Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 21, Problem 1.4P
To determine
To calculate the value added.
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Suppose Nicholas owns a business making Christmas tree ornaments. Currently, he makes 300 ornaments a month. At this level of production, each additional ornament takes him 30 minutes to make and costs him $5 in materials. Nicholas makes his ornaments in a small studio that he rents for $300 a month. Nicholas can easily increase or decrease the amount of time he spends making ornaments, and he can easily go to the store to buy additional materials to make the ornaments, but he has a year-long lease on his studio, so he has to pay his monthly rent no matter how many ornaments he produces each month. Nicholas values his time at $10 per hour. Other than his time, the cost of the materials and the rent on his studio, Nicholas has no additional production costs.
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1. Consider this simplified sequence: A farmer starts with a unit of wheat and sells it to a
miller for 20 cents. The miller grinds it into flour and sells it to a baker for 50 cents. The
baker converts all the flour into a loaf of bread and sells it to a grocer for $2.00. The grocer
then sells that bread to a customer for $3.35.
a) What is the total value added by the grocer?
b) What is the total value added by all these stages of production?
I
c) How much does GDP increase?
Chapter 21 Solutions
Principles of Economics (12th Edition)
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