Answers to Questions on Finance and Costs - Paper Example

What is the difference between explicit and implicit costs?

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An implicit cost is one that occurs and is not reported as a separate cost whereas an explicit cost occurs and is reported separately.

Why should sunk costs be ignored for decision making?

Sunk costs should be ignored for decision making because they can no longer be recovered for future use.

Why should a firm never hire a worker when negative marginal returns set in?

During negative marginal return, the product of labor is falling and hiring a new worker does not help the situation and it is a waste of firms resources.

What is the difference between marginal cost and average total cost?

The difference in total cost upon production of another unit is called marginal cost whereas average total cost the cost incurred to come up with each product.

Video Question: What was the most important concept presented in this video? Using your own words explain why you feel this way.

https://www.khanacademy.org/economics-finance-domain/microeconomics/firm-economic-profit/economic-profit-tutorial/v/economic-profit-vs-accounting-profitThe most important concept presented in this video is the difference between accounting profit and economic profit. I feel it is important to evaluate a business based on both profits as opposed to the accounting profit as most people do. An accounting profit may tell you how much money a business makes you in a given period of time but an economic profit actually evaluates whether the business is a going concern or not.

CHAPTER 8

1. Why must price cover average costs if the firm is to continue operating?To avoid operating in debts. For a business to be deemed a going concern then the total average costs should be met by the price of the goods or services produced.2. Describe the role that easy entry and exit play in competitive markets over the long run.

Firms that can easily enter or exit the market enhance monopolistic competition due to the low capital requirements. These kind of firms are flexible to satisfy the customers demands and keep the other competitors on their toes.

3. Why are marginal revenue and price equal for the perfectly competitive firm?

So that the quantity of products produced and sold does not affect the price. The customers do not determine the price and price elasticity is negative.

4. Describe the reasons why an industry's costs might increase in the long run. Why might they decrease over the long run?

Industrys costs might increase due to salaries disbursed to obtain skilled labor, advances in technology demanding current machines and the need to improve quality of products as a marketing strategy to win new customers as well as retaining the old ones.

Industrys costs might decrease in the long run due to reduced expenses such as acquiring new machines and stabilized sales revenue.

5. Video Question: What was the most important concept presented in this video? Using your own words explain why you feel this way.

https://www.khanacademy.org/economics-finance-domain/microeconomics/perfect-competition-topic/perfect-competition/v/perfect-competitionThe concept of perfect competition is expounded in this video. For a market to attain the status of perfect competition then the market should have many players to offer the customers a wide range of variety and new players should not be denied entry.