Decide wheather the following statements are true or false and EXPLAIN Eswhy. 1)

Question

Decide wheather the following statements are true or false and EXPLAIN Eswhy.

1) A decision maker must always use the historical cost of raw materials in making an economic decision.

2) The marginal cost curve always intersect the average cost curve at the aveage cost's lowest point.

3) The portion of the long run cost curve that is horizontal indicates that the firm is experiencing neither economies nor diseconomies of scale.

4) Marginal cost is relevant only in the short run analysis of the firm.

5) The rational firm will try to operate most efficiently by producing at the point where its average cost is minimized.

Explanation / Answer

[False]

Historical costs are cost of items at the price originally paid for them, while replacement cost valuation states the costs at the prices that would have to be paid currently. Costs reported by conventional financial accounts are based on historical (original outlay) valuation.

In a business organization, management has to make plans for the future and also choose between alternative plans. While making these choices, an estimate must be made how each alternative plan will affect future expenses and revenues. Hence cost estimates must be tailored to the economic characteristics of the choices. The only costs that matter for business decisions are future costs;

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