During a year of operation, a firm collects $450,000 in revenue and spends $100,000 on labor expense, raw materials, rent and utilities. The firm’s owner has provided $750,000 of her own money instead of investing the money and earning a 10 percent annual rate of return. The accounting costs of the firm are $______________________ The opportunity cost is $______________________ Total economic costs are $______________________ Accounting profits are $______________________ Economic profits are $______________________
Question #4: Part I and Part II are independent. Please answer both parts.
Part I: During a year of operation, a firm collects $450,000 in revenue and spends $100,000 on labor expense, raw materials, rent and utilities. The firm’s owner has provided $750,000 of her own money instead of investing the money and earning a 10 percent annual
The accounting costs of the firm are $______________________
The
Total economic costs are $______________________
Accounting profits are $______________________
Economic profits are $______________________
Part II: Oil prices doubled in 2008, from $67.49 per barrel in June 2007 to $133.88 per barrel in June 2008. Since prices of non-oil products rose less than 2 percent per year during 2003-08, we can assume prices of non-oil products have remained constant. Use a graph to show the income effect and substitution effect of the increase in oil prices in 2008. (You should use oil on the x-axis and non-oil products on the y-axis).
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