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Economics 1101

Assignment 3

Due: by 2:30pm Friday, October 16, in the box on the porch of 6206 University Ave.

NOTE: Make sure that you write your name and student ID on your assignment. If you have

worked as part of a group, make sure that all members of the group have their names and ID

numbers on the assignment. A group must have no more than three members.

1. Assume you can either work making $8 per hour working at a Tim Hortons, or you

can open up a rival hot dog stand to the Dawg Father, The Dawg Father II. You must

decide how much time to spend on each activity each day (up to 8 hours total). If you

earn $1.00 for each hot dog sold:

a. (2 points) Complete the following table by calculating the additional hot dogs

sold for each hour, and the income earned for each hour spent selling hot dogs.

b. (2 points) Use the information in the table to determine how you will allocate

your time (i.e. how many hours selling hot dogs and how many hours working at

Tom Hortons).

Hours selling hot dogs Quantity of hot

dogs sold

Additional hot dogs

each hour

Income earned each

hour selling hot dogs

0 0

1 18

2 33

3 47

4 59

5 69

6 75

7 79

8 82

2

2 You are fired from Tim Hortons, so now you spend all your time working at The Dawg

Father II. You currently face a market price for your hot dogs of $4. However, you want to know

how the hot dog market will respond to price changes. The graph above shows the hot dog

industry’s supply curve.

a. Calculate the price elasticity of supply at point A. (1.5 points)

b. Based on the elasticity of supply in part (a), if the price increases by 10%, by how much will

the quantity supplied change? (1 point)

c. In each of the following cases, what will happen to the price elasticity of supply? Will

supply become more inelastic, more elastic, or not change? (1.5 points)

i. Inputs into hot dog making become easier to transport.

ii. New inputs into hot dog production are found.

iii. The Dawg Father II moves from the short run to the long run.

Price

Supply

5

4

A

20 30 Quantity

3

3. You are running The Dawg Father II. You can add to your output by hiring more

workers. Imagine you have the following costs:

Total

Product

(100s of

hotdogs)

(1)

Total

Fixed

Cost ($)

(2)

Total

Variable

Cost ($)

(3)

Total

Cost ($)

(4)

Average

Fixed

Cost($)

(5)

Average

Variable

Cost($)

(6)

Average

Total

Cost($)

(7)

Marginal

Cost($)

(8)

0 600 0 -- -- --

1 600 100

2 600 150

3 600 230

4 600 380

5 600 580

6 600 800

7 600 1200

8 600 1700

a. Fill in the rest of the cost chart. (5 points)

b. Graph the ATC, AVC, AFC, and MC curves all in one graph. (You can use Excel or a

different program to help.) (2 points)

4. The financial information for The Dawg Father II is given below (all values are monthly).

Cost of frozen hot dogs $2500

Wage costs $600

Hot dog stand lease $1100

Monthly revenue $5200

Answer each of the following, based on the information provided.

a. Calculate your accounting profit. (1 point)

b. If your other employment opportunity is to earn $900 per month playing music in a band

(and you are equally happy selling hot dogs or playing in a band), what is your economic

profit? Should you continue selling hot dogs? Explain. (2 points)

c. What happens to your economic profit if you enjoy playing in a band and would be willing

to forgo up to $200 per month to work in a band rather than selling hot dogs? Should you

continue selling hot dogs? Explain. (2 points)