ECO404 Assignment

Question # 1:
A firm pays Rs. 450,000 in wages, Rs. 66,430 in interest on borrowed money capital and Rs. 89,320 for the yearly rental of its factory building. If the entrepreneur worked for somebody else as a manager, he would earn at most Rs. 58,400 per year and if he lent out his money capital to somebody else in a similarly risky business, he would at most receive Rs. 28,500 per year. He owns no land or building. Keeping in view the above information, calculate the:

a) Explicit cost of the entrepreneur

b) Implicit cost of the entrepreneur

Solution:
a)Explicit cost the entrepreneur
Explicit cost = wages + interest+ rent
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= 450,000 + 66,430 + 89,320

= Rs. 605,750

Implicit cost = entrepreneur forgone salary

= Rs. 28,500

Question # 2:
Given the following equations of total revenue and total cost:
TR =250Q – 5Q2
TC = 100 + 50Q
Find out the level of output at which profit is maximized (by using marginal
revenue and marginal cost approach).

Solution:

According to necessary condition of equilibrium
MC=MR ………..(1)
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MC= taking derivative of TC
MC= d (TC) dQ MC= d (100+50Q) dQ
MC= 50 ………..(2)

Now

MR= taking derivative of TR
MR = d (TR) dQ MR = d (250Q - 5Q2) dQ
MR= 250 -10Q ………(3)

Put the values of equ (2) & (3) in equ (1)

50=250 – 10Q

OR
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250 – 10Q = 50

- 10Q = 50 -250

- 10Q = - 200
Q = 200 10 Q = 20
Now Tp= TR – TC
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p= 250Q – 5Q2– 100 – 50Q
p= 200Q – 5Q2– 100 ……..(4)

Put the value of Q in (4)

p= 200(20) – 5(20)2 – 100

= 4000 -2000 – 100

Tp= 1900

So profit is maximized where output is 20 and maximum profit is 1900

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