ECON 3411 Lecture Notes - Lecture 2: Opportunity Cost

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19 Jan 2018

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Topic: the nature and importance of profits: a t(cid:455)pi(cid:272)al fir(cid:373)"s o(cid:271)je(cid:272)tive is to (cid:373)a(cid:454)i(cid:373)ize profits, a(cid:272)(cid:272)ou(cid:374)ti(cid:374)g profit. Total amount of money taken in from sales (total revenue) minus the dollar cost of producing goods or services: e(cid:272)o(cid:374)o(cid:373)i(cid:272) profit. The difference between total revenue and the total opportunity cost of producing goods or services. Opportunity cost: the e(cid:454)pli(cid:272)it (cid:272)ost of a resour(cid:272)e plus the i(cid:373)pli(cid:272)it (cid:272)ost of givi(cid:374)g up its (cid:271)est alternative, profit principle: Profits are a signal to resource holders where resources are most highly valued by society. Assumptions: earning ,000 per year as a labor, to start your business, invest. ,000 (has been earning you per year), you use your own place (has been renting out for ,000 per year), hiring a clerk with ,000 per year. Accounting profit will be: total sales revenue ,000, cost of production ,000, clerk"s salar(cid:455) (cid:1005)8,(cid:1004)(cid:1004)(cid:1004, utilities 5,000, total (explicit) costs 63,000, accounting profit 57,000.

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?

The difference between total revenue and total cost is _______________________________

20. . A perfectly competitive firm is definitely earning an economic profit when: ________________

A) MR > MC. B) P > ATC. C) P > MC. D) P > AVC.

-Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits are:_________________________________________________

-For the economist, total cost includes______________________________ for an economic profit

-Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation accounting profit is:_______________________________________________________________

-Identify the following market structure

-A market with no close substitutes ____________________________________

-A market that focuses on differentiated products_______________________

-A market with one seller______________________________

-A market where there is collusion________________________

-A market that involves the auto industry_____________________

-A market where you are a price taker_____________________________

-A market where advertising is a strong incentive____________________

Why can fixed costs be considered as an entry fee?

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1. In a market economy, the high salaries of some star baseball players such as Adrian Gonzalez, are determined by

		Team owners, based on the total number of star athletes they plan to hire.
	B	advertising companies, based on what they are willing to pay to advertise their products at baseball games.
	C	the interaction of the demand for star athletes and the supply of star athletes.
	D	consumers, based on their willingness to watch baseball games.

2. Demand in factor markets differs from demand in product markets in that

	A	the demand for a factor of production is difficult to determine.
B		the demand for a factor of production is influenced by workers' productivity and by the producers' expected sales revenues, not by tastes and preferences of consumers.
C		demand for a factor of production is based on the tastes and preferences of firms.
D		demand for a factor of production is based on the tastes and preferences of resource owners.

3. The demand for labor is described as a derived demand because

A		it is derived by workers seeking to earn income to fund the consumption of goods and services.
B		it is derived by producers seeking to make profits by starting new businesses.
C		it is derived from the demand for products that use labor in the production process.
D		it is derived from government institutions that rely on labor markets for the purpose of raising tax revenue.

4. Which of the following is not an example of a derived demand?

A		Several of the animated films released between 1999 and 2001 failed to earn a profit, which caused some companies to stop making these films, thereby decreasing the demand for animators.
B		Seth Bullock, a personal injury attorney, complains that he is earning far less now than a few years ago largely because personal injury cases have been undercut by state laws limiting class-action suits and payouts on damages.
C		Millicent Manning, the owner of a furniture store, is concerned that her sales have fallen for the past six months. She attributes this to the downturn in the real estate market.
D		As advancements in medical technology increase the safety and success of laser eye surgery, the demand for opticians has decreased.

5. Marginal revenue product for a perfectly competitive seller is equal to

A		the output price multiplied by the total product of labor.
B		the output price multiplied by the number of workers hired.
C		the change in total revenue that results from hiring another worker.
D		the marginal cost of production.

6. What is the difference between labor's marginal product and marginal revenue product?

A		The marginal product of labor is the increase in output as a result of hiring an additional worker while the marginal revenue product of labor is the increase in profit as a result of hiring an additional worker.
B		The marginal revenue product of labor is the dollar value of hiring an additional worker while the marginal product of labor is the increase in the firm's physical output as a result of hiring an additional worker.
C		The marginal product of labor is the additional labor's contribution to the firm's total output while the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.
D		Labor's marginal product is a measure of labor's productivity while labor's marginal revenue product is a measure of labor's ability to sell the firm's products.

7. What is the difference between a firm's marginal revenue and its marginal revenue product?

A		Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the profit earned from hiring one more worker.
B		Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the change in total revenue from hiring one more worker.
C		Marginal revenue is the increase in revenue when a firm raises its output price while marginal revenue product is the increase in the marginal product when a firm hires an additional worker.
D		There is no difference between the two terms.

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ECON 3411 Lecture Notes - Lecture 2: Opportunity Cost

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