Question

1. Distinguish between explicit and implicit costs, giving 3 examples of each using the production of higher education.

2. Which of the following are short-run and which are long-run adjustments?

1. Freddie’s Frozen Custard builds 5 new restaurants.
2. Pioneer Balloon Corporation hires 200 more production workers.
3. Gaddert Farms increases the amount of fertilizer used on their corn crop.
4. Boeing closes its manufacturing facility in Wichita, sells the plant and moves to Oklahoma City.

Answer 1

Answer 1:- Explicit costs are payments the firm must make for inputs to non-owners of the firm to attract them away from other employment, for example, wages and salaries to its employees. Implicit costs are nonexpenditure costs that occur through the use of self-owned, self-employed resources, for example, the salary the owner of a firm forgoes by operating his/her own firm and not working for someone else.

Implicit Cost : Employee training time, Time equipment is offline for maintenance or repair and Decision not to make other products.

Explicit Cost : Building rent, equipment and supplies and raw materials.

Answer 2:-

(a) : long-run :- This is capital investment which takes time to become productive

(b) : Short-Run. The new laborers can work immediately

(c) : Short-run :- Although this takes time via the growing process, this is still a short run adjustment. It influences the growth of current crops immediately.

(d) : Long-run :- Here all inputs are variable, including factory space, meaning that there are no fixed factors or constraints preventing an increase in production output.