Question

In: Economics

2. [Macroeconomics: The Big Picture – Measuring Production, Income, and the Spending of Nations] Charles has...

2. [Macroeconomics: The Big Picture – Measuring Production, Income, and the Spending of Nations] Charles has a new small business that makes and sells amigurumi—crocheted stuffed animals. Charles already has crochet tools such as needles and a yarn ball winder, but needs to rent studio and retail space, as well as purchase project-specific supplies. These are his revenues and costs for his first week of operating.

Revenue = $5,000

Costs:

Rental Fee For Studio Space = $800

Rental Fee For Retail Space/Equipment = $1,000

Yarn = $900

Stuffing = $200

Wages = $1,200

a) Calculate the value added by this firm. (Hint: what are the intermediate goods?)

b) Show that value added equals capital income plus the labor income paid by the amigurumi firm. (Hint: what comprises capital income?)

c) Suppose that there is a sudden increased interest in amigurumi. This causes two things. First, the firm’s revenue rises from $5,000 to $6,500. Second, there is an increased demand for yarn. The firm must now pay $1000, instead of $900. Please repeat (a) and (b) with these new values.

Expert Solution

Answer:

Revenue = $5,000

Costs:

Rental Fee For Studio Space = $800

Rental Fee For Retail Space/Equipment = $1,000

Yarn = $900

Stuffing = $200

Wages = $1,200

a)

Value added=Revenue of the firm-Cost of intermediate goods=$5000-($900+200)=$3900.

Intermediate goods are Yarn and stuffing.

b)

Capital income= Rental Fee For Studio Space $800+ Rental Fee For Retail Space/Equipment $1,000+Profit $900=$$2700.

Wage Income=$1200.

Capital income+Wage income=$2700+$1200=$3900=Value added.

Profit is calculated as Revenue-Cost of goods sold=$5000-$(800+1000+900+200+1200)=$900.

c)

Revenue is increased to $6500, Yarn=$1000

Value added=Revenue of the firm-Cost of intermediate goods=$6500-($1000+200)=$5300.

Capital income= Rental Fee For Studio Space $800+ Rental Fee For Retail Space/Equipment $1,000+Profit $2300=$$4100.

Wage Income=$1200.

Capital income+Wage income=$4100+$1200=$5300=Value added.

Profit is calculated as Revenue-Cost of goods sold=$6500-$(800+1000+1000+200+1200)=$2300.

Rahul Sunny answered 2 years ago

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