided in the following table to fill in the blanks.

ANSWER 2:
 Output Total Total Total cost Average Average Average Marginal
fixed cost variable fixed cost variable total cost cost
cost cost

0 $500 $0 $500 0 0 0 0
1 $500 $200 $700 $500 $200 $700 $200
2 $500 $300 $800 $250 $150 $400 $100
3 $500 $375 $875 $166.67 $125 $291.67 $75
4 $500 $425 $925 $125 $106.25 $231.25 $50
5 $500 $450 $950 $100 $90 $190 $25
6 $500 $450 $950 $83.33 $75 $158.33 0

Working Notes: Calculations have been done in the above table with the following formulae-

i. Fixed cost is the cost at 0 output level and will remain the same at all levels of output
because fixed cost remains constant.
ii. Total Variable Cost = Total Cost – Fixed Cost
iii. Total Cost = Fixed cost + Variable cost
iv. Average fixed cost = fixed cost/output
v. Average variable cost = variable cost/output
vi. Average total cost = Total cost/output
vii. Marginal Cost = Change in Total cost/Change in Output

QUESTION 3. The accompanying table shows a car manufacturer’s total cost of producing cars (’000
$)
a. What is this manufacture’s fixed cost?
b. For each level of output, calculate the variable cost (VC). For each level of output except
zero output, calculate the average variable cost (AVC), average total cost (ATC), and
average fixed cost (AFC). What is the minimum- cost output?
c. For each level of output, calculate the manufacturer’s marginal cost (MC)

ANSWER 3:

Amounts in ‘000$
Quantity 0 1 2 3 4 5 6 7 8 9 10
of cars
Total 500 540 560 570 590 620 660 720 800 920 1100
cost
Fixed 500 500 500 500 500 500 500 500 500 500 500
Cost
Variable - 40 60 70 90 120 160 220 300 420 600
Cost
Average - 40 30 23.33 22.5 24 26.67 31.43 37.5 46.67 60
Variable
Cost
 Average - 540 280 190 147.5 124 110 102.86 100 102.22 110
Total
Cost
Average - 500 250 166.67 125 100 83.33 71.43 62.5 55.55 50
Fixed
Cost
Marginal - 40 20 10 20 30 40 60 80 120 180
Cost

The minimum cost output is 8 units of cars where the Average total cost is the minimum (i.e., 100).

Working Notes: Calculations have been done in the above table with the following formulae-

i. Fixed cost is the cost at 0 output level and will remain the same at all levels of output
because fixed cost remains constant.
ii. Total Variable Cost = Total Cost – Fixed Cost
iii. Average variable cost = variable cost/output
iv. Average total cost = Total cost/output
v. Average fixed cost = Fixed cost/output
vi. Marginal Cost = Change in Total cost/Change in Output

QUESTION 4. A manufacturer of an electronic toy finds that the total daily cost C (q) of producing q
toys per day is given by C (q) =400+200q+0.1q2. Each toy can be sold at a price P (in dollars) given by:
P=500-0.2q. If all the toys that are manufactured can be sold, find the daily level of production that
will result in maximum profit.

ANSWER 1:
Cost of producing q toys (C) = 400 + 200q + 0.1q2
Price per toy = 500 – 0.2q
Total revenue by selling q toys (R) = (500 – 0.2q) * q
Revenue (R)= 500q – 0.2q2
Profit is the cost subtracted from revenue as follows:
Profit = Revenue – Cost
Profit = 500q – 0.2q2 – (400 + 200q + 0.1q2)
= 500q – 0.2q2 – 400 - 200q - 0.1q2
= 300q – 0.3q2 – 400
Now, calculate the value of q that maximises the profit function in order to determine the level of
production that maximises profit. To accomplish this, use the derivative of the profit function as 0
𝑑𝑃
with respect to q (i.e., = 0):
𝑞
Profit = = 300q – 0.3q2 – 400
𝑑𝑃
Derivative of profit function ( 𝑞 ) = 300 – 0.6q
𝑑𝑃
𝑞
= 300 – 0.6q = 0
300
q= 0.6
q = 500
Thus, the profit will be maximum at daily production of 500 toys.