Chapter 7 4.Why is it important to distinguish between explicit and implicit costs?

It is important to distinguish between implicit and explicit cost because opportunity cost includes both explicit costs and implicit costs. Business economic profits are determined using opportunity costs. Accounting profits are calculated using only explicit costs. It will give a clearcut idea as to how much a business economic profits are. Also its important to tell the costs apart because it will affect the decisions that are made within the business. It determines the accounting profit, which is determined using only explicit costs. 6. Jane quit her job at IBM where she earned $50,000 a year. She cashed in $50,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, depreciation, etc. (a) Complete the following questions: (1) What are Janes total revenues? (2) What are Janes explicit costs? (3) What is her accounting profit? (b) List two important implicit costs that Jane has not included. (c) What is Janes pure economic profit (loss)? A.(1) Janes total revenue is $400,000.00 (2) Janes explicit cost is $330,000.00 ($280.00 x 1,000 people) for gas, maintenance, etc. and $50,000.00 in corporate bonds she cashed in. (3) Janes accounting profit is the difference between her total sales revenue and her explicit costs which is $70,000.00. (b) Two of Janes important implicit cost is $55,000.00 - 1) the salary/wages of $50,000.00 she will not receive from IBM and 2) the 10% interest she will not earn on the $50,000.00 in corporate bonds, which is $5,000.00. (c) Janes pure economic profit loss is $15,000.00

8. Indicate whether the inputs below are variable (V) or fixed (F) in the short run. Input Variable Meat Fire Fixed insurance Variable Tires Output

in hamburgers. dry in cleaning. in automobiles. textile Fixed Property tax in production. trucking Variable Gasoline in services.

Fixed

aircraft Depreciation in production.

9. What is the difference between the short run and the long run? The difference between short run and long run is basically the flexibility the long run has over the short run. The short run is defined as a period in which producers are able to change the quantities of some but not all of the resources, meaning some resources are fixed and some variable. The long run is defined as a period of time long enough to enable producers of a product to change the quantities of all the resources they employ. Many decisions are fixed in the short run but variable in the long run. For instance, over a period of three months, Mercedes auto manufacturer cant change the size of its car factories. In order to produce more autos is to hire more factory workers at the factories it has. The cost of these factories is a fixed cost in the short run. Over a period of several years, the auto manufacturer can expand the size of its factories by building new ones and closing down old ones. The cost of its factories is a variable cost in the long run. 12. Interpret this statement: If diminishing returns did not occur, the world could be fed out of a flower pot. If each unit of input (adding seeds, fertilizer & water to a flower pot) would add more to output (food produced from the seeds) than the last unit of input. The food produce would be overly abundant, therefore, we would never be without food. If diminishing returns did not occur, obviously increasing returns would, because we would receive more and more each time. However, because diminishing returns is true and constant we will never be able to feed the world from a flower pot because we would eventually produce less and less as time goes by. 19. What is the relationship between marginal cost and marginal product? Marginal cost is the increase in total cost that comes from producing one more unit. Marginal product is the increase in output from an extra unit of input, such as hiring one more worker. Marginal cost and marginal product is inversely related. Marginal product and marginal costs are mirror images of each other. When marginal product is rising, marginal cost falls. When marginal product falls, marginal cost is rises. When marginal product reaches a maximum, marginal cost is at its minimum.