1- Distinguish between explicit and implicit costs, giving examples of each. Wha
ID: 1104293 • 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
1. Explicit costs are the direct costs which are actually incurred by us. Implicit costs are the hidden or opportunity costs of taking up an alternative. For example, the explicit cost of watching a movie is the price of the ticket. However, there are implicit costs different from the ticket price alone. One could study or play an outdoor sport or do something else rather than watching the movie. So, the alternatives foregone is the implicit cost of watching the movie.
The explicit cost of attending college includes the course fees, cost of books and other study materials, transportation costs, costs of meals, etc.
One could take up a job and earn money rather than going to college. Alternatively, one could invest the course fees in a business and earn revenue. So, these lost incomes are the implicit cost of attending college.
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