ECO401

Q: 1
Ans:
Part A:
a. Explicit cost of the firm = wages + interest + rent
= 250,000 + 55,430 + 74,320
Total = 379,750$
b. Implicit cost of the firm = 44,500 + 16,600

Total= 61,100$


c. Total cost of the firm = explicit cost + implicit cost
= 379,750 + 61,100

Total = 440,850$

Part B:
If the value of multiplier is 2.49 then
Total profit = total revenue – total cost
= 495,680 – 440,850

Total profit = 54,830$
Part C:
Total profit = total revenue – total cost

= 413,934 – 440,850

Total loss = 26,916

Q 2:
Ans:
Part A:
a: K = 1/1-MPC
K = 1/1-0.39
K = 1.6
b: K = 1/MPS
K = 1/0.64
K = 1.56

Part B:

a: K = 1/1-MPC

Adjusting the equation:

K (1 – MPC) = 1

1 – MPC = 1/K

MPC = 1 – 1/K

MPC = 1 – 1/2.49

MPC = 0.60

b: K = 1/MPS

adjusting the equation:
MPS = 1/
MPS = 1/2.4
MPS = 0.4

Part C:
There is a direct relationship between MPC and the value of multiplier. If the MPC is higher, the size of multiplier would be high and vice versa.

Part D:

Change in investment = ΔI = 25$

MPC = 0.75

First we would find the value of multiplier

K = 1/1-MPC

K = 1/1-0.75

K = 4

As, K = Δy (change in income) / ΔI (change in investment)

K * Δ I = Δ y

4 * 25 = Δ y

Δ y = 100$