Profit

Profit

1. a. The total explicit cost is $793,000($970,000-$177,000). The total implicit cost is $190,000($175,000+. 15X$100,000). The total economic costs is $983,000($793,000+$190,000). b. The accounting profit in 2010 is $177,000($970,000-$793,000) c. The economic profit in 2010 is $-13,000($970,000-$793,000-$190,000). d. The owner should not leave his job because the economic profit is negative, which means he will earn less if he does his own business. 2. a.

The type of agency problem that is involved here is principal-agent problem. Marriott wants to maintain a certain level of quality at all of its hotels, but in order to do that it would require capital investment by franchisees. By investing in the hotels, the franchisees are losing profits. b. I believe that Marriott needs to worry about the quality of all the hotels whether they are owned or franchised. In order to keep customers satisfied and coming back to stay at a Marriott they need to keep a good reputation. c.

Marriott would tend to own its hotels in resort areas because the people will be more focused on the quality and upkeep of the hotel itself. By Marriott providing good quality in resort areas it will help them gain more business in downtown areas due to the customers’ previous experience. In downtown areas it is also more difficult to find a high quality hotel. If people do not have a good experience at a Marriott then the next time they need to stay in a hotel they will travel further down the street to a different hotel due to the poor quality of the previous Marriott stay.

The reputation of the Marriott depends highly on how much business it will have. A good reputation will lead to great profits. 3. a. I would expect the price of wine to decrease as well. b. I would expect the price of wine to decrease because the quantity demanded for wine will increase. c. I would expect the price of wine to decrease as well because the quantity demanded will increase due to people having a job and making more money. d. I would expect the price of wine to decrease.

A rise in the price of cheese will decrease demand for cheese, which should decrease demand for wine which in turn will decrease the price for wine. e. I would expect the price of wine to increase due to the increase in prices of the wine bottles. f. I would expect the price of wine to decrease since it will be cheaper to produce. g. I would expect the price of wine to decrease. h. Since older people drink less wine, demand would be falling in this case. As a result, the price would decrease. 4. a. 5.

I believe that the equilibrium price of products gaining a presence on the Internet will increase because the quantity demanded will be higher and the equilibrium output will also increase. Since it will be new to the internet the demand will increase which will make the price increase as well. 6. MC=MR 1000-10P=40P 50P=1000 P= 1000/50 P=20 units (reduction of pollution units) 7. a. MB=MC MC is w=200 and MB from hiring a second worker is MB(2)=(30-20)X25=250 TB=(50-20)X25-(200X2)=750-400=350 The firm will hire two guards. b.

The benefit from the first guard is: B(1)=(50-30)X25=20X25=500. The maximum payment to the first guard the firm will be willing to pay is $500. c. MC=200 MB(4)=(14-8)x50=6X50=300 TB=(50-8)X50-(4X200)=1300 Therefore the firm should hire 4 guards. 8. a. Price=MC 70=40+0. 005Q; Q=6000 The MR for each unit of output is the same at $70. b. TR=70X6000=$420,000 TC=10,000+(40X6000)+(0. 0025X(6000)^2)=$340,000 Total Profits=$420,000-$340,000=$80,000 c. MR=MC therefore providing one more unit of output will earn $70 and cost $70 so there would be no profit.