Question

1)

1A. Heidi left her job as an executive chef making $40,000 per year to start her own restaurant. This fiscal year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the servers and kitchen staff and $20,000 per year to purchase food and supplies. What is Heidi's Accounting Profit (Net Income) for the year?

A. $80,000

B. $50,000

C. $30,000

D. -$10,000

1B. Which of the following represents a short-run production adjustment for a firm?

a. a farmer is planning to purchase additional land for his corn crop.
b. a U.S. auto manufacturer adds a third shift of workers at one of its assembly plants.
c. a steel manufacturer plans to expand its production facilities.
d. BMW is considering whether to construct a larger assembly plant in South Carolina.

1C. The law of diminishing returns states that as increasing amounts of a variable factor are applied to a given quantity of fixed factors

a. the marginal product of the variable factor will eventually decrease.
b. the marginal product will eventually increase with average product remaining    constant.
c. the marginal product becomes constant. d. total product becomes constant.

Answer 1

Ans 1A.

The right answer is Option c - $ 30000.

Accounting Profit = Revenue - COGS

Total Revenue = $ 100000

COGS:

Wages (Labor ) = $ 50000

Kitchen supplies (direct materials) = $ 20000

Therefore,

Accounting Profit = 100000 - ( 50000 + 20000)

= 100000 - 70000

= $ 30000

Ans IB.

The right answer is Option b - a U.S. auto manufacturer adds a third shift of workers at one of its assembly plants.

Since short-run is the time period under consideration, there will be time only to change the variable factor - labor. The other action plans for adjusting production can be carried out only in the long-run when all factors are variable and can be changed to increase production. Land and capital are fixed in the short-run.

Ans IC.

The right answer is Option a - the marginal product of the variable factor will eventually decrease.

In the short-run, few factors like capital and land are fixed. Production can only be increased by increasing the units of the variable factor - labor. But since capital is fixed in the short-run, the increasing units of labor will overload the capital, thus decreasing productivity.