Suppose the equilibrium quantity in the market for widgets is 200 per month when there is no tax

1. Suppose the equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. As a result, the government is able to raise $740 per month in tax revenue. We can conclude that the equilibrium of widgets has fallen by how much? 

John is considering starting a t-shirt company. To do so would require the purchase of a machine to imprint the t-shirts. Cost = $50,000 with no resale value. A corporate "friend" has promised John a one-year contract for 20,000 shorts, if his price is "right". The marginal cost of producing a t-shirt is $1.50. 

a. What is the lowest price John can offer for this contract? 

b. At the end of the one-year contract, what will his "friend" offer John as the price for an extension of the deal? 

2. Now, assume that John (from the question above) left a job at which he made $65,000 per year. To pay for the machine, John borrowed $40,000 from the bank at an interest rate of 7%. The balance of the purchase price ($10,000) came from John's personal savings account, where it has been earning 3%. If he charged $5.00 per shirt for the first year's contract, what was his accounting profit? What was his economic profit?

3. Marginal Analysis

Number of workers Total cost

0 50

1 110

2 160

3 200

4 240

5 250

6 260

7 280

8 310

9 350

10 400

If hiring the 7th worker increases total product by 5 units and the price of each unit is $2, should he/she be hired? Why or why not?