Calvin buys newspapers and delivers them (by bike) to his customers' houses while Hobbes sells lemonade at his lemonade stand. One day they compare notes and find that Calvin, after paying for the newspapers and the maintenance on his bike, clears $5 per hour while Hobbes, after paying for the lemonade ingredients and upkeep of his lemonade stand, clears $4.50 per hour. The newspaper and lemonade businesses are the only possible trades for Calvin and Hobbes.
a. If Calvin and Hobbes are identical, how much economic profit (per hour) is each making?
b. Suppose Hobbes is slower on his bike than Calvin -- and he could only deliver half as many newspapers per hour. What's his economic profit in the lemonade business?
What will be an ideal response?
a. Calvin's economic profit is 50 cents while Hobbes' is minus 50 cents per hour. This is because Calvin's opportunity cost of spending an hour delivering newspapers is $4.50 he could have made selling lemonade -- and this is an economic cost that has to be deducted from his revenue of $5 per hour. Similarly, Hobbes' opportunity cost is $5 per hour -- which, when subtracted from his earnings in the lemonade business, gives him a negative profit.
b. If Hobbes could only make $2.50 per hour in the newspaper business, his economic profit in the lemonade business is $2 her hour.
You might also like to view...
The government played a central role in directing the post-World War II economy, causing all of the following to occur except
(a) The reduction of entitlements, such as Social Security and unemployment benefits. (b) Massive spending by the federal government, justified by the Cold War. (c) Enormously expanded government infrastructure spending on things like highways, airports, education and research and development. (d) There is no "except"; all of the above occurred.
When there are diseconomies of scale in production: a. long-run average total cost declines as output expands. b. long-run average total cost increases as output expands. c. marginal cost decreases as output expands
d. none of the above
Over the years, many food and beverage producers began merging with other companies. Nabisco merged with a tobacco firm; Campbell's Soup purchased mushroom farms; and, Anheuser-Busch purchased, among others, malt, yeast, and canning companies. Pepsi purchased Kentucky Fried Chicken, Taco Bell, and Pizza Hut. Which of these merging firms engaged in either vertical or conglomerate mergers?
a. none b. all c. only Campbell's Soup d. only Anheuser-Busch e. only Pepsi
From 1992, America’s trade performance was marked by a(n)
A. reduced current account deficit. B. increased current account deficit. C. reduced capital account surplus. D. increase in the growth of exports.