Complete all questions by filling the blanks and/or circling(or highlighting) a
ID: 1166667 • Letter: C
Question
Complete all questions by filling the blanks and/or circling(or highlighting) a correct choice.
1. Why are costs important in economics? Differences in using costs from accounting?
Costs are important in economics in determining the optimal (a__________ ) of resources based on what firms are willing to pay, which in turn depends on how much consumers are willing to pay for the products produced by these resources. How an optimal combination of resources is chosen by following the producers’ goal of minimization of total economic costs. The “least-cost way of production” results in allocative efficiency. Keep in mind that the producer’s goal is to maximize profit and that goal must be consistent with the minimization of costs (See the picture illustrated for the relations of those with the double-edged sword on PPT slides). Costs reflect the market prices of the resources used in production, but also economic costs include the ( o____________ c________ ) of using some resources that may not have an explicit market price. Economists argue that the cost of all resources should be considered when determining the real cost of production.
Whereas the “accounting costs” refers to the ( implicit, explicit ) cost, economists (but not accountants) would count the income forgone in the use of the owner’s time as an economic cost, the interest forgone by using one’s own funds, and so on. These implicit costs should be counted so one can judge the true economic or opportunity cost of production. If these costs are neglected, then an overallocation of resources could occur because not all of the production costs are being measured.
2. Normal profit as a cost vs. Economic profit as pure profit
Normal profit is considered an ( implicit, explicit ) cost because they are the minimum payments required to keep the owner’s entrepreneurial abilities. In the text example of T-shirt store (pp.197-198 or pp.181-182 in 21st Ed), the amount of normal profit is $( ________ ). Normal profit represents the forgone payment you would have received doing another business. If you don’t receive an equivalent or greater income to your normal profit cost, you would face the incentive to change businesses.
Economists classify normal profits as ( costs, profits ), 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.
However, Economic profits ( are, 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. If economic profits are zero, it means the business is covering all of its explicit and implicit costs, including the (n_______ p_______). Thus the business has no incentive to shut down and open a business in another industry, and it will maintain its line of work.
3. Justin runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4,000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3,000 per year. Total annual revenue from pottery sales is $72,000. Calculate accounting profits and economic profits for Justin’s pottery.
a) Explicit costs: $___________ (= $___________ for _________+ $___________ for ________+ $_______________ for _______________ ).
b) Implicit costs: $___________ (= $___________ for _________+ $___________ for ________+ $_______________ for _______________ ).
c) Accounting profit = $__________ (= $___________ - $ ___________).
d) Economic profit = $_____________ (= _________________________________________ ).
4. Comment on the problem with this statement: “Of course, there are diminishing marginal returns from adding more workers to a fixed quantity of plant and equipment because additional workers are not as good as initial workers.”
The statement is ( correct, incorrect ). The law of ( __________ ___________ ___________ ) assumes all units of variable inputs, which would be workers in the textbook, are of ( equal, unequal ) quality. Marginal product (MP) diminishes not because each additional worker who is hired is inferior to the previous worker, but because more workers are being used relative to the fixed plant and equipment that is available.
How can total course learning and studying be related to the law of diminishing returns?
Total course learning can be considered an output in the educational production process. The inputs include intelligence or ability, quality of the course materials, instructor effectiveness, class time, and study time. If you hold constant the other inputs, and just change study time, then you can use this change to explain the law of diminishing returns. As study time is added to these other fixed resources, the contribution made by each additional hour of study time to total course learning eventually starts to ( rise, fall ). That is, at some point the marginal product (MP) of an extra hour of study time will ( increase, decline ) and at some further point, become zero. The total product (TP) rises at a(n) ( diminishing, increasing) rate, reach a maximum, and then decline.
Explanation / Answer
1) Costs are important in economics in determining the optimal ALLOCATION of resources based on what firms are willing to pay, which in turn depends on how much consumers are willing to pay for the products produced by these resources.
2) Costs reflect the market prices of the resources used in production, but also economic costs include the OPPORTUNITY COST of using some resources that may not have an explicit market price. Economists argue that the cost of all resources should be considered when determining the real cost of production.
3) Whereas the “accounting costs” refers to the EXPLICIT cost, economists (but not accountants) would count the income forgone in the use of the owner’s time as an economic cost, the interest forgone by using one’s own funds, and so on.
4) Normal profit is considered an IMPLICIT cost because they are the minimum payments required to keep the owner’s entrepreneurial abilities.
5) In the text example of T-shirt store (pp.197-198 or pp.181-182 in 21st Ed), the amount of normal profit is $( ________ ). TEXT NOT AVAILABLE HENCE CANT BE ANSWERED.
6) Economists classify normal profits as COST since in the long run the owner of a firm would close it down if a normal profit were not being earned.
7) However, Economic profits ARE NOT costs of production since the entrepreneur does not require the gaining of an economic profit to keep the firm operating.
8) If economic profits are zero, it means the business is covering all of its explicit and implicit costs, including the NORMAL PROFIT.
9) a) Explicit costs: $37000 (= $$12,000 for WORKER+ $5,000 for RENT+ $20,000 for MATERIAL ).
b) Implicit costs: $22000 (= $40,00for OWN INVESTMENT'S RETURN ALTERNATIVELY+ $15,000 for OPPORTUNITY COST OF LOOSING JOB AS POTTER+ $3,000 for ENTREPRENEURIAL TALENT ).
c) Accounting profit = $35000 (= $72000 - $ 37000).
Economic profit = $13000 (= $72000 - $ 37000 - 22000).
10)The statement is INCORRECT. The law of DIMINISHING MARGINAL UTILITYassumes all units of variable inputs, which would be workers in the textbook, are of EQUAL quality.
11) As study time is added to these other fixed resources, the contribution made by each additional hour of study time to total course learning eventually starts to FALL. That is, at some point the marginal product (MP) of an extra hour of study time will DECLINE and at some further point, become zero. The total product (TP) rises at a(n) DIMINISHING rate, reach a maximum, and then decline.
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