Unit 5 - Cost Functions. Explicit Costs and Implicit Costs Explicit cost are out-of-pocket expenses, such as labor, raw materials, and rent. Implicit costs are foregone expenses, such as the value of your own time, and the value of your own money (interest earned). Microeconomics.
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Explicit cost are out-of-pocket expenses, such as labor, raw materials,and rent.
Implicit costs are foregone expenses, such as the value of your own time, and the value of your own money (interest earned).
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Estimated explicit costs of attending college (4 years):
tuition, fees, books, and transportation: $15,000 x 4 = $60,000 .Estimated implicit costs include foregone earnings, and foregone interest:$25,000 x 4 = $100,000.
Total economic cost: $160,000.
If a firm’s total revenue is $80,000, and its explicit and implicit costs are $50,000 and $25,000, respectively, then its economic and accounting profits are:
Economic Profit = $80,000 - $75,000
Accounting Profit = $80,000 - $50,000
Example 2 answer
Economic Profit = $80,000 - $95,000
= - $15,000
Accounting Profit = $80,000 - $70,000
= $10,000From a financial point of view, should the firm continue to operate?
Total and per unit economic costs include:
Example 1If TVC + TFC = TC, and TVC and TFC are $900 and $300, respectively, what is TC?
Example 1 answer
Total Variable Cost $900
Total Fixed Cost $300 + +
Total Cost $1200
Example 2If TC is $1,200 and production is 50, what is ATC?
Example 2 answerATC =
Example 3If production is 50, and total variable and total fixed cost are $900 and $300, respectively, what are average variable cost and average fixed cost? (Output = 50).
Example 3 answer
Average variable cost =
Average fixed cost =
Example 4Using the data in the previous examples, let’s say that you produce an additional 5 products, and your total cost rises to $1260, what is your marginal cost?
Example 4 answer
Marginal cost =
change in total cost
change in production
Long-run average costs fall as production first rises.
This is called economies of scale (EOS).
When the firm gets too big, long-run average costs
rise. This is called diseconomies of scale (DOS).
When inputs increase, and production more than proportionately increases, then we speak of increasing returns to scale (associated with economies of scale).
ExampleInputs increase by 10%, and production increases by 20%.
When inputs increase, and production less than proportionately increases, then we speak of decreasing returns to scale (associated with diseconomies of scale).
ExampleInputs increase by 10%, and production increases by 5%.
When inputs increase, and production increases by the same percentage, then we speak of constant returns to scale.
ExampleInputs increase by 10%, and production increases by 10%.