Give a brief summary of economic costs. Suppose a firm is operating at the minim

Question

1. Give a brief summary of economic costs.
2. Suppose a firm is operating at the minimum point of its short-run average total cost curve, so that marginal cost equals average total cost. Under what circumstances would it choose to alter the size of its plant? Explain.
3. In the short-run, why might a firm still operate even when there is a loss?
4. Suppose a firm is producing 1,000 units of output (Q). Its average fixed costs are $50. Its average variable costs are $25. What is the total cost (TC) of producing 1,000 units of output (Q)? It the price (P) of the good is $100, what is total revenue? What is total profit?

Explanation / Answer

1) Economic Costs take into account the opportunity cost of the capital employed in the project.

So Economic Cost = Accounting Cost + Opportunity Cost of Capital

2) A firm may alter size even if it is at the minimum point of Short Run Average Cost curve as there might be Economies/Diseconomies of Scale. That is, there may be scope of reducing Long Run Average Cost by increasing/decreasing the firm size.

3) While making losses in the short run, a firm may continue if the Revenue is sufficient to cover the Variable Costs. Fixed Costs may be covered in the long run.

4) Total Cost = Total Fixed Cost + Total Variable Cost = 50(1000) + 25(1000) = 75000

Total Revenue = 100(1000) = 100000

Total Profit = Total Revenue - Total Cost = 100000 - 75000 = 25000

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