ECO 112-Assignment

Student’s Name:

Institution:

American First Ladies

1-Opportunity cost refers to the value of best forgone alternative in a situation where an individual must make choice on two or more alternatives, usually mutual exclusive alternatives where the resources are limited. In a case where the best choice is made, the opportunity cost becomes the cost realized by not enjoying the benefit that would have come by, going with or considering the second best choice. It also refers to the loss of potential gain from other alternatives, when a certain alternative is chosen over the other. It is a very important concept in economics which expresses the mutual relationship between scarcity and choice. Opportunity cost is so wide that it does not only consider or restricted to the monetary or financial value but also the real cost of the output foregone, pleasure, as well as time lost and other utility providing benefits.

For instance, if milk costs $4 every gallon and bread $2 every loaf, then the relative cost of milk is 2 chunks of bread. In the event that a buyer goes to the supermarket with just $4 and purchases a gallon of milk with it, then one can say that the opportunity expense of that gallon of milk was 2 pieces of bread, expecting that bread was the following best option. Therefore, If Bob’s bagel store earns $100,000 per year in profit and Bob’s opportunity cost is $110,000 running the Greasy Spoon Diner, Bob should not stay in the business but run a Greasy spoon Diner.

2-

Hero’s accounting profit would be the out of pocket expenses of materials and travelling expenses also known as the explicit costs of accounting, deducted from the total revenue. Therefore his accounting profit would be as follows:

$100+$57000= $57100

The total revenue collected was $100000. Therefore his accounting profit would be:

$100000-$57100= $42900

Hero’s economic profits also known as implicit costs, explicit costs or accounting costs will be the forgone opportunities Hero will be giving up by working in his business instead of working as an accountant teacher plus the foregone interest he would be earning from the sale of the computer.

Therefore it would be $50000+$100=$50100

By subtracting $50100 from the implicit cost $42900 we get negative $7200. This means that hero could earn additional $7200 if he shut his business and worked as accountancy teacher at the college.

3- When I factor is fixed capital diminishing returns will occur in the short run. If the variable factor of production is increased, there will be a point where it will be producing less or other it will become less productive. This will lead to a decreasing marginal followed by average product. For example in a situation where capital is fixed, extra workers step on the ways of other workers already inside as there will be an attempt to increase production. If for example extra workers are employed in a small café, production increases but very slowly. The law of diminishing marginal returns only implies in the short run because in the long run all factors are variable. A decent sample of diminishing returns incorporates the utilization of fertilizer- a little amount prompts an enormous increment in yield. On the other hand, expanding its utilization further may prompt declining Marginal Product (MP) as the viability of the chemical declines or decays.

4-with additional production, the average fixed cost decreases and there is relatively simple logic behind this. We all know that because fixed cost is FIXED and the quantity of output is not affected by this, as quantity increases a given cost is spread more thinly per unit. For example if only 100 units are produced, 1000 dollars averages out to 10 dollars per unit. However if 10000 units were to be produced it would mean that the average shrinks to only 10 cents per unit. I also think that there is adoption of economies of scale under with decreasing average fixed cost in production. When a firm is in a position to produce more, it will reduce the cost of its products and services.

5- Economists consider fixed costs, overhead costs and indirect costs as expenses incurred by the business that are not dependent on the level of goods and services that the business produces. They are expenses such as rent or salaries that are to be met per month meaning they are time related. In the long run of a business there are no fixed costs. This is because in the long run, there is sufficient time for all short run fixes inputs to become variables. Investments in equipment and machinery in an organization can be reduced in a short period because these are committed costs. Fixed costs arise from corporate decisions to in increase expenditure on particular fixed cost equipment like advertisement costs, maintenance costs, and development costs. When a firm changes production level over time in order to respond to expected profits or losses or the overall objectives of the organization, long run costs are accumulated. This means that there are no fixed factors of production in the long run. The factors of production become variable in order to reach the long run cost of production of the goods and services of a particular firm. Long run is considered the planning and implementation stage for all the producers.

6-

MC=TC/Q=TVC/Q

TC=TFC+TVC

ATC=TC/Q therefore TC=ATC(Q)

AFC=TFC/Q therefore TFC=AFC(Q)

AVC=TVC/Q therefore TVC=AVC(Q) and ATC=AFC+AVC

From the table above we observe that Marginal Cost decreases as output level increases. But at output level 7 there is an increase in Marginal Cost.

At output level 2, diminishing return sets in and increases to diminish up to out put level 5 where it becomes constant.

8

The $ 1000 paid for the cafeteria is non-refundable whether you take dinner from the restaurant or not. An individual cannot eat more than he cannot take at 1 particular time. This is because your utility will drop too first that you won’t able to finish the additional plate of food and it will be a waste. Unless the tickets for the meals are sold off to somebody else, you will not be able to take the additional plate. Therefore the parents are not right.

When offered a job in another restaurant where rather than being allowed to eat for free I’m given $2 discount on food and it will cost a $200 less for the whole semester, I would still consider taking dinner at the first restaurant since the money had been paid and it is non-refundable and maybe consider the $2 in the following semester as this would be viable in the long run.

9

Energy cost is considered semi-variable cost because it’s an expense which contains both fixed and variable costs components. Irrespective of the level of activity achieved by the entity, fixed costs are always part of the costs that need to be paid. Energy costs like electricity is integral to production of goods and services. Electric power is both used for lighting and general operation of the business. This cost must be forgone regardless of production. On the other hand if the production activity increases cost of electricity will also increase. Regardless of the production, a cost of this portion must be forgone. This therefore is a clear indication that the cost of electricity is semi-variable.

Whenever there is an increase in the fixed costs, the average total costs will also increase. This means that the average total cost curve will shift upwards. However if the variable does not change, the marginal cost curve will not be affected. Therefore the marginal cost curve will remain in its initial position.

In is considered an input in the production of ethanol and production or more quantities or larger quantities of ethanol requires more or larger quantities of corn. Corn is therefore a variable cost.

An increase in variable cost comes with an increase in average total costs and marginal costs and both the curves shift upwards.

10

as the level of output increases the MC-marginal cost decreases. Wolfsburg Wagon which is a small auto maker is experiencing increasing returns to scale at output level 8. At output level 1 the company is only able to make $30000. As the output levels increases the marginal cost decreases. At output level 8 the WW is able to make more profits taking advantage of economies of scale. Additional output gained by another 1 unit increase in output level will be smaller than the additional output gained from the previous input available.

At output level 7 WW is experiencing decreasing returns to scale. In a production process as an input variable increases, at a certain point the marginal per unit will start decreasing. Holding other factors constant.

WW auto manufacturers are experiencing constant return to scale at level 4, 5 and 6.