Short free-response question
Is the bakery worth it?
- Unit 3
- 5 points
- About 12 minutes
You can use a calculator on this question, just like on exam day.
A shorter question with a few lettered parts on one situation, often built on a table, a payoff matrix or a given or described graph. You make claims, explain them, calculate a value, or describe a labeled graph and show a change on it. On the exam: Questions 2 and 3 of 3 in Section II; 5 points each, a quarter of the section score each. About 12 minutes suggested for each. Four-function calculator allowed.
The question and its sources
Rosa quit her job as an accountant, which paid $60,000 a year, to open a bakery. She took $100,000 out of her savings account, which paid 5% interest a year, to buy the bakery's equipment. The bakery sells in a perfectly competitive market. In its first year, it has the results below.
Table 1. Rosa's bakery, first year
| Item | Amount |
|---|---|
| Total revenue | $200,000 |
| Explicit costs (ingredients, rent, wages, utilities) | $150,000 |
Source: Hypothetical data
Suggested time: 12 minutes
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Part (a)
1 pointCalculate the bakery's accounting profit for the year. Show your work.
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Part (b)
1 pointCalculate the bakery's economic profit for the year. Show your work.
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Part (c)
1 pointIs Rosa earning a normal profit? Explain what your answer means for her choice to run the bakery.
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Part (d)
1 pointSuppose Rosa's results are typical of firms in this market. Identify what will happen to the number of bakeries in the market in the long run. Explain.
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Part (e)
1 pointExplain how the change you identified in part (d) affects the economic profit of the bakeries that remain in the market.
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