Question

5. A. Explain why explicit costs and implicit costs are relevant in economic decision B. You have just been offered a job in a firm at Wall Street paying $60,000 per making. year. You decide to turn down this offer because you want to work for yourself. Explain the opportunity cost of working for yourself? C. Analyze why the marginal cost is the relevant cost to the producer when he is deciding whether to produce more of a good.

Answer 1

Answer : 5) A) Cost and profit are two important parts of a business decision. Because a business get economic profit when it subtract the total cost from total revenue. This means that a business get economic profit by,

Economic profit = Total revrnue - Total cost.

Total cost include both implicit cost and explicit cost. This means that,

Total Cost = Implicit cost + Explicit Cost.

As implicit cost and explicit cost are included in total cost and by subtracting this total cost from total revenue, hence explicit cost and implicit cost are related to the business decision. As the cost level can be changed for future production and cost = implicit cost + explicit cost, hence for economic decision making both the explicit cost and implicit cost are relevant.

B) Offering job with payment of $60,000 is an opportunity for me. But I turn down this opportunity. As here I am losing $60,000 paying job for working for myself, hence $60,000 is the opportunity cost for working for myself.

C) Marginal cost is that cost which occur for producing one more unit of a good. If producer decide to produce one more unit of a good then this additional unit creates some costs like labour cost, raw material cost etc. This additional cost for producing additional one unit of a good is called marginal cost. Therefore, marginal cost is related with one additional unit production decision. Hence for producing one more unit of a good the marginal cost is the relevant cost to producer.