Question

Complete the following Module 2 Written Homework Assignment for this module by the stated due date on the Schedule. Please submit in the Module 2 Written Homework Assignment folder as a .doc, .docx, .pdf or .rtf file.

Instructions

Complete the following questions in the form of short essays. Each question is worth 6 points. Be sure to cite your references as needed. Type all responses following each question on this assignment page and submit to the folder.

1. All-you-can-eat restaurants allow customers to eat as much as they want for a fixed price. These types of restaurants must make money or they would not remain in business. How can they earn profits when people can always eat more which would increase the restaurant’s costs as they eat more? What principle are the restaurants relying on? How does this work?

2. Assume you are selling a product in which at a price of $10, you can sell 90 units. When the price increases to $11, you can only sell 63 units. Given this change in price and sales, answer the following:

1. What is the price elasticity of demand for your product?
2. Is demand elastic, unit-elastic or inelastic?
3. What is the change in revenue for this product from the price increase?

3. Compute and discuss elasticities for the following cases:

1. When consumer income increases by 4%, the demand for Ramen Noodles decreases by 6%. What is the income elasticity for Ramen Noodles? Explain what this income elasticity measure tells you.

2. When the price of bread increases by 7%, the demand for butter decreases by 9%. What is the cross price elasticity? How are the two goods related – are they substitutes or complements? Explain why.

3. When the price of pork increases by 8%, the quantity of lamb purchased increases by 5%. What is the cross price elasticity? How are the two goods related - are they substitutes or complements? Explain why.

4. Explain the factors of production and give an example for each one. (Note: We utilize production factors throughout Module 2, but they are also explained in Chapter 2.)

5. An individual leaves a college faculty, where she was earning $50,000 a year, to begin a new venture. She invests her savings of $20,000, which were earning 10 percent annually. She then spends $20,000 renting office equipment, hires two students at $30,000/student a year, rents office space for $15,000 and has other variable expenses of $50,000. At the end of the year, her revenues are $240,000.      

1. What are her accounting profits for the year?

2. What are her economic profits for the year?

                   (Be sure and show your work for both questions)

Answer 1