1. Distinguish between explicit and implicit costs, giving examples of each. Wha
ID: 1091318 • Letter: 1
Question
1. Distinguish between explicit and implicit costs, giving examples of each. What are the explicit and implicit costs of attending college? Why does the economist classify normal profit as a cost? Is economic profit a cost of production?
2. List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1,000 miles to Florida for spring break. Which costs fixed, variable, or both would you take into account in making your decision? Would any implicit costs be relevant? Explain.
3. Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case justify your classification.
4. Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive.
Explanation / Answer
1)
Explicit costs are payments the firm must make for inputs to nonowners of the firm to attract
them away from other employment, for example, wages and salaries to its employees. Implicit
costs are nonexpenditure costs that occur through the use of self-owned, self-employed resources,
for example, the salary the owner of a firm forgoes by operating his or her own firm and not
working for someone else.
The explicit costs of going to college are the tuition costs, the cost of books, and the extra costs of
living away from home (if applicable). The implicit costs are the income forgone and the hard
grind of studying (if applicable).
Economists classify normal profits as costs, since in the long run the owner of a firm would close
it down if a normal profit were not being earned. Since a normal profit is required to keep the
entrepreneur operating the firm, a normal profit is a cost.
Economic profits are not costs of production since the entrepreneur does not require the gaining
of an economic profit to keep the firm operating. In economics, costs are whatever is required to
keep a firm operating.
2)
Fixed costs associated with owning and operating an automobile include the price of the car
(probably monthly payments); insurance; driver
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