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1、Chapter 7: The Costs of Production84CHAPTER 7THE COST OF PRODUCTIONQUESTIONS FOR REVIEW1. A firm pays its accountant an annual retainer of $10,000. Is this an economic cost?Explicit costs are actual outlays. They include all costs that involve a monetary transaction. An implicit cost is an economic
2、cost that does not necessarily involve a monetary transaction, but still involves the use of resources. When a firm pays an annual retainer of $10,000, there is a monetary transaction. The accountant trades his or her time in return for money. Therefore, an annual retainer is an explicit cost.2. The
3、 owner of a small retail store does her own accounting work. How would you measure the opportunity cost of her work?Opportunity costs are measured by comparing the use of a resource with its alternative uses. The opportunity cost of doing accounting work is the time not spent in other ways, i.e., ti
4、me such as running a small business or participating in leisure activity. The economic, or opportunity, cost of doing accounting work is measured by computing the monetary amount that the owners time would be worth in its next best use.3. Please explain whether the following statements are true or f
5、alse.a. If the owner of a business pays himself no salary, then the accounting cost is zero, but the economic cost is positive.True. Since there is no monetary transaction, there is no accounting, or explicit, cost. However, since the owner of the business could be employed elsewhere, there is an ec
6、onomic cost. The economic cost is positive, reflecting the opportunity cost of the owners time. The economic cost is the value of the next best alternative, or the amount that the owner would earn if he took the next best job. b. A firm that has positive accounting profit does not necessarily have p
7、ositive economic profit.True. Accounting profit considers only the explicit, monetary costs. Since there may be some opportunity costs that were not fully realized as explicit monetary costs, it is possible that when the opportunity costs are added in, economic profit will become negative. This indi
8、cates that the firms resources are not being put to their best use. c. If a firm hires a currently unemployed worker, the opportunity cost of utilizing the workers services is zero.False. The opportunity cost measures the value of the workers time, which is unlikely to be zero. Though the worker was
9、 temporarily unemployed, the worker still possesses skills, which have a value and make the opportunity cost of hiring the worker greater than zero. In addition, since opportunity cost is the equivalent of the workers next best option, it is possible that the worker might have been able to get a bet
10、ter job that utilizes his skills more efficiently. Alternatively, the worker could have been doing unpaid work, such as care of a child or elderly person at home, which would have had a value to those receiving the service.4. Suppose that labor is the only variable input to the production process. I
11、f the marginal cost of production is diminishing as more units of output are produced, what can you say about the marginal product of labor ?The marginal product of labor must be increasing. The marginal cost of production measures the extra cost of producing one more unit of output. If this cost is
12、 diminishing, then it must be taking fewer units of labor to produce the extra unit of output, since the extra cost refers to the extra cost of the labor. If fewer units of labor are required to produce a unit of output, then the marginal product (extra output produced by an extra unit of labor) mus
13、t be increasing. Note also, that MC=w/MPL, so that if MC is diminishing then MPL must be increasing for any given w.Chapter 7: The Costs of Production855. Suppose a chair manufacturer finds that the marginal rate of technical substitution of capital for labor in his production process is substantial
14、ly greater than the ratio of the rental rate on machinery to the wage rate for assembly-line labor. How should he alter his use of capital and labor to minimize the cost of production?To minimize cost, the manufacturer should use a combination of capital and labor so the rate at which he can trade c
15、apital for labor in his production process is the same as the rate at which he can trade capital for labor in external markets. The manufacturer would be better off if he increased his use of capital and decreased his use of labor, decreasing the marginal rate of technical substitution, MRTS. He sho
16、uld continue this substitution until his MRTS equals the ratio of the rental rate to the wage rate. The MRTS in this case is equal to MPK/MPL. As the manufacturer uses more K and less L, the MPK will diminish and the MPL will increase, both of which will decrease the MRTS until it is equal to the ratio of the input prices (rental rate on capital divided by wage rate). 6. Why are isocost lines straight lines?The isocost line represents all possible
