Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1. Optimal choice of capital
Eleanor makes sweaters in her home. Starting with just some knitting needles and yarn, she was able to knit 60 sweaters per year. Now some local
stores have expressed interest in her designs and offered to buy her sweaters for $10 each. This makes it worthwhile for her to invest in some capital;
in particular, she could produce many more sweaters if she invested in one or more looms, as shown in the following table. Assume that Eleanor's
sweater business is a perfectly competitive firm.
Complete the following table by calculating the marginal physical product (MPP) of each loom and the marginal revenue product (MRP) of each loom.
Quantity of Input
(Looms)
Output
(Sweaters per year)
MPP of Each Loom
(Sweaters)
MRP of Each Loom
(Dollars)
0
1
2
3
4
5
60
110
150
184
213
238
50
40
34
29
25
If the rental price of a loom is $270 per year, Eleanor should use
500
400
340
290
250
Suppose the demand for sweaters is very elastic, while the demand for cigarettes is very inelastic.

Transcribed Image Text:Suppose that looms are used exclusively in the production of sweaters and that tobacco is used exclusively in the production of cigarettes. Which of
the following might we expect?
O The supply of looms would be less elastic than the supply of tobacco.
O The demand for looms would be less elastic than the demand for tobacco.
O The demand for looms would be more elastic than the demand for tobacco.
O The supply of looms would be more elastic than the supply of tobacco.
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