Question 01 A firm pays in cash $250000 in wages, $55430 in interest onborrowed
ID: 1239023 • Letter: Q
Question
Question 01A firm pays in cash $250000 in wages, $55430 in interest onborrowed money capital and $74320 for the yearly rental of itsfactory building. If the entrepreneur worked for somebody else as amanager, he would earn at most $44500 per year and if he lent outhis money capital to somebody else in a similarly risky business,he would at most receive $16600 per year. Keeping in view the aboveinformation:
(A) Calculate:
a) The explicit cost of the firm.
b) The implicit cost of the firm.
c) The total cost of the firm.
(B) If the entrepreneur received $495680 from selling his yearsoutput, then calculate his total profit.
(C) What will be the total profit if the entrepreneur’s totalrevenue were $413934 instead?
(Marks: A = 2+2+2, B = 2, C = 2)
Question 02
(A) Find the value of multiplier if:
a) MPC = 0.39
b) MPS = 0.64
(B) If the value of multiplier is 2.49 then find out:
a) MPC
b) MPS
(C) What is the relationship between the value of multiplier andMPC?
(D) Find the change in equilibrium level of output when there is a$25 increase in investment spending and the MPC is 0.75.
Explanation / Answer
Answer:
a) MPC = 0.39
Multiplier = 1 / (1-MPC)
Multiplier = 1 / (1-0.39)
Multiplier = 1 / (0.61)
Multiplier = 1.64
b) MPS = 0.64
Multiplier = 1 / (MPS)
Multiplier = 1 / (0.64)
Multiplier = 1.56
(B) If the value of multiplier is 2.49 then find out:
a) MPC
b) MPS
Answer:
a) MPC
We know that;
Multiplier = 1 / (1-MPC)
(1-MPC) = 1 / Multiplier
MPC = 1 – [1 / Multiplier]
MPC = 1 – [1 / 2.49]
MPC = 1 – [0.4016]
MPC = 0.5984
b) MPS
Multiplier = 1 / (MPS)
(MPS) = 1 / Multiplier
(MPS) = 1 / 2.49
(MPS) = 0.4016
(C) What is the relationship between the value of multiplier andMPC?
Answer:
As we know that;
Multiplier = 1 / (1-MPC)
So, greater the MPC will result into greater multiplier.
(D) Find the change in equilibrium level of output when there isa $25 increase in investment spending and the MPC is 0.75.
Answer:
Change in output = Multiplier * Increase in InvestmentSpending
So, first we will calculate multiplier, as shown below:
Multiplier = 1 / (1-MPC)
Multiplier = 1 / (1-0.75)
Multiplier = 1 / (0.25)
Multiplier = 4
Change in output = Multiplier * Increase in InvestmentSpending
Change in output = 4 * $25
Change in output = $100