Labor Economics
Labor Economics
7th Edition
ISBN: 9780078021886
Author: George J Borjas
Publisher: McGraw-Hill Education
Question
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Chapter 7, Problem 10P

a)

To determine

Person A’s yearly profit.

a)

Expert Solution
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Explanation of Solution

Profit can be calculated using the following equation:

Profit=Total revenueTotal cost ...... (1)

Person A will maximize at MC=MR.

MR=2000.2QMC=150150=2000.2QQ=500.2=250

Q=200010P...... (2)

Rewrite Equation (2) as P=2000Q10        (3).

Substitute the value of Q in Equation 3.

P=200025010P=175

TR=P×Q=175×250=43,750TC=150×250=37,500

Substitute the values of TR and TC in Equation (1).

Profit=43,75037,500=6,250

The calculated value shows that Person A’s yearly profit is $6,250.

b)

To determine

Person A’s new profit.

b)

Expert Solution
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Explanation of Solution

New demand is, Q=2,5005P...... (4)New marginal revenue is, MR=5000.4QMC=150MR=MC5000.4Q=150500150=0.4QQ=3500.4=875

Rewrite Equation (4) as P=2,500Q5...... (5).

Substitute the value of Q in Equation 5.

P=2,5008755=325TR=325×875=2,84,375TC=875×150=1,31,250

Substitute the vales of TR and TC in Equation (1).

Profit=2,84,3751,31,250=1,53,125

The calculated value shows that Person A’s new profit is $1,53,125.

c)

To determine

The effect of technological advancement on Person A’s profit.

c)

Expert Solution
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Explanation of Solution

MC=120FC=1,000Q=2,5005P...... (6)MR=5000.4QMR=MC5000.4Q=2050020=0.4QQ=500200.4=1,200

Rewrite Equation (6) as P=2,500Q5......(7).

Substitute the value of Q in Equation (7).

P=2,5001,2005=260TR=260×1,200=3,12,000TC=FC+(MC×Q)=1,000+20×1,200=25,000

Substitute the values of TR and TC in Equation (1).

Profit=3,12,00025,000=2,87,000

The calculated value shows that Person A’s new profit is $2,87,000.

d)

To determine

Summarise the lessons from the problem.

d)

Expert Solution
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Explanation of Solution

The calculations of parts (a), (b), and (c) show that the superstar phenomenon definitely helps to increase profits.

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