accounting

Suppose afirm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual explicit costs for the firm described above?

$360,000.The explicit costs include wages and salaries, raw materials, equipment, rent, and interests for a total of $360,000.

Lashondra is the owner/operator of an interior design firm. Last year she earned $400,000 in total revenue. Her explicit costs were $200,000 (assume that this amount represents the total opportunity cost of these resources). During the year she received offers to work for other design firms. One offer would have paid her $120,000 per year and the other would have paid her $130,000 per year. Lashondra's economic profit is equal to

$70,000. Accounting profit is equal to revenue ($400,000) minus explicit costs ($200,000), which is $200,000. Economic profit is equal to accounting profit ($75,000) minus implicit costs-the best forgone alternative-($130,000); therefore her economic profit is $70,000.

Suppose a university raises its tuition by 6 percent and as a result the enrollment of students decreases by 3 percent. The absolute value of the price elasticity of demand is

.5 The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore the price elasticity of demand is equal to 3/6 or 0.5.

For product XYZ, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded will increase by

3.5 percent for each 1 percent decrease in price,ceteris paribus. The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore a 1 percent decrease in price will cause a 3.5 percent increase in quantity demanded.

Diminishing returns occur because

A firm increases the amount of a variable input without changing a fixed input. In the short run, a production process is characterized by a fixed amount of available land and capital. Typically the only factor that can be varied in the short run is labor. Yet as more labor is hired, each unit of labor has less capital and land to work with.

A production decision involves choosing

A rate of output and is a short-run decision. A production decision is the selection of the short-run rate of output (with existing plants and equipment), including shutdown (producing zero) or production.

How do you find average variable cost?

AVC is equal to VC divided by quantity

Adam Weed is the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year he received three offers to work for other flower shops with the highest offer being $75,000 per

Accounting profit = $75,000; economic profit = $0. Accounting profit is equal to revenue ($250,000) minus explicit costs ($175,000), which is $75,000. Economic profit is equal to accounting profit ($75,000) minus implicit costs ($75,000); therefore his economic profit is $0.

The accounting profit is equal to

Accounting profit is equal to revenue minus explicit costs

Megan used to work at the local pizzeria for $15,000 per year but quit in order to start her own deli. To buy the necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest). Last year she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000. She asked her dad the accountant and her mom the economist to calculate her costs for her.

Dad says her cost is $31,000 and Mom says her cost is $47,600. Profit is equal to revenue minus costs. An accountant will consider only explicit costs, whereas an economist will consider economic costs, which include explicit and implicit costs.

If the price of Good X falls and total revenue rises, then

Demand for Good X is elastic. Lower prices result in higher total revenue only if price elasticity of demand is elastic (price elasticity is greater than 1).

What is economic profit?

Economic profit is the accounting profit minus implicit costs

n defining economic costs, economists emphasize

Explicit and implicit costs while accountants recognize only explicit costs. Accounting costs refer to the explicit dollar outlays made by a producer. Economic costs, in contrast, refer to the value of all costs, both explicit and implicit.

When a producer can control the market price for the good it sells, the producer

Has market power. A firm that has market power will have the ability to control the market price for the good it sells, unlike a perfectly competitive firm that risks losing all of its customers, who will shop elsewhere, if it increases the price of its product.

A production function shows

How a firm's production changes as quantity of labor and other inputs changes. Production increases as a firm adds more inputs such as labor. Given a certain level of technology, the production function shows the relationship between total output and how much labor a firm is using.

Price Elasticity looks at

How much quantity demanded changes after a change in price.

Marginal Physical Product

If total output decreases with the addition of a new worker, the marginal physical product is not only diminishing but is actually negative.

For perfectly competitive firms, price

Is equal to marginal revenue. Because a competitive firm can sell all its output at the prevailing price, the marginal revenue will always be equal to price, and the MR curve will be equal to the demand curve.

Ceteris paribus, the law of diminishing returns states that beyond some point, the

Marginal physical product of a factor of production diminishes as more of that factor is used. The law of diminishing returns says that the marginal physical product of a variable input declines as more of it is employed along with a constant quantity of other (fixed) inputs.

