Maria makes sweaters in her home. She started with just some knitting needles an
ID: 1093818 • Letter: M
Question
Maria makes sweaters in her home. She started with just some knitting needles and yarn and was able to knit 40 sweaters per year. Now some local stores have expressed interest in her designs and have offered to buy her sweaters for $30 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 following table. Calculate and enter the marginal physical product, as well as the marginal revenue product, of each loom in the previous table. If the rental price of a loom is $1,000 per year, Maria should use________________ .
Suppose the demand for sweaters is very elastic, while the demand for cigarettes is very inelastic. Assuming that looms and tobacco are exclusively used for the production of sweaters and cigarettes respectively, we would expect:
The demand for tobacco to be more elastic than the demand for looms
The demand for tobacco to be less elastic than the demand for looms
The supply of tobacco to be more elastic than the supply of looms
The supply of tobacco to be less elastic than the supply of looms
Explanation / Answer
Q1 is incomplete as table is missing.
Q2
It is given that demand for sweaters are elastic and that of cigarettes is inelastic. As a result, demand for input used in the production of sweater (loom) will be more elastic as compared to input used in the production of cigarettes (tobacco).
Thus, correct option: The demand for tobacco to be less elastic than the demand for looms