Question

Microeconomics Chapter 9. Name Emili 1. Economic cost can best be defined as any contractual obligation that results in a flow of money expenditures resource suppliers. B. those payments for resources that involve an obvious cash transaction. C. the income the firm must provide to resource suppliers to attract ri uses. D. the opportunity cost of using a resource already owned by the firm. 2. Which of the following is most likely to be an implicit cost for C (A). forgone rent from the building owned and used by Company X B. rental payments on IBM equipment C. payments for raw materials purchased from Company Y D. transportation costs paid to a nearby trucking firm 3. Implicit and explicit costs are different in that A. explicit costs are opportunity costs; implicit costs are not. B. implicit costs are opportunity costs; explicit costs are not. C the latter refer to nonexpenditure costs and the former to monetary D. the former refer to nonexpenditure costs and the latter to mone

Answer 1

1. Economic cost is the payment that must be made to obtain and retain the services of resources. The resources may be self owned or hired/purchased. The cost on self owned factors of an entrepreneur is implicit cost and cost other than self owned factors is explicit cost. Economic cost includes both implicit cost and explicit cost.

Answer: C. the income the firm must provide to resource suppliers to attract resource use. .

2. The calculation of economic cost involves implicit cost and explicit cost. In case of implicit cost the value is imputed and there is no outflow of cash from the firm. The cost imputed on self owned factors of an entrepreneur is the implicit cost. There is no payment of cash but the cost imputed on such factors is considered while calculating economic cost.

Answer: A. forgone rent from the building owned and used by Company X.

3. For implicit cost there is no money payment but for the explicit cost there is a money payment.

Answer: D. the former refers to non-expenditure costs and the latter to money expenditure.

7. Implicit cost

Entrepreneur’s potential earnings as a salaried worker= $50,000

Value of entrepreneur’s talent in the next best entrepreneurial activity= $80,000

Entrepreneur’s forgone interest on personal funds used to finance the business = $6,000.

Total= $50,000+$80,000+$6,000= $136,000

Explicit cost.

Payments to workers =$120,000, Utilities (electricity, water, disposal) cost= $8000, annul lease on buildings = $22,000.

Total= $120,000+$8000+$22,000=$150,000.

Economic profit is equal to Total Revenue -Implicit cost + explicit cost.

Then economic profit = 380,000-286,000= $94000.

Accounting profit is equal to Total Revenue – Explicit cost.

Then Accounting profit = $380,000- $150,000=$230,000.

Answer: A. has lower implicit cost, including a normal profit, than its explicit costs.

8. During shortrun the firms do not have sufficient time to change the size of its plant.

Answer: B. the firm does not have sufficient time to change the size of its plant.

9. During longrun the amount of fixed factors can be altered. A firm can increase the plant size, cut off the plant size or dispose altogether.

Answer: B. Unable to meet foreign competition, a U.S watch manufacturer sells one of its branch plants.