Ceteris paribus, as the number of substitutes for a good increases, the

Price elasticity of demand should become larger. The greater the availability of substitutes, the higher the price elasticity of demand. For example, the high elasticity of demand for fish reflects the fact that consumers can always eat chicken, beef, or pork if fish prices rise.

A perfectly competitive firm will maximize profits by choosing an output level where

Price equals marginal cost. A competitive firm maximizes total profit at the output rate where MC is equal to price (which is the same as MR in perfect competition). If MC is less than price, the firm can increase profits by producing more. If MC exceeds price, the firm should reduce output.

When demand is price-inelastic, ceteris paribus, an increase in

Price leads to greater total revenue. Higher prices result in higher total revenue only if the price elasticity of demand is inelastic (price elasticity is less than 1).

In the $80 to $40 price range in Figure 20.1, demand is

Price-inelastic. At price levels less than $100, a decrease in the price causes revenue to decrease, which implies that demand is inelastic.

How can total cost be calculated?

TC can be found by multiplying ATC by quantity at any output level

If the elasticity of demand is 3, and the price rises by 15 percent, then

The quantity demanded will fall by 45 percent. The basic formula for price elasticity is the price elasticity of demand number = the percentage change in quantity demanded divided by the percentage change in price. 3 = x/.15 =.45, so quantity demanded falls by 45 percent.

Which of the following should notbe included when calculating accounting profit?

The return on the next best alternative investment opportunity. The cost of taxes, rent, and utilities are all explicit costs. The return on the next best alternative investment opportunity is an implicit cost and therefore is not included when calculating accounting profit.

How do you find total variable costs?

Total cost minus total fixed cost

If the demand for cigarettes is inelastic,

Total revenue will rise if the price of cigarettes rises. If demand is inelastic, as it is for cigarettes, an increase in price will cause an increase in total revenues for the company.

Unitary elastic.

When demand is unitary elastic, a change in price will not cause the revenue to change.

Technically the elasticity number is negative because

When price falls quantity demanded will rise, but for simplicity economists take the absolute value of the elasticity number.

A price decrease will cause total revenue to fall if

demand is inelastic Lower prices result in lower total revenue only if price elasticity of demand is inelastic (price elasticity is less than 1).

Which of the following costs do not change when output changes in the short run?

fixed costs Fixed costs such as the cost of the basic plants and equipment do not vary with the rate of output.

When demand is elastic, the absolute number for price elasticity will be

greater than 1 The price elasticity formula is the percentage change in quantity demanded divided by the percentage change in price. When demand is price-elastic, the percentage change in quantity demanded will be greater than the percentage change in price, so the absolute number will always be greater than 1. For example, foreign airline travel tests out to = 3.5.

Which of the following is the best explanation of why the law of diminishing returns does not apply in the long run?

in the long run, firms can increase the availability of space and equipment to keep up with the increase in variable inputs. The problems of crowded facilities apply to most production processes in the short run because of fixed resources. In the long run, all resources can be changed.

Assume the price elasticity of demand for MC Pretzel Co. pretzels is 0.8. If the company increases the price of each bag of pretzels, total revenue will

increase because the percentage increase in price is greater than the percentage change in quantity demanded. Higher prices result in higher total revenue only if the price elasticity of demand is inelastic (price elasticity is less than 1).

The change in total output associated with one additional unit of input is the

marginal physical product The marginal physical product (MPP) is the change in total output associated with one additional unit of input.

The period in which at least one input is fixed in quantity is the

short run The short run is the period in which the quantity (and quality) of some inputs can't be changed, or in other words inputs are fixed.

Marginal cost is

the change in total cost that occurs when more output is produced.

A demand curve that is perfectly inelastic is

vertical A vertical demand curve implies that an increase in price won't affect the quantity demanded.In this situation of completely inelastic demand, consumers are willing to pay any price to get a particular quantity.

Profit maximization occurs

where marginal revenue equals marginal cost.

in the short run, when a firm produces zero output, variable cost equals

zero Variable costs start at zero when a firm produces zero.