Question

Indicate if the following questions are True or False. Explain “Why” your answer is True or False.

1. It is good to incur high opportunity costs for an activity one is engaged in. Why?
2. Price of elasticity measures vary along the demand curve. Why?
3. Employing economic cost/profit instead of accounting cost/profit when making business decisions tend to generate more efficient or superior economic results for firms. Why?
4. Firms do not try to maximize their output. Why?

Answer 1

Answer a. False

Meaning of Opportunity cost

Opportunity cost is the cost of the next best alternative.

Economics is concerned with choice-using scarce resources which have alternative uses. The cost may be in terms of money or maybe in terms of the utility or benefits the person derives from making the choice.

It is bad to incur high opportunity cost for an activity. We will understand this concept with the help of an example.

Example

If you invested in Ford(the automobile branch) instead of General Motors( given that profit of General Motors is much bigger than Ford), your opportunity cost would be high because you would loose alot if the share prices of Ford falls due to unfavorable circumstances.

On the contrary, If the opportunity cost is low, that means you would not miss out very much if you loose by making selection.

Answer 2 True

What is Price Elasticity of Demand?

Price Elasticity of Demand is the degree of response of quantity demanded of a good or service in response to change in its price. It can be Highly elastic, elastic, unitary, inelastic or highly inelastic.

Price Elasticity of Demand varies along the demand curve.

Formula for Point Elasticity of Demand = Lower Segmentof DemandC urve Upper Se gment of Demand Curve

For segments of the curve that are closer and closer to quantity axis (X-axis) from left to right, the demand curve is increasingly inelastic.

Answer 3 True

What is the difference between accounting cost and economic cost?

Accounting cost includes only explicit costs (actual expenditure that is paid) whereas Economic Costs includes both explicit cost and implicit cost (Opportunity cost). Opportunity Cost is the cost of next best alternative.

Though employing economic cost/profit is more efficient but it is difficult to calculate it in every case and it is not feasible to use economic costs and profits.

Answer 4 True

Increasing Quantum of Output is not a criteria for increasing profit. Had this been the criteria, every firm would have been in profit. Beyond a particular point producing the goods and services results in losses

Rather cost is used as a criteria for deciding the output to be produced. Reason being cost per unit changes with change in output. The concept of Law of Variable proportion and returns to scale are used to identify the behaviour of cost.

Output is produced till that point where Marginal Revenue $=$ Marginal Cost.