After watching the Cost Analysis video lecture, consider the question(s) below. Then “submit” your response.
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<<feedback>>Suggested solution: Accounting profit is defined as revenue minus explicit costs (those paid to another economic entity and typically documented by a receipt or invoice). Economic profit is calculated by subtracting both explicit and implicit costs (opportunity costs associated with the resources supporting the firm) from revenue. An example of such an opportunity cost is the interest that business owners could have earned on the cash that they put into their business.
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<<feedback>>Suggested solution: No. Fixed costs do not change in the short run as the level of output in the firm changes. Sunk costs are fixed costs that once spent cannot be recovered in whole or part. For example, college tuition (a fixed cost, since it doesn’t vary no matter how much one studies) is a sunk cost; once spent, it cannot be transferred to benefit another student or (after add/drop) refunded. A physical textbook (a fixed cost, since its cost doesn’t vary whether one reads it or not) is not a sunk cost: typically it can be sold on the used book market to recover at least part of the purchase price. (Answers may vary.)
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<<feedback>>Suggested solution: The profit maximizing rule (marginal revenue equal to marginal cost) tells the business owner the level of output and price that will maximize the firm's profits, though not its level of profits (or losses). Price less average total cost indicates to the business owner the level of profit (or loss) per unit of output the firm is realizing. (Answers may vary.)
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