EXERCISES OF LECTURE 6&7

1. Mariam left her job at RHB Bank where she earned RM50,000 a year to start her

business, a boutique store. In the first year, the boutique generated monthly

revenue of RM6,000. The costs for rent, material supplies and employees’ salary

were RM25,000 per year.

a. Compute the accounting profit for Mariam’s boutique store.

Accounting profit =(RM6000 x 12 months)
=RM72000(yearly revenue)-RM25000(yearly cost)
=RM47000

b. Compute the economic profit or loss for Mariam’s boutique store.

Economic profit=RM47000-RM50000
=-RM3000(economic loss)
2. Consider a firm that has just built a plant, which cost RM1,000. Each worker costs

RM5.00 per hour. Complete the table below based on this information.

Table 1: Production Schedule

Number of

Worker Output MP FC VC TC MC AVC ATC

Hours
0 0 - 1000 - 1000 -- -- --
50 400 9 1000 250 1250 0.625 0.625 3.125
100 900 10 1000 500 1500 0.278 0.56 1.67
150 1300 8 1000 750 1750 0.625 0.58 1.35
200 1600 6 1000 1000 2000 0.833 0.625 1.25
250 1800 4 1000 1250 2250 1.25 0.69 1.25
300 1900 2 1000 1500 2500 2.5 0.79 1.32
350 1950 1 1000 1750 2750 5 0.89 1.41
3. The number of motorcycles assembled in a factory depends on the number of

workers as follows:

Table 2: Production Schedule

Number of Worker (Per Number of motorcycles

Week) assembled (Per Week)

 0 0
1 4
2 12
3 22
4 34
5 44
6 49
7 52
8 51
9 46
Assume that all inputs (raw materials, machinery and utilities) other than labor

are fixed in the short run.

a. To table 2, add two more columns and insert the marginal product and average

product for each number of workers.

Number of Worker (Per Number of motorcycles Marginal Average

Week) assembled (Per Week) Product(MP) Product(AP)

0 0 - -
1 4 4 4
2 12 8 6
3 22 10 7.3
4 34 12 8.5
5 44 10 8.8
6 49 5 8.17
7 52 3 7.43
8 51 -1 6.38
9 46 -5 5.11

b. Over what range of labor input are there increasing returns to labor?

Diminishing returns to labor? Negative returns to labor?

In week 0-6 ,its increasing returns , in week 6-7 is diminishing returns while in
week 7-9 is negative return.
4. Sell each sandal for RM20.

Table 3: Cost Schedule

Quantity Total cost Total Profit or loss

(sandal) (RM) revenue (RM)

 (RM)
0 0 0 0
1 10 20 +10
2 28 40 +12
3 45 60 +15
4 66 80 +14
5 80 100 +20
a. Complete the table 3.

b. Total revenue is maximized by the 5 sandals.