Chapter 18: Problem 11

Mariam is opening a pizza joint. She plans to hire a cook to make pizzas at $\$ 10$ an hour. She is also considering purchasing or leasing a convection oven. The purchase price of the oven is $\$ 500$ and after 3 years it is worthless. The annual cost of leasing the oven is $\$ 150$ a. In which factor markets does Mariam operate? b. What is the price of the capital equipment and rental rate of capital?

Short Answer

Expert verified

Mariam operates in the labor and capital markets. The capital equipment price is $ \$500 $ and the rental rate of capital is $ \$150 $ per year.

Step by step solution

Identify the Factor Markets

Mariam operates in multiple factor markets, specifically the labor market (to hire a cook) and the capital market (to purchase or lease a convection oven).

Calculate the Price of Capital Equipment

To find the price of the capital equipment, consider the purchase price of the oven. The convection oven costs $ \$500 $.

Calculate the Rental Rate of Capital (Lease Cost)

The annual cost of leasing the oven is $ \$150 $. So, the rental rate of capital in this context is $ \$150 $ per year.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

labor market

Mariam is entering the labor market when she plans to hire a cook to make pizzas. The labor market involves the buying and selling of labor, which is the work people do. In this market, companies like Mariam's pizza joint need workers, while individuals looking for jobs offer their labor. Mariam decides to pay her cook $\text{\textdollar}10$ an hour.
To understand the labor market, consider these points:

**Supply and demand:** The number of available cooks (supply) and the number of businesses needing cooks (demand) affect the wages.
**Wages:** The payment workers receive for their labor, influenced by skills, experience, and the local job market.
**Job conditions:** Factors such as working hours, job safety, and benefits can attract or repel workers.

These elements determine how businesses find employees and what they need to offer to hire them.

capital market

In addition to the labor market, Mariam engages in the capital market when she considers purchasing or leasing a convection oven. The capital market deals with financial assets or tools businesses need to produce goods and services.
Here are essential points about the capital market:

**Purchase of equipment:** When Mariam buys the oven for $\text{\textdollar}500$, she's obtaining a long-term asset that will help her business make products.
**Leasing:** Alternatively, Mariam can lease the oven for an annual cost of $\text{\textdollar}150$. Leasing is like renting, where she pays to use the oven without owning it outright.
**Investment:** Companies must decide which option maximizes their profit based on costs and expected benefits.

Businesses use the capital market to ensure they have the equipment and resources necessary for production.

rental rate of capital

The rental rate of capital is the cost of using a capital asset. For Mariam, this relates to the annual cost of leasing the convection oven, which is $\text{\textdollar}150$ per year.
Key points to understand the rental rate:

**Cost:** It represents the amount paid periodically (e.g., annually) to use the asset.
**Decision-making:** Businesses choose between buying or leasing based on the rental rate and the asset’s usefulness over time.
**Depreciation:** When considering ownership, companies also factor in the asset's depreciation, which is how much value it loses over time.

For Mariam, leasing the oven at $\text{\textdollar}150$ a year lets her avoid a large upfront cost but means she won't own the asset.

price of capital equipment

The price of capital equipment is the initial cost to purchase an asset used for production. In Mariam's case, the convection oven costs $\text{\textdollar}500$. This is a one-time expense to acquire ownership of the equipment.
Important aspects of the price of capital equipment include:

**Initial investment:** The upfront cost required to buy the equipment and put it to use.
**Depreciation:** Over time, the asset loses value. For instance, the oven will be worthless after 3 years.
**Cost-benefit analysis:** Mariam must weigh the benefits of buying versus leasing (e.g., $\text{\textdollar}500$ upfront vs. $\text{\textdollar}150$ annually).

The price of capital equipment impacts a business's financial planning and long-term investment strategy.