Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 3, Problem 5MC
To determine
Avoidance of hidden cost fallacy.
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Consider a company using the economic
production quantity model.
a. Derive the percent change of total cost if the
lot size is different than the optimal by a factor
of (1+z).
b. How would the total cost change if the
holding cost in the model is reduced 30
percent?
c. Derive the percent cost difference if decide to
increase production rate by a factor of (1+w)
Implicit costs are: regarded as costs by accountants but not by economists.B. payments that a firm makes to other firms or individuals who supply resources to it.C. non-expenditure costs.D. costs that vary proportionately with output.
Question 2
a. A producer borrows money and starts a business. He himself looks after the business. Identify implicit and explicit costs from this information. Explain.
b.List and explain which of the following is a fixed cost or a variable cost for Caribbean Airlines.
i.The cost of fuel used in its planes.
ii. The rent on its Piarco headquarters.
iii. The lease payments on its current inventory of jets.
iv. The cost of peanuts it serves to passengers.
v. The salary paid to the Chief Executive Officer.
c. How is the difference between average total cost and average variable cost impacted by an increase in output?
Chapter 3 Solutions
Managerial Economics: A Problem Solving Approach
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Similar questions
- Answer the following Questions. Include referencing where additional sources have been used a. Why will firms in most markets be located at or close to the bottom of the long-run average cost curve? b. Distinguish between implicit and explicit costs. How is it possible to have positive accounting profit and negative economic profit concurrently? c. Distinguish between economies of scale and constant returns to scale. What shape will the long-run average cost curve have for economies of scale and constant returns to scale. d. What is the difference between production in the short run and production in the long run? Explain the shape of the long-run cost curve in relation to short-run cost curves?arrow_forwardQ47 In the long run, the law of diminishing marginal returns... a. Sometimes holds, depending on the production process. b. Does not hold because technology varies. c. Is exactly the same as in the short run. d. Does hold, regardless of the production process. e. Is not relevant because there are no fixed factors of production.arrow_forwardAnswer a and what u can in b pleasearrow_forward
- Answer c pleasearrow_forwarda. Define explicit costs and implicit costs. b. Assume the following: * A firm buys a unit of capital for $300. * This capital generates $500 of total revenue for the firm. * This firm could have earned a 10% rate of return from the best alternative use of its $300. Determine the values of explicit cost, implicit cost, and profit. Give economic meaning to the value of profit.arrow_forwardWhich of the following best defines a sunk cost? A. Costs that have already been incurred and cannot be recovered. B. The variable costs associated with increasing production. C. The total costs including both fixed and variable costs. D. Future costs that are expected to be incurred as a result of current decisions.arrow_forward
- Which of the following is true of fixed costs? a. Fixed costs can be changed, but it is extremely costly to do so in a short period of time. Therefore, in the short run not all input factors are flexible b. Fixed costs can be changed immediately. Therefore, we do not observe inefficiencies in the economy. c. Fixed costs can never be changed. Therefore, companies do not change their output over time. d. Fixed costs are not an issue economists deal with. The term relates to psychology.arrow_forwarda. Give 2 examples of explicit cost b. Give 2 examples of implicit cost/opportunity cost/cost of ownership/cost of equity capital c. Imagine yourself as an entrepreneur. Pick any business you like. Run some numbers to calculate your accounting profit and economic profit. Show your numbers. Note: Make up those numbers yourself. d. After you have run the numbers, do you still want to start the business? Why or why not?arrow_forward1. Why do marginal costs tend to rise, and marginal benefits tend to fall? Explain. 2. Is it possible to avoid Diminishing Marginal Return? Why? Explain 3. Suppose that the Law of Diminishing Returns sets in immediately (that is, there is no range of output over which the Division of Labor holds). What would the short run marginal cost, average cost, and average variable cost curves look like? Explain.arrow_forward
- What happen to salaries and wages when you are in a production/manufacturing business that you want to operate on and on for many production cycles? a. it will either be a variable and/ or fix cost b. it becomes fixed cost c. It becomes variable cost d. it is an operating expense When there are 3 indifference curves in a graph, what ideal point is desired? a. a point where budget and satisfaction coincides with each other b. a point that is within the highest budget line c. point that is within the highest indifference curve d. the point where there is satisfaction yielded An example of business that is servicing a captive consumers as there is an absence of choices to serve them. a. Duopoly b. Monopsony c. Monopoly d. Oligopolyarrow_forwardWhen the output level is 100 units, what is the total cost of production. A. $2000 B. $20 C. $1000 D.arrow_forwarda. marginal factor of production. b. fixed factor of production. c. incremental factor of production. d. variable factor of production. 21. Which of the following is not true? a. Marginal cost intersects average variable cost at its minimum point. b. Marginal cost intersects average total cost at its minimum point. c. Marginal cost intersects average fixed cost at its minimum point. d. Average fixed cost intersects average variable cost at its minimum point. 22. If a consumer moves upward along an indifference curve, his or her total utility: a. remains constant. b. first decreases, then increases. c. increases. d. first increases, then decreases. 23. Jill Smith, a careful maximizer of utility, consumes only two goods, peanut butter and ice cream. She had just achieved the utility-maximizing solution in her consumption of the two goods when the price of peanut butter rose. As she adjusts to this event, she will consume: a. more peanut butter and more ice cream. b. less peanut butter…arrow_forward
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