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Unformatted text preview: Econ302 Homework Assignment 4 Solutions 1. Please explain whether the following statements are true or false. 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 economic 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 positive 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 indicates 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 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 better 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. 2. How does a change in the price of one input change the firms long-run expansion path? The expansion path describes the combination of inputs that the firm chooses to minimize cost for every output level. This combination depends on the ratio of input prices: if the price of one input changes, the price ratio also changes. For example, if the price of an input increases, less of the input can be purchased for the same total cost, and the intercept of the isocost line on that inputs axis moves closer to the origin. Also, the slope of the isocost line, the price ratio, changes. As the price ratio changes, the firm substitutes away from the now more expensive input toward the cheaper...
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- Spring '08