Worked Problems

After working as a head chef for years, Jared gave up his $60,000 salary to open up his own restaurant last year. He withdrew $50,000 of his own savings that had been earning 4% interest and borrowed another $100,000 from the bank at a rate of 5%. As the restaurant space he was leasing had no separate office, Jared converted his basement apartment into office space. He had previously rented the apartment to a students for $300/month. The following table summarizes his operations for the past year.

Total sales revenue		$590,000

Employee wages	$120,000
Materials	$350,000
Interest on loan	$5,000
Utilities	$10,000
Rent	$25,000
Total explicit costs		$510,000

What is Jared's accounting profit?
Suppose Jared could have used his talents to run a similar kind of business instead. If he values his entrepreneurial skill at $10,000 annually, find Jared's total implicit costs.
What was Jared's economic profit last year?

The following table summarizes the short-run relationship between a firm's total labour input and its total output.

Labour Input	Total Product	Marginal Product	Average Product
0	0
1	20
2	46
3	75
4	102
5	125
6	138
7	140
8	136

Fill in the columns labeled "Marginal Product" and "Average Product."
Over what range of labour input does the firm experience increasing marginal returns? Diminishing marginal returns? Negative marginal returns?
Comparing marginal product to average product, under what circumstances will average product rise? Under what circumstances will average product fall?

Suppose a firm is currently producing 10 units. It is spending $100 on fixed costs, $40 on variable costs. What is the firm's current:

Total cost of producing 10 units?
Average fixed cost?
Average variable cost?
Average total cost?
If the total cost of producing 11 units is $147, what is the marginal cost of the eleventh unit?
Is average total cost rising or falling? How do you know?
Is average variable cost rising or falling? How do you know?

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