Question

Handwrite in text plz not in pic since its hard to read from and plz dont copy answers that were answered before least 2-3 paragraphs

1. Suppose Jill Johnson operates her pizza restaurant in a building she owns in the center of the city. Similar buildings in the neighborhood rent for $4000 per month. Jill is considering selling her building and renting space in the suburbs for $3000 per month, but she decides not to make the move. She reasons: “I would like to have a restaurant in the suburbs, but I pay no rent for my restaurant now, and I don’t want to see my costs rise by $3000 per month.” Evaluate Jill’s reasoning.

2. What is the difference between a firm’s shutdown point in the short run and in the long run? Why are firms willing to accept losses in the short run but not in the long run?

3.

Number of Workers	Mushrooms per Day (pounds)
1	12
2	30
3	45
4	50
5	54
6	56

The table above shows the technology of production at the Matsuko's Mushroom Farm for the month of May.

a. What is the marginal product of the 4th worker?

b. What is the average product of labor when the farm hires 5 workers?

c. Diminishing marginal returns sets in when the ________ worker is hired.

Answer 1

Answer

1. It's good that Jill Johnson decides not to make the move but her reasoning is not correct. Presently, Jill Johnson operates her pizza restaurant in a building, that she owns in the center of the city. The similar buildings in the neighborhood rent for $4000 per month, i.e., if Jill Johnson rents her building, she can earn $4000 per month. But at present, Jill is earning more than $4,000, because she owns the building, and also she operates her pizza restaurant from her own building. She is earning from her restaurant, and also saving the monthly rental,because her shop is in her own building.Now, if there are other shop owners in her building, she is also earning rental from them.

Now, if Jill considers selling her building and renting space in the suburbs for $3000 per month, she is ignoring the opportunity cost of owning a building in the center of city and running a restaurant from her own building.Between these two options, the best option is her present status. If she moves to suburb and runs her business there by renting a space for $3000 per month, she has to bear the rent per month, which may rise in future. The rental cost also may rise by hiring more space with the expansion of business. Moreover she will loss many customers, if she opens her restaurant in suburb, which is not so much crowded as the center of the city. Again, she will loss her earning that comes through rent from other shop owners in her building, if she considers selling it.

Now, one more thing. If Jill sells her building, she will get a lump sum amount which she may invest in secure investment as fixed deposit, or she may take some risk in risky investment. In fixed deposit, the amount she gets is fixed. In business, the costs are variable. So, what Jill thinks now about selling her building and opening a restaurant in suburb may not always match her future outcome.The risky investment, like stock/equity market involves risk.

Jill Johnson shows the only reason that her cost will rise by $3,000 and so she decides not to make a move but there are many other costs involve in moving to suburb that Jill never thinks about. So,her reasoning is not very much correct.

_____________________________________________________________

2. In the short-run, the total cost includes the fixed cost and the variable cost. The shut-down point is set when the price doesn't even cover the minimum average variable cost(AVC) of production.So, when price is below the minimum AVC, the firm shuts down her production temporarily. It's a short-term decision.

In the long-run, all costs are variable. The shut down point is set when the price is below the long-run average total cost (ATC) of production.If the price is below the long-run average total cost, the firm will exit the industry.

_______________________________________________________________

3. The marginal productivity of labor shows the change in production for the change in one additional unit of labor.

The average product of labor shows the total product per unit of labor.

Number of Workers	Mushrooms per Day (pounds)	Marginal Product of Labor(Worker)
1	12	12
2	30	18
3	45	15
4	50	5
5	54	4
6	56	2

a. 5 pounds per day

The marginal product of the 4th worker is 5 pounds per day.

_____________________________________________

b. 10.8 pounds per day

When the farm hires 5 workers, the average product of labor is,

54 pounds / 5 = 10.8 pounds per day.

_______________________________________________

c. Diminishing marginal returns sets in when the third  worker is hired.

The diminishing marginal returns sets in when the third worker is hired.From the table, we see the first worker produces 12 pounds of mushroom per day. When the second worker is hired, he/she produces extra 18 pounds of mushroom, that gives total 30 mushroom. When third worker is hired, he/she produces extra 15 pounds of mushroom,i.e., the marginal productivity has declined by hiring the third worker.So the diminishing marginal returns sets in after the second worker , i.e., when the third worker is hired.

________________________________________________