1- Distinguish between explicit and implicit costs, giving examples of each. Wha
ID: 1103190 • Letter: 1
Question
1- Distinguish between explicit and implicit costs, giving examples of each. What are some explicit and implicit costs of attending college?
2- Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued bonds, shipping charges, payments for raw materials, real estate taxes, executive salaries, insurance premiums, wage payments, depreciation and obsolescence charges, sales taxes, and rental payments on leased office machinery. “There are no fixed costs in the long run; all costs are variable.” Explain.
3- Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the steel industry; (c) a Kansas wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. In each case justify your classification.
4- Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive.
5- Explain how the long run differs from the short run in pure competition.
6- How does a generic drug differ from its brandname, previously patented equivalent? Explain why the price of a brandname drug typically declines when an equivalent generic drug becomes available? Explain how that drop in price affects allocative efficiency.
Explanation / Answer
Explicit cost are the out of pocket cost and differ from the implicit cost in that the latter are imputed cost and the occurrence is only implied. No actual recording or reporting takes place in case of the implicit cost or no cash outlay memo is prepared where in in case of explicit cost there is a cash outflow owing to the factors of production. The explicit costs are taken into account when accountinf for the Accounting profit as well as economic profit while the implicit costs are taken into account only in case when calculating the economic profit. Examples of Explicit cost are: Salaries, rents wages, advertisement cost.
Examples of implicit cost : Interest payments on capital, salary to the owner etc. which don’t occur in reality.
The explicit costs associated with attending college are the tuition fee, the bus fair, the cost of books and stationary.
Implicit cost is the wage foregone while attending college.
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