Chapter 7 Making Decisions

Chapter 7 Making Decisions - that activity • Decreasing...

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Chapter 7 Making Decisions Explicit cost o A cost that involves actually laying out the money Implicit Cost o A cost that does not involve an outlay of money o It is measured by the value of the benefits that are forgone Accounting profit: o Is the business’s revenue minus the explicit costs and depreciation Economic profit: o Is the business’s revenue minus the opportunity cost of its resources. It is often less than the accounting profit Marginal cost (MC): o Is the additional cost incurred by doing one more unit of that activity Increasing marginal: o Exists when each additional unit of the activity costs more than the previous unit Marginal Benefit (MB): o From an activity is the additional benefit derived from undertaking one more unit of
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Unformatted text preview: that activity • Decreasing marginal benefit: o From an activity when each additional unit of the activity produces less benefit than the previous unit • Optimal quantity o Is the level that generates the maximum possible total net gain • Principle of marginal analysis o The optimal quantity of an activity is the quantity at which marginal benefit is equal to marginal cost • Sunk cost o Is a cost that has already been incurred and is non-recoverable o A sunk cost should be ignored in decisions about future actions • Money today is more valuable than the same amount of money in the future • Interest rate: o Is the price, calculated as a percentage of the amount borrowed, charged by the lender •...
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This document was uploaded on 10/09/2008.

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Chapter 7 Making Decisions - that activity • Decreasing...

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