Question

1. Discuss one or more examples of an opportunity cost an accountant might not count as a cost. As part of your reply, state why the accountant might ignore this cost.

2. Give an example of a government-created monopoly. Is the creation of this monopoly necessarily good or bad public policy?

3. Which contributes more to GDP -- the production of an economy car or the production of luxury car? Why?

4. Why do economists use "real GDP" rather than "nominal GDP" to gauge economic well-being?

Answer 1

1)

Opportunity cost is the benefit that has been sacrificed from the next best alternative. For example, land can be used for producing either wheat or rice. Producing rice means, we have to sacrifice the production of the wheat. Hence, the opportunity cost of producing rice is the amount of wheat that has been sacrificed.

Accountant considers the only the explicit cost of production, he does not take into account the implicit cost. Opportunity cost is not explicit cost or it is not made in monetary term, Thus, such costs are ignored while the accounting profits of firms.

2)

Monopoly refers to the market conditions where only a single seller exists in the market. Transportation, Electricity sector etc are examples of government-created monopolies.

These monopolies are necessary and essential for society as a whole. Single firm in such market tends to reduce the average cost of production.

But if more firms are allowed to operate in such a market, then there would be duplicacy of infrastructure in the market. Hence, such competition is not desirable at all where the average cost is likely to rise.