Wendy drinks 01 sugary drinks and 4smoothies a wek. Smoothies are $5 each and sugary drinks were $2 each. This week, things are different: the government has slapped a tax on sugary drinks and their price has doubled ot $4. But it's not all bad news for Wendy. The government has also revised the income tax, so Wendy's drinks budget has increased. She can now just afford to buy her usual 01 sugary drinks and 4smoothies a week. a. What was Wendy's drinks (sugary drinks and smoothies) budget last week and what is it this week. b. What was Wendy's opportunity cost of a sugary drink last week and what is ti this week? c. Does Wendy buy 10 sugary drinks and 4smoothies this week? Explain.
Problem 1:
Wendy drinks 01 sugary drinks and 4smoothies a wek. Smoothies are $5 each and sugary drinks were $2 each. This week, things are different: the government has slapped a tax on sugary drinks and their price has doubled ot $4. But it's not all bad news for Wendy. The government has also revised the income tax, so Wendy's drinks budget has increased. She can now just afford to buy her usual 01 sugary drinks and 4smoothies a week.
a. What was Wendy's drinks (sugary drinks and smoothies) budget last week and what is it this week.
b. What was Wendy's
c. Does Wendy buy 10 sugary drinks and 4smoothies this week? Explain.
d. Draw Wendy's budget line for drinks for last week by taking smoothies on vertical axis and sugary drinks on horizontal axis. What is the slop of budget line?
.e Draw Wendy's budget line for drinks for this week on the same graph. How the new budget line si different from the old one.
Problem 2:
a. What si hte law of diminishing returns? Why does marginal product eventually diminish?
.b Explain the relationship between marginal product and average product.
.c Governments impose excise taxes on goods that have inelastic demand, such as cigarettes, more often than ni other cases. Why?
d. Lin's makes fortune cookies. Anyone can make and sel fortune cookies, so there are dozens of producers. Al fortune cookies are the same and buyers and sellers
1
know this fact. In what type of market does Lin's operate? What determines the price of fortune cookies? What determines Lin's marginal revenue?
Problem 3:
Joe, who has no skills, no job experience, and no alternative job, runs a shoeshine stand. Other shoeshine operators earn $10,000 a year. Joe pays rent of $2,000 a year, and his total revenue is $15,000 a year. Joe spent $1,000 on equipment and used his credit card to buy it. The interest on a credit card balance is 20 percent a year. At the end of the year, Joe was offered $500 for his business and its equipment. Calculate Joe's opportunity cost of production and economic profit.
Problem 4:
The table sets out Sue's Surfboards' total product schedule.
Labour Output (Workers per week) (Surface Boards per week)
1 30 2 70
3
120
4 160
5 6 7
190 210 20
a. Calculate the average product of labour and draw the average product curve.
b. Calculate the marginal product of labour and draw the marginal product curve on the same graph where average product has been drawn.
c. Over what output range does Sue's Surfboards:
i. Enjoy the benefits of increased specialization and the division of labour (increasing marginal product)?
Experience diminishing marginal product of labour.
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