AGR 110 Chapter Notes - Chapter 1: Mental Accounting, Status Quo Bias, Sunk Costs

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31 Jan 2017

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Explicit cost - a cost that requires an outlay of money. Implicit cost - the value, in dollar terms, of the benefits that are forgone. Economic profit - explicit cost + implicit cost. Capital - the total value of the assets of an individual of a firm. Implicit cost of capital - the income the owner of the capital could have earned of the capital had been employed in its next best alternative use. Principle of either-or decision making - choose the one with the positive economic profit. Marginal cost - the additional cost incurred by producing one or more unit of that good or service. Increasing marginal cost - when each unit of a good costs more to produce than the previous unit. Marginal cost curve - a graphical representation of marginal costs. Constant marginal cost - when the cost of producing an additional unit is the same as the cost of producing the previous unit.

Related Questions

5. Economic profit is equal to

a. total revenue minus the explicit cost of producing goods and services.

b. total revenue minus the opportunity cost of producing goods and services.

c. total revenue minus the accounting cost of producing goods and services.

d. average revenue minus the average cost of producing the last unit of a good or service.

6. Accounting profit is equal to

a. marginal revenue minus marginal cost.

b. total revenue minus the explicit cost of producing goods and services.

c. total revenue minus the opportunity cost of producing goods and services.

d. average revenue minus the average cost of producing the last unit of a good or service.

7. Economic profit

a. will never exceed the accounting profit.

b. is most often equal to accounting profit

c. is always at least as large as accounting profit.

d. is a less complete measure of profitability than accounting profit

8. Which of the following expressions is correct?

a. accounting profit = total revenue - explicit costs

b. economic profit = total revenue - implicit costs

c. economic profit = total revenue - explicit costs

d. Both a and b are correct

Scenario 13-2:

Zach took $400,000 out of the bank and used it to start his new cookie business. The bank account pays 3% interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50. Also during the first year, the cookie business incurred costs that required outlays of money amounting to $9,000.

9. Zach's accounting profit for the year was

10. Zach's economic profit for the year was

Scenario 14-1:

As part of an estate settlement, Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per

11. At the end of the first year of operating her new business, Mary's accountant reported an accounting profit of $150,000. What was Mary's economic profit?

Question:

Evaluate the following statement:

In the short-run, information about a perfectly competitive firm's fixed costs is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output.

Answer:

The profit-maximizing level of output in a perfectly competitive market is determined at the level where marginal revenue (MR) equals marginal cost (MC). Marginal revenue is the additional revenue earned by selling an additional unit of output, while marginal cost is the additional cost of producing an additional unit of output (Farnham, 2014). Additionally, in order to find the amount of profit earned, we need to know the total cost and total revenue amounts. Total cost is the total of variable and fixed cost. Therefore, in short-run production, a firm's fixed cost is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output.

Farnham, P (2014) Economics for Managers 3^rd edition

~Beth

I need a peer reply for this, please.

plumhornet520

Complete Table 1. Summarize your calculations and use Microsoft Excel.

Using Excel, draw one graph showing average fixed costs, average variable costs, average total costs, marginal revenue, and marginal costs.

Using the data in the table and on your graph, what is the profit maximizing, or loss minimizing level of output? Explain and justify your answers.

What is a normal profit? What is an economic profit? Explain your answer using examples. Are normal profits being earned in this example? Are economic profits present for this firm in this example? Explain your answers.

Given the data in the table and the graph, how could you determine or identify the optimal plant size?

What is the difference between explicit and implicit cost? Explain your answers.

How would we determine if a cost is a fixed cost or a variable cost?

Output	Average Fixed cost	Average Variable Cost	Average Total Cost	Marginal Cost	Price	Total Revenue	Marginal Revenue
0					$ 345.00
1	$ 180.00	$ 135.00	$ 315.00		$ 300.00
2	$ 90.00	$ 127.50	$ 217.50		$ 249.00
3	$ 60.00	$ 120.00	$ 180.00		$ 213.00
4	$ 45.00	$ 112.50	$ 157.50		$ 189.00
5	$ 36.00	$ 111.00	$ 147.00		$ 165.00
6	$ 30.00	$ 112.50	$ 142.50		$ 144.00
7	$ 25.71	$ 115.70	$ 141.41		$ 126.00
8	$ 22.50	$ 121.90	$ 144.40		$ 111.00
9	$ 20.00	$ 130.00	$ 150.00		$ 99.00
10	$ 18.00	$ 139.50	$ 157.50		$ 87.00

AGR 110 Chapter Notes - Chapter 1: Mental Accounting, Status Quo Bias, Sunk Costs

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