What is the economic meaning of mrsto

Reference no: EM133552720

Question 1: Janet is running a painting business. She receives $200,000 payment from buyers at the end of year, at which time she also pays $20,000 fixed cost and 15% of the revenues as a variable cost.

(1) An opportunity for new business opens for Janet from which she will make $100,000 accounting profits at the end of year. If she takes this new business, then she has to reduce her work for painting business, so the revenue from painting business will drop by 30%. What will be the size of annual economic profit from the new business?

(2) If the new business will last only for the next five years, so she can take the profits from the new business for five times starting from one year from now, what is the size of the value of the new business for Janet? You must use the economic profit in the process of computing the value of the business. Assume that the annual interest rate is 7%.

Question 2: Park is always willing to give up 1 orange for 4 tangerines.

(1) What is the size of MRSTO (marginal rate of substituting tangerine for orange) for Park?

(2) What is the economic meaning of MRSTO?

(3) Suppose that the price of one orange is $1 and the price of one tangerine is $0.2. Which fruit should Park buy between orange and tangerine? Use the economic meaning of MRSTO to justify your answer.

Reference no: EM133552720

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