Solutions to Problems
Chapter 9
1. Explicit costs are all the costs for which there is a payment. Explicit costs are $30,000.
Implicit costs are the sum of the costs that do not involve a payment. If we assume the current rate of interest is the 10% mentioned in the text then implicit costs are $52,000.
Explicit costs
wages paid $20,000
services bought from other firms $10,000 $30,000
Implicit costs
interest forgone (assuming 10%) $5,000
income forgone by Jack $30,000
Jill's leisure forgone (500 hours) $15,000
economic depreciation $2,000 $52,000
3a. All methods other than "pocket calculator with paper and pencil" are technologically efficient.
To use a pocket calculator with paper and pencil to complete the tax return is not a technologically efficient method because it takes the same number of hours as it would with a pocket calculator but it uses more capital.
3b. The economically efficient method is to use (i) a pocket calculator, (ii) a pocket calculator, (iii) a PC.
The economically efficient method is the technologically efficient method that allows the task to be done at least cost.
When the wage rate is $5 an hour:
total cost with a PC is $1,005
total cost with a pocket calculator is $70
total cost with paper and pencil is $81
Total cost is least with a pocket calculator.
When the wage rate is $50 an hour:
total cost with a PC is $1,050
total cost with a pocket calculator is $610
total cost with paper and pencil is $801
Total cost is least with a pocket calculator.
When the wage rate is $500 an hour:
total cost with a PC is $1,500
total cost with a pocket calculator is $6,010
total cost with pencil and paper is $8,001
Total cost is least with a PC.
5a. Methods a, b, c, and d are technologically efficient. Compare the amount of labour and capital used by the four methods. Start with method a. Moving from a to b to c to d, the amount of labour increases and the amount of capital decreases in each case.
5b. The economically efficient method in (i) is method d, in (ii) is methods c and d, and in (iii) is method a.
The economically efficient method is the technologically efficient method that allows the 100 shirts to be washed at least cost.
(i) Total cost with method a is $1,001
total cost with method b is $805
total cost with method c is $420
total cost with method d is $150
Method d has the lowest total cost.
(ii) Total cost with method a is $505
total cost with method b is $425
total cost with method c is $300
total cost with method d is $300
Methods c and d have the lowest total cost.
(iii) Total cost with method a is $100
total cost with method b is $290
total cost with method c is $1,020
total cost with method d is $2,505
Method a has the lowest total cost.
7a. The three-firm concentration ratio is 50.62.
The three-firm concentration ratio equals the ratio of the total sales of the largest three firms to the total industry sales expressed as a percentage.
The total sales of the largest three firms = $450 + $325 + $250
= $1,025
Total industry sales = $2,025.
The three-firm concentration ratio = ($1,025/$2,025) ´ 100
= 50.62 percent.