# Opportunity Cost

The New York Times, a profit maximizing newspaper, faces a downward-sloping demand schedule for advertisements. When advertising for itself in its own pages, (for example, an ad saying "READ MAUREEN DOWD IN THE SUNDAY TIMES"), is the opportunity cost of a given-size ad simply the price it charges its outside advertisers?

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Opportunity cost will be less than the cost of a given-size ad simply the price it ...

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The solution answers the question below. A profit maximizing newspaper is examined.

Microeconomic Questions (Not including #2 and #5)

8. (Opportunity Cost and Economic Rent) Define economic rent. In the graph below, assume that the market demand curve for labor is initially D1.

a. What are the equilibrium wage rate and level of employment? What is the amount of economic rent?

b. Next assume that the price of a substitute resource increases, other things constant. What happens to demand for labor? What are the new equilibrium wage rate and level of employment? What happens to the amount of economic rent?

c. Suppose instead that demand for the final product drops, other things constant. Using labor demand curve D1 as your starting point, what happens to demand for labor? What are the new equilibrium wage rate and level of employment? Does the amount of economic rent change?

9. (Firm's Demand for a Resource) Use the following data to answer the questions below. Assume a perfectly competitive output market.

Units of Labor Units of Output

0 0

1 7

2 13

3 18

4 22

5 25

a. Calculate the marginal revenue product for each additional unit of labor if output sells for $3 per unit.

b. Draw the demand curve for labor based on the above data and the $3-per-unit output price.

c. If the wage rate is $15 per hour, how much labor will be hired?

d. Using your answer to part (c), compare the firm's total revenue to the total amount paid for labor. Who gets the difference?

e. What would happen to your answers to parts (b) and (c) if the price of output increased to $5 per unit, other things constant?

10. (Selling Output as a Price Taker) If a competitive firm hires another full-time worker, total output will increase from 100 units to 110 units per week. Suppose the market price of output is $25 per unit. What is the maximum weekly wage at which the firm would hire that additional worker?

11. (Shifts in Resource Demand) A local pizzeria hires college students to prepare pizza, wait on tables, take telephone orders, and deliver pizzas. For each situation described, determine whether the demand for student employees by the restaurant would increase, decrease, or remain unchanged. Explain each answer.

a. The demand for pizza increases.

b. Another pizzeria opens up next door.

c. An increase in the minimum wage raises the cost of hiring student employees.

d. The restaurant buys a computer system for taking telephone orders.

1. (Market Supply of Labor) The following table shows the number of hours per week supplied to a particular market by three individuals at various wage rates. Calculate the total hours per week (QT) supplied to the market.

Hourly Hours per Week

Wage

Q1 Q2 Q3 Qr

$5 20 0 0

$6 25 0 0

$7 35 10 0

$8 45 25 10

$9 42 40 30

$10 38 37 45

Which individuals, if any, have backward-bending supply curves in the wage range shown? Does the market supply curve bend backward in this wage range?

2. (Optimal Investment) Look back at Exhibit 1 in this chapter. If the marginal resource cost rose to $24,000 what would be the optimal investment at a market interest rate of 10 percent? If the interest rate then rose to 16.6 percent, what would be the optimal level of investment?

3. (Present Value) Calculate the present value of each of the following future payments. (For some of these problems you may wish to use the online calculator available at http://www.datachimp.com/articles/finworks/fmpresval.htm.)

a. A $10,000 lump sum received 1 year from now if the market interest rate is 8 percent

b. A $10,000 lump sum received 2 years from now if the market interest rate is 10 percent

c. A $1,000 lump sum received 3 years from now if the market interest rate is 5 percent

d. A $25,000 lump sum received one year from now if the market interest rate is 12 percent

f. A $25,000 lump sum received one year from now if the market interest rate is 10 percent

g. A perpetuity of $500 per year if the market interest rate is 6 percent

4. (Present Value of an Income Stream) Suppose the market interest rate is 10 percent. Would you be willing to lend $10,000 if you were guaranteed to receive $1,000 at the end of each of the next 12 years plus a $5,000 payment 15 years from now? Why or why not?

5. (Search with Imperfect Information) The following questions concern the accompanying graph.

a. Identify the two curves shown on the graph, and explain their upward or downward slopes.

b. Why does curve A intersect the horizontal axis?

c. What is the significance of quantity d?

d. What does point e represent?

e. How would the optimal quantity of information change if the marginal benefit of information increased?that is, if the marginal benefit curve shifted upward?

14. (Search with Imperfect Information) Determine the effect of each of the following on the optimal level of search.

a. The consumer's income increases.

b. One seller guarantees to offer the lowest price on the market.

c. The technology of gathering and transmitting information improves.

See attached file for full problem description.

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