1. If only part of the labor force employed by a firm can be dismissed at any ti

Question

1. If only part of the labor force employed by a firm can be dismissed at any time without affecting the level of output, the total wages and salaries paid out by the firm must be considered:

a) a fixed cost

b) a variable cost

c) partly a fixed cost and partly a variable cost

d) any of the above

2. I get $100 revenue from the sale of my product each day. I rent the factory that I use for $15 a day. The raw materials of the operation cost $50 a day. I do all the work myself. Recently, a competitor offered me $30 a day to work for him. My accounting profit is ___ per day, and my economic profit is ___ per day.

Explanation / Answer

If only part of the labor force employed by a firm can be dismissed at any time without affecting the level of output, the total wages and salaries paid out by the firm must be considered variable costs. The reason is that the labor will not be paid if there is no or zero level of output in the firm. Even if their dismissal do not affect the ouput does not mean that they will be paid at zero level of output. If there are costs which are paid at zero level of output those costs are considered as fixed costs. Surely, no firm will employ labor or pay them if there is no output in the firm.

Accounting Profits = 100-15-50 = 35

Economic Profits = 35-30 = 5

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