ASSIGNMENT 3

PRINCIPLES OF MICROECONOMICS 1201

Summer 2019

Assigned: July 31, 2019

Due: Aug12, 2019

Instructions:

• Answer all thequestions
• Late assignment will not be accepted.
• Get to the point. Be clear and concise.
• You may submit the assignment in a group of up to four students. Make sure you indicate clearly the names and IDs on the cover page of the assignment

Question one

Use the following data to work Problems a and b.

Joe is a computer programmer who earned $35,000 in 2016. But on January 1, 2017, Joe opened a body board manufacturing business. At the end of the first year of operation, he submitted the following information to his accountant:

• He stopped renting out his cottage for $3,500 a year and used it as his factory. The market value of the cottage increased from $70,000 to $71,000.
• He sold $160,000 worth of body boards.

He spent $50,000 on materials, phone, etc.

He leased machines for $10,000 a year.

He paid $15,000 in wages.

He used $10,000 from his savings account, which earns 5 percent a year interest.

He borrowed $40,000 at 10 percent a year.

• Calculate Joe’s economic profit.
• Joe’s accountant recorded the depreciation on his cottage during 2018 as $7,000. According to the accountant, what accounting profit did Joe make?

Question two

Use the following information to answer problems a,b, and c

Moore “fast food” shop

Most retailers are blaming the economy for their poor sales, but one store chain that sells “fast food” is boldly declaring that an economic downturn can actually be a boom for its business. Last year, Moore “fast food” took in $20 million in sales, up 5% from the previous year.

• According to the above, is “fast food” a normal good or an inferior good? If the price of “fast food” falls and income remains the same, explain how the quantity of “fast food” bought changes.
• Describe the substitution effect and the income effect that occur.
• Use a graph of a family’s indifference curves for “fast food” and other goods. Then draw two budget lines to show the effect of a fall in income on the quantity of “fast food” purchased.

